UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 March 31, 2006
-----------------------
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
-------------------------
(Exact name of Registrant as Specified in Its Charter)
Delaware 84-0915893
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
7301 South Peoria, Englewood, Colorado 80112
------------------------------------------ -----
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (303) 792-7400
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act (check
one):
Large accelerated Filer [ ] Accelerated Filer [X] Non-accelerated Filer [ ]
Indicate by check mark whether the registrant is a shell company (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 April
28, 2006, was 11,761,613.
TABLE OF CONTENTS
Form 10-Q
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - March 31, 2006 and December 31, 2005 1
Consolidated Statements of Operations for the three months
ended March 31, 2006 and 2005 3
Consolidated Statements of Cash Flows for the three months ended
March 31, 2006 and 2005 4
Notes to 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 1A. Risk Factors 19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 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 20
SIGNATURES 21
PART I: FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
AIR METHODS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share amounts)
(unaudited)
MARCH 31, DECEMBER 31,
2006 2005
--------------------------
Assets
- ------
Current assets:
Cash and cash equivalents $ 3,051 3,218
Current installments of notes receivable 66 65
Receivables:
Trade 139,649 129,107
Less allowance for doubtful accounts (50,098) (45,540)
--------------------------
89,551 83,567
Other 1,897 2,524
--------------------------
91,448 86,091
--------------------------
Inventories 9,515 9,197
Work-in-process on medical interiors and products contracts 1,018 762
Assets held for sale 5,401 6,446
Costs and estimated earnings in excess of billings on
uncompleted contracts 4,061 3,548
Deferred income taxes 1,062 1,133
Prepaid expenses and other 2,822 2,051
--------------------------
Total current assets 118,444 112,511
--------------------------
Property and equipment:
Land 441 441
Flight and ground support equipment 145,944 143,342
Buildings and other equipment 13,811 13,354
--------------------------
160,196 157,137
Less accumulated depreciation and amortization (65,676) (63,607)
--------------------------
Net property and equipment 94,520 93,530
--------------------------
Goodwill 6,485 6,485
Notes and other receivables, less current installments 82 99
Other assets, net of accumulated amortization of $3,030 and
$2,773 at March 31, 2006 and December 31, 2005,
respectively 8,912 8,907
--------------------------
Total assets $ 228,443 221,532
==========================
(continued)
1
AIR METHODS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
(Amounts in thousands, except share and per share amounts)
(unaudited)
MARCH 31, DECEMBER 31,
2006 2005
------------------------
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Notes payable $ 5,401 6,446
Current installments of long-term debt 10,043 9,399
Current installments of obligations under capital leases 739 657
Accounts payable 9,392 8,405
Deferred revenue 3,488 3,913
Billings in excess of costs and estimated earnings on
uncompleted contracts 42 332
Accrued wages and compensated absences 8,946 7,217
Due to third party payors 2,303 1,858
Other accrued liabilities 7,355 7,445
------------------------
Total current liabilities 47,709 45,672
Long-term debt, less current installments 58,561 57,704
Obligations under capital leases, less current installments 794 688
Deferred income taxes 19,775 19,997
Other liabilities 10,901 11,260
------------------------
Total liabilities 137,740 135,321
------------------------
Stockholders' equity (notes 3 and 4):
Preferred stock, $1 par value. Authorized 5,000,000 shares,
none issued -- --
Common stock, $.06 par value. Authorized 16,000,000 shares;
issued 11,742,584 and 11,605,590 shares at March 31,
2006 and December 31, 2005, respectively 705 696
Additional paid-in capital 68,122 66,219
Retained earnings 21,876 19,296
------------------------
Total stockholders' equity 90,703 86,211
------------------------
Total liabilities and stockholders' equity $ 228,443 221,532
========================
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 MARCH 31,
---------------------------------
2006 2005
---------------------------------
Revenue:
Flight revenue $ 87,831 $ 66,958
Sales of medical interiors and products 1,569 1,524
Parts and maintenance sales and services 36 26
---------------------------------
89,436 68,508
---------------------------------
Operating expenses:
Flight centers 31,349 25,746
Aircraft operations 17,210 14,929
Aircraft rental 5,004 4,280
Cost of medical interiors and products sold 871 843
Cost of parts and maintenance sales and services 34 47
Depreciation and amortization 3,171 2,897
Bad debt expense 16,407 10,111
Loss on disposition of assets, net 85 107
General and administrative 9,827 8,763
---------------------------------
83,958 67,723
---------------------------------
Operating income 5,478 785
Other income (expense):
Interest expense (1,356) (1,893)
Other, net 346 373
---------------------------------
Income (loss) before income taxes 4,468 (735)
Income tax benefit (expense) (1,888) 267
---------------------------------
Net income (loss) $ 2,580 $ (468)
=================================
Basic income (loss) per common share (note 2) $ .22 $ (.04)
=================================
Diluted income (loss) per common share (note 2) $ .21 $ (.04)
=================================
Weighted average number of common shares outstanding - basic 11,635,327 10,998,232
=================================
Weighted average number of common shares outstanding - diluted 12,278,738 10,998,232
=================================
See accompanying notes to consolidated financial statements.
3
AIR METHODS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(unaudited)
THREE MONTHS ENDED MARCH 31,
--------------------------------
2006 2005
--------------------------------
Cash flows from operating activities:
Net income (loss) $ 2,580 (468)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization expense 3,171 2,897
Bad debt expense 16,407 10,111
Deferred income tax benefit (151) (277)
Stock-based compensation 78 --
Tax benefit from exercise of stock options (833) --
Loss on retirement and sale of equipment, net 85 107
Changes in assets and liabilities:
Decrease (increase) in prepaid expenses and other current assets (98) 539
Increase in receivables (21,764) (9,811)
Increase in inventories (318) (287)
Decrease (increase) in work-in-process on medical interiors and costs in
excess of billings (769) 1,060
Increase (decrease) in accounts payable and other accrued liabilities 3,797 (1,411)
Increase (decrease) in deferred revenue and billings in excess of costs, and
other liabilities (967) 5
--------------------------------
Net cash provided by operating activities 1,218 2,465
--------------------------------
Cash flows from investing activities:
Acquisition of equipment and leasehold improvements (3,669) (2,761)
Proceeds from disposition and sale of equipment -- 463
Decrease (increase) in notes receivable and other assets, net (199) 289
--------------------------------
Net cash used by investing activities (3,868) (2,009)
--------------------------------
(Continued)
4
AIR METHODS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(Amounts in thousands)
(unaudited)
THREE MONTHS ENDED MARCH 31,
--------------------------------
2006 2005
--------------------------------
Cash flows from financing activities:
Net borrowings under line of credit $ 4,119 1,836
Payments for debt issue costs (18) (37)
Payments of long-term debt (3,291) (2,074)
Payments of capital lease obligations (161) (140)
Tax benefit from exercise of stock options 833 --
Proceeds from issuance of common stock, net 1,001 117
--------------------------------
Net cash provided (used) by financing activities 2,483 (298)
--------------------------------
Increase (decrease) in cash and cash equivalents (167) 158
Cash and cash equivalents at beginning of period 3,218 2,603
--------------------------------
Cash and cash equivalents at end of period $ 3,051 2,761
================================
Interest paid in cash during the year $ 1,227 2,003
================================
Income taxes paid in cash during the year $ 102 25
================================
Non-cash investing and financing activities:
In the quarter ended March 31, 2006, the Company settled notes payable of $4,778
in exchange for the aircraft securing the debt. The Company also entered into
notes payable of $3,733 to finance the purchase of aircraft which are held for
sale as of March 31, 2006.
In the quarter ended March 31, 2006, the Company entered into a note payable of
$673 to finance insurance policies and into capital lease obligations of $349 to
finance the purchase of equipment.
In the quarter ended March 31, 2005, the Company settled notes payable of $5,105
in exchange for the aircraft securing the debt. The Company also settled a note
payable totaling $85 by applying a purchase deposit against it and entered into
a note payable of $396 to finance insurance policies.
See accompanying notes to consolidated financial statements.
5
AIR METHODS CORPORATION AND SUBSIDIARIES
NOTES TO 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 year ended
December 31, 2005.
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 depreciation and
residual values. Actual results could differ from those estimates.
(2) INCOME (LOSS) PER SHARE
--------------------------
Basic earnings per share is computed by dividing net income (loss) by
the weighted average number of common shares outstanding during the period.
Diluted earnings per share is computed by dividing net income by all
outstanding and dilutive potential common shares during the period.
The reconciliation of basic to diluted weighted average common shares
outstanding is as follows for the quarters ended March 31:
2006 2005
----------------------
Weighted average number of common shares outstanding - basic 11,635,327 10,998,232
Dilutive effect of:
Common stock options 551,741 --
Common stock warrants 91,670 --
----------------------
Weighted average number of common shares outstanding - diluted 12,278,738 10,998,232
======================
Common stock options totaling 1,012,500 and common stock warrants
totaling 574,716 were not included in the diluted shares outstanding for
the quarter ended March 31, 2005, respectively, because their effect would
have been anti-dilutive.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(3) STOCKHOLDERS' EQUITY
---------------------
Changes in stockholders' equity for the three months ended March 31,
2006, consisted of the following (amounts in thousands except share
amounts):
Shares
Outstanding Amount
--------------------
Balances at January 1, 2006 11,605,590 $86,211
Issuance of common shares for options and warrants
exercised 136,994 1,001
Tax benefit from exercise of stock options -- 833
Stock-based compensation -- 78
Net income -- 2,580
--------------------
Balances at March 31, 2006 11,742,584 $90,703
====================
(4) STOCK-BASED COMPENSATION
------------------------
Effective January 1, 2006, the Company implemented FASB Statement No.
123R (Statement 123R), Accounting for Stock-Based Compensation, an
amendment of FASB Statement No. 123, adopting the modified prospective
method of implementation. Statement 123R requires recognition of the
grant-date fair value of stock options and other equity-based compensation
issued to employees in the income statement. Under the modified prospective
method, compensation cost has been recognized in the financial statements
beginning with the effective date based on the requirements of Statement
123R for all share-based payments granted after that date and based on the
requirements of Statement 123 for all unvested awards granted prior to the
effective date of Statement 123R. During the quarter ended March 31, 2006,
the Company recognized $78,000 in compensation expense related to
outstanding stock options. Total unrecognized compensation cost related to
unvested stock-based awards as of March 31, 2006, was $719,000 and is
expected to be recognized over the remaining weighted average vesting term
of 2.6 years. Any future excess tax benefits derived from the exercise of
stock options will be recorded prospectively and reported as cash flows
from financing activities in accordance with FAS 123R.
Prior to January 1, 2006, the Company accounted 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 granted its options at or above market value, no compensation
cost was 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 for the
quarter ended March 31, 2005 (amounts in thousands, except per share
amounts):
Net loss:
As reported $ (468)
Pro forma (544)
Basic and diluted net loss per share:
As reported $ (.04)
Pro forma (.05)
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(4) STOCK-BASED COMPENSATION, CONTINUED
-----------------------------------
The Company has a Stock Option Plan (the Plan) which provides for the
granting of incentive stock options (ISO's) and nonqualified stock options
(NSO's), stock appreciation rights, and supplemental stock bonuses. Under
the Plan, 3,500,000 shares of common stock are reserved for options.
Generally, the options granted under the Plan have an exercise price equal
to the market value on the date of grant, vest in three equal installments
beginning one year from the date of grant, and expire five years from the
date of grant. However, option grants to certain officers and employees in
2004 included 460,000 options which vest after five years and expire six
years from the date of grant.
The Company also has a Nonemployee Director Stock Option Plan (the
Director Plan) which authorizes the grant of NSO's to purchase an aggregate
of 300,000 shares of common stock to nonemployee directors of the Company.
Through 2004, each nonemployee director completing one fiscal year of
service received a five-year option to purchase 10,000 shares, exercisable
at the then current market value of the Company's common stock. All options
under this plan were vested immediately upon issue.
The following is a summary of option activity under the Plan and the
Director Plan during the quarter ended March 31, 2006:
Weighted- Aggregate
Average Intrinsic
Weighted Remaining Value
Average Contractual (amounts in
Shares Exercise Price Life (Years) thousands)
--------- --------------- ------------ -------------
Outstanding at December 31, 2005 961,522 $ 8.48
Exercised (131,023) 7.67
---------
Outstanding at March 31, 2006 830,499 8.61 3.3 $ 17,381
=========
Exercisable at March 31, 2006 362,500 8.15 2.7 7,755
=========
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model. No options were granted
during the first quarter of 2006 or 2005. During the quarters ended March
31, 2006 and 2005, options to purchase 131,023 and 12,381 shares were
exercised with aggregate intrinsic values totaling approximately $2,352,000
and $22,000, respectively.
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(5) 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 Hospital-Based Model (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
seventeen 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 in 26 states and Puerto Rico 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.
Products Corporate Intersegment
FOR QUARTER ENDED MARCH 31: CBM HBM Division Activities Eliminations Consolidated
- -------------------------------------------------------------------------------------------------------
2006
External revenue $ 61,279 26,588 1,569 -- -- 89,436
Intersegment revenue -- -- 3,244 -- (3,244) --
-------------------------------------------------------------------------
Total revenue 61,279 26,588 4,813 -- (3,244) 89,436
-------------------------------------------------------------------------
Operating expenses (36,623) (24,172) (3,493) (2,544) 2,452 (64,380)
Depreciation & amortization (1,652) (1,338) (107) (74) -- (3,171)
Bad debt expense (15,773) (634) -- -- -- (16,407)
Interest expense (728) (599) -- (29) -- (1,356)
Other income, net 293 -- -- 53 -- 346
Income tax expense -- -- -- (1,888) -- (1,888)
-------------------------------------------------------------------------
Segment net income (loss) $ 6,796 (155) 1,213 (4,482) (792) 2,580
=========================================================================
Total assets $ 95,511 N/A N/A 135,096 (2,164) 228,443
=========================================================================
2005
External revenue $ 44,618 22,366 1,524 -- -- 68,508
Intersegment revenue -- -- 2,787 -- (2,787) --
-------------------------------------------------------------------------
Total revenue 44,618 22,366 4,311 -- (2,787) 68,508
-------------------------------------------------------------------------
Operating expenses (31,835) (19,564) (3,321) (2,312) 2,317 (54,715)
Depreciation & amortization (1,397) (1,348) (91) (61) -- (2,897)
Bad debt expense (10,108) (3) -- -- -- (10,111)
Interest expense (976) (892) -- (25) -- (1,893)
Other income, net 226 -- -- 147 -- 373
Income tax benefit -- -- -- 267 -- 267
-------------------------------------------------------------------------
Segment net income (loss) $ 528 559 899 (1,984) (470) (468)
=========================================================================
Total assets $ 66,995 N/A N/A 132,686 (2,164) 197,517
=========================================================================
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 our consolidated financial statements and
notes thereto included in Item 1 of this report. This report, including the
information incorporated by reference, contains forward-looking statements as
defined in the Private Securities Litigation Reform Act of 1995. The use of any
of the words "believe," "expect," "anticipate," "plan," "estimate," and similar
expressions are intended to identify such statements. Forward-looking statements
include statements concerning our possible or assumed future results; size,
structure and growth of our air medical services and products markets;
continuation and/or renewal of HBM contracts; acquisition of new and profitable
Products Division contracts; flight volume and collection rates for CBM
operations; and other matters. The actual results that we achieve may differ
materially from those discussed in such forward-looking statements due to the
risks and uncertainties described in the Risk Factors section of this report, in
Management's Discussion and Analysis of Financial Condition and Results of
Operations, and in other sections of this report, as well as in our annual
report on Form 10-K. We undertake no obligation to update any forward-looking
statements.
OVERVIEW
We provide air medical transportation services throughout the United States and
design, manufacture, and install medical aircraft interiors and other aerospace
products for domestic and international customers. Our divisions, or business
segments, are organized according to the type of service or product provided and
consist of the following:
- - Community-Based Model (CBM) - provides air medical transportation services
to the general population as an independent service. Revenue consists of
flight fees billed directly to patients, their insurers, or governmental
agencies, and cash flow is dependent upon collection from these individuals
or entities. In the first quarter of 2006 the CBM Division generated 68% of
our total revenue, increasing from 65% in the first quarter of 2005.
- - Hospital-Based Model (HBM) - provides air medical transportation services
to hospitals throughout the U.S. under exclusive operating agreements.
Revenue consists of fixed monthly fees (approximately 62% of total contract
revenue) and hourly flight fees (approximately 38% of total contract
revenue) billed to hospital customers. In the first quarter of 2006 the HBM
Division generated 30% of our total revenue, decreasing from 33% in 2005.
- - Products Division - designs, manufactures, and installs aircraft medical
interiors and other aerospace and medical transport products for domestic
and international customers. In the first quarter of 2006 the Products
Division generated 2% of our total revenue, unchanged from 2005.
See Note 5 to the consolidated financial statements included in Item 1 of this
report for operating results by segment.
We believe that the following factors have the greatest impact on our results of
operations and financial condition:
- - FLIGHT VOLUME. Fluctuations in flight volume have a greater impact on CBM
operations than HBM operations because 100% of CBM revenue is derived from
flight fees, as compared to 38% of HBM revenue. By contrast, approximately
61% of the Company's costs primarily associated with flight operations
(including salaries, aircraft ownership costs, hull insurance, and general
and administrative expenses) are mainly fixed in nature. While flight
volume is affected by many factors, including competition and the
effectiveness of marketing and business development initiatives, the
greatest single variable has historically been weather conditions. Adverse
weather conditions-such as fog, high winds, or heavy precipitation-hamper
our ability to operate our aircraft safely and, therefore, result in
reduced flight volume. Total patient transports for CBM operations were
approximately 7,600 for the first quarter of 2006 compared to approximately
6,700 for the first quarter of 2005. Patient transports for CBM bases open
longer than one year (Same-Base Transports) were approximately 7,400 in the
first quarter of 2006, compared to 6,500 in the first quarter of 2005.
Cancellations due to unfavorable weather conditions for CBM bases open
longer than one year were 551, or 23.9%, lower in the first quarter of
2006, compared to the first quarter of 2005.
10
- - REIMBURSEMENT PER TRANSPORT. Net reimbursement per transport for CBM and
HBM at-risk operations is primarily a function of price, payor mix, and
timely and effective collection efforts. Both the pace of collections and
the ultimate collection rate are affected by the overall health of the U.S.
economy, which impacts the number of indigent patients and funding for
state-run programs, such as Medicaid. Medicaid reimbursement rates in many
jurisdictions have remained well below the cost of providing air medical
transportation. We respond to calls for air medical transports without
pre-screening the creditworthiness of the patient. 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. We increased prices for
our CBM operations approximately 7% effective March 2005, 5% effective
October 2005, and 9% effective January 2006, contributing to an increase of
16.8% in net revenue after bad debt expense per transport from 2005 to
2006. The total provision for expected uncollectible amounts, including
contractual discounts for Medicare/Medicaid and bad debts, increased from
45.1% of related gross flight revenue in 2005 to 48.1% in 2006. Although
price increases generally increase the net reimbursement per transport from
insurance providers, the amount per transport collectible from private
patient payors and Medicare and Medicaid does not increase proportionately
with price increases. Therefore, price increases will usually result in an
increase in the percentage of uncollectible accounts, depending upon
overall payor mix.
- - AIRCRAFT MAINTENANCE. Both CBM and HBM operations are directly affected by
fluctuations in aircraft maintenance costs. Proper operation of the
aircraft by flight crews and standardized maintenance practices can help to
contain maintenance costs. Increases in spare parts prices from original
equipment manufacturers tend to be higher for aircraft which are no longer
in production. Five models of aircraft within our fleet, representing 39%
of the rotor wing fleet, are no longer in production and are, therefore,
susceptible to price increases which outpace general inflationary trends.
In addition, on-condition components are more likely to require replacement
with age. We entered into two long-term purchase commitments in 2004 for a
total of 25 aircraft and into two additional purchase commitments in 2005
for ten aircraft. The majority of new aircraft delivered under these
commitments are expected to replace the discontinued models and other older
aircraft over the next five to seven years. As of March 31, 2006, we had
taken delivery of thirteen aircraft under these commitments. Replacement
models of aircraft typically have higher ownership costs than the models
targeted for replacement but lower maintenance costs. Total maintenance
expense for CBM and HBM operations increased 14.3% from the first quarter
of 2005 to the first quarter of 2006, while total flight volume for CBM and
HBM operations increased 10.7% over the same period. The number of engine
events, including overhauls, increased approximately 34.3% in the first
quarter of 2006 compared to the first quarter of 2005.
- - COMPETITIVE PRESSURES FROM LOW-COST PROVIDERS. We are recognized within the
industry for our standard of service and our use of cabin-class aircraft.
Many of our regional competitors utilize aircraft with lower ownership and
operating costs and do not require a similar level of experience for
aviation and medical personnel. Reimbursement rates established by
Medicare, Medicaid, and most insurance providers are not contingent upon
the type of aircraft used or the experience of personnel. However, we
believe that higher quality standards help to differentiate our service
from competitors and, therefore, lead to higher utilization. Deploying
multiple aircraft in a market also serves as a barrier to entry for lower
cost providers.
- - EMPLOYEE RECRUITMENT AND RELATIONS. The ability to deliver quality services
is partially dependent upon our ability to hire and retain employees who
have advanced aviation, nursing, and other technical skills. In addition,
hospital contracts typically contain minimum certification requirements for
pilots and mechanics. Employees who meet these standards are in great
demand and are likely to remain a limited resource in the foreseeable
future. In September 2003, our pilots voted to be represented by a
collective bargaining unit, and we signed a collective bargaining agreement
(CBA) on March 31, 2006. The agreement is effective January 1, 2006,
through April 30, 2009. The CBA establishes procedures for training,
addressing grievances, discipline and discharge, among other matters, and
defines vacation, holiday, sick, health insurance, and other employee
benefits. The CBA also establishes wage scales, including adjustments for
geographic locations, covering each year of the agreement. Significant
changes from our previous wage rates or benefits include increases in
initial base pay rates, dependent upon each pilot's level of seniority;
increase in pay for overtime shifts from regular pay rates to 1.5 times
regular pay rates; and changes in our contributions to defined contribution
retirement plans (401k plans). Previously, under one 401k plan, we
contributed 2% of gross pay for all eligible employees and matched
11
60% of the employees' contributions up to 6% of their gross pay. Under the
other plan, we matched 30% of the employees' contributions up to 6% of
their gross pay. The CBA provides for Company contributions up to 5.6% of
gross pay to both 401k plans, depending on the level of each employee's
participation. We recorded approximately $1,654,000 in incremental salary
and benefit costs during the first quarter as a result of implementing the
CBA provisions. Other employee groups may also elect to be represented by
unions in the future.
RESULTS OF OPERATIONS
We reported net income of $2,580,000 for the three months ended March 31, 2006,
compared to a net loss of $468,000 for the three months ended March 31, 2005.
Same-Base Transports for CBM bases increased 14.0% in the first quarter of 2006
compared to 2005, and net reimbursement (revenue after Medicare/Medicaid
discounts and bad debt expense) for CBM operations increased 16.8% over the same
period. Flight volume for HBM bases open longer than a year also increased 5.5%
in 2006 compared to 2005.
FLIGHT OPERATIONS - COMMUNITY-BASED MODEL AND HOSPITAL-BASED MODEL
FLIGHT REVENUE increased $20,873,000, or 31.2%, from $66,958,000 to $87,831,000
for the three months ended March 31, 2006, compared to 2005. Flight revenue is
generated by both CBM and HBM operations and is recorded net of contractual
allowances under agreements with third-party payors and Medicare/Medicaid
discounts.
- - CBM - Flight revenue increased $16,671,000, or 37.4%, to $61,270,000 in the
three months ended March 31, 2006, compared to 2005, for the following
reasons:
- Average price increases of approximately 7% for all CBM
operations effective March 2005, approximately 5% effective October
2005, and approximately 9% effective January 2006.
- Incremental revenue of $3,524,000 generated from the addition of
seven new CBM bases either during or subsequent to the first quarter
of 2005 and from the provision of air medical transportation services
in Gulfport, Mississippi, in the aftermath of Hurricane Katrina,
pursuant to a contract with the State of Mississippi.
- Closure of three bases either during or subsequent to the first
quarter of 2005, resulting in a decrease in revenue of approximately
$1,306,000 for the quarter ended March 31, 2006.
- Increase in Same-Base Transports. Excluding the impact of the new
bases and base closures discussed above, total flight volume for all
CBM operations for the first quarter of 2006 increased 907 transports,
or 14.0%, compared to the prior year. Cancellations due to unfavorable
weather conditions for CBM bases open longer than one year were 551,
or 23.9%, lower in the first quarter of 2006, compared to the first
quarter of 2005.
- Decrease caused by a change in payor mix to a higher percentage
of Medicare/Medicaid transports, resulting in higher contractual
discounts which are offset against flight revenue. Contractual
discounts were 30.6% of related flight revenue in 2006 compared to
29.1% in 2005. See discussion of total provision for uncollectible
accounts, including contractual discounts and bad debt expense, below
under Bad Debt Expense.
- - HBM - Flight revenue increased $4,202,000, or 18.8%, to $26,561,000 for the
quarter ended March 31, 2006, for the following reasons:
- Revenue of $1,932,000 from the addition of one new base and the
expansion of five contracts either during or subsequent to the first
quarter of 2005.
- Annual price increases in the majority of contracts based on
changes in the Consumer Price Index and in hull insurance rates.
- Increase of 5.5% in flight volume for all contracts excluding the
new contracts and contract expansions discussed above.
12
FLIGHT CENTER COSTS (consisting primarily of pilot, mechanic, and medical staff
salaries and benefits) increased $5,603,000, or 21.8%, to $31,349,000 for the
quarter ended March 31, 2006, compared to 2005. Changes by business segment are
as follows:
- - CBM - Flight center costs increased $3,300,000, or 19.7%, to $20,015,000
for the following reasons:
- Increase of approximately $1,520,000 for the addition of
personnel to staff new base locations described above.
- Decrease of approximately $698,000 due to the closure of base
locations described above.
- Increase of approximately $704,000 in pilot salaries and benefits
related to the implementation of the CBA effective January 1, 2006.
- Increases in salaries for merit pay raises.
- Increases in our cost of medical insurance premiums.
- - HBM - Flight center costs increased $2,303,000, or 25.5%, to $11,334,000
primarily due to the following:
- Approximately $532,000 for the addition of personnel to staff new
base locations described above.
- Increase of approximately $950,000 in pilot salaries and benefits
related to the implementation of the CBA effective January 1, 2006.
- Increases in salaries for merit pay raises.
- Increases in our cost of medical insurance premiums.
AIRCRAFT OPERATING EXPENSES increased $2,281,000, or 15.3%, for the quarter
ended March 31, 2006, in comparison to the quarter ended March 31, 2005.
Aircraft operating expenses consist primarily of fuel, insurance, and
maintenance costs and generally are a function of the size of the fleet, type of
aircraft flown, and number of hours flown. The increase in costs is due to the
following:
- - Addition of fourteen helicopters for CBM operations and five helicopters
for HBM operations after March 31, 2005, resulting in an increase of
approximately $392,000.
- - Increase of approximately 24.8% in the cost of aircraft fuel per hour
flown.
- - Decrease in hull insurance rates effective July 2005.
- - Increases in flight volume for both CBM and HBM as described above.
- - Increase of 34.3% in the number of engine events.
AIRCRAFT RENTAL EXPENSE increased $724,000, or 16.9%, for the first quarter of
2006 compared to the first quarter of 2005. Incremental rental expense incurred
in the first quarter of 2006 for fourteen leased aircraft added to our fleet
subsequent to March 31, 2005, totaled $1,067,000. The increase for new aircraft
was offset in part by refinancing twelve aircraft at lower lease rates during
the last three quarters of 2005.
BAD DEBT EXPENSE increased $6,296,000, or 62.3%, for the quarter ended March 31,
2006, compared to 2005, due in part to the increase in related flight revenue.
Bad debt expense as a percentage of related net flight revenue also increased
from 22.5% in the first quarter of 2005 to 26.0% in the first quarter of 2006.
Flight revenue is recorded net of Medicare/Medicaid discounts. The total
allowance for expected uncollectible amounts, including contractual discounts
and bad debts, increased from 45.1% of related flight revenue in the first
quarter of 2005 to 48.1% in the first quarter of 2006, primarily because of the
effect of price increases. Although price increases generally increase the net
reimbursement per transport from insurance providers, the amount per transport
collectible from private patient payors and Medicare and Medicaid does not
increase proportionately with price increases. Therefore, price increases will
usually result in an increase in the percentage of uncollectible accounts,
depending upon overall payor mix. Bad debt expense related to the Products
Division was not significant in either 2006 or 2005.
13
MEDICAL INTERIORS AND PRODUCTS
SALES OF MEDICAL INTERIORS AND PRODUCTS increased $45,000, or 3.0%, from
$1,524,000 for the first quarter of 2005 to $1,569,000 for the first quarter of
2006. Significant projects in the first quarter of 2006 included continued
production of eleven Multi-Mission Medevac Systems for the U. S. Army's HH-60L
Black Hawk helicopter and 21 litter systems for the U.S. Army's Medical
Evacuation Vehicle (MEV). We also began production of two modular, medical
interior kits for commercial customers. Revenue by product line was as follows:
- - $1,006,000 - manufacture of multi-mission interiors
- - $417,000 - manufacture and installation of modular medical interiors
- - $145,000 - design and manufacture of other aerospace and medical transport
products
Significant projects in the first quarter of 2005 included continued production
of thirteen HH-60L units, nineteen MEV litter systems, a multi-mission interior
for a Sikorsky FIREHAWK helicopter for the Los Angeles County Fire Department,
and two modular medical interiors for a commercial customer. Production of the
nineteen MEV units and eleven of the HH-60L units was completed during the first
quarter. Revenue by product line was as follows:
- - $786,000 - manufacture of multi-mission interiors
- - $404,000 - manufacture and installation of modular medical interiors
- - $334,000 - design and manufacture of other aerospace and medical transport
products
COST OF MEDICAL INTERIORS AND PRODUCTS increased $28,000, or 3.3%, for the three
months ended March 31, 2006, as compared to the previous year, consistent with
the change in sales volume.
GENERAL EXPENSES
DEPRECIATION AND AMORTIZATION EXPENSE increased $274,000, or 9.5% for the three
months ended March 31, 2006, compared to 2005, primarily as a result of upgrades
to aircraft, engines, and avionics systems and the purchase of rotable equipment
and a new dispatch, flight tracking, and medical field data software system and
related hardware.
GENERAL AND ADMINISTRATIVE (G&A) EXPENSES increased $1,064,000, or 12.1%, for
the quarter ended March 31, 2006, compared to the quarter ended March 31, 2005.
G&A expenses include executive management, accounting and finance, billing and
collections, human resources, aviation management, pilot training, dispatch and
communications, and CBM program administration. We increased the number of
personnel in the billing and collections function due to the increase in flight
volume and, in the short-term, to accommodate the transition of accounts from
the Bountiful billing office to the San Bernardino billing office. Consolidation
of the billing function into the San Bernardino office is expected to be
completed in the second quarter. G&A expenses were also impacted by the increase
in our cost of medical insurance premiums. G&A expenses were 11.0% of revenue in
2006, compared to 12.8% in 2005.
INTEREST EXPENSE decreased $537,000, or 28.4%, in the first quarter of 2006,
compared to the first quarter of 2005, primarily as a result of regularly
scheduled payments of long-term debt and decreased borrowings against our line
of credit. The average balance outstanding against the line of credit was $9.0
million in the first quarter of 2006 compared to $17.0 million in the first
quarter of 2005. In addition, in May 2005 we repaid $23 million in subordinated
debt, which had an effective interest rate of 16.2% during 2005, with the
proceeds of $20 million in term loans which bore interest at an effective rate
of approximately 8.8% during 2006. The remainder of the repayment was funded by
draws against the line of credit.
INCOME TAX EXPENSE was $1,888,000 in the first quarter of 2006, compared to an
income tax benefit of $267,000 in the first quarter of 2005, primarily due to
the improvement in operating results. The effective tax rate for the first
quarter of 2006 was 42%, compared to approximately 39% in 2005. The higher
effective tax rate in 2006 is the result of an increase in certain permanent
book-tax differences.
14
LIQUIDITY AND CAPITAL RESOURCES
Our working capital position as of March 31, 2006, was $70,735,000, compared to
$66,839,000 at December 31, 2005. Net receivables increased $5,357,000
consistent with increased revenue for the CBM and HBM divisions and increased
net reimbursement for CBM operations. In addition, days' sales outstanding for
CBM operations, measured by comparing net revenue after bad debt for the
annualized previous 3-month period to outstanding open net accounts receivable,
increased from 119 days at December 31, 2005, to 132 days at March 31, 2006. The
increase in days' sales outstanding is primarily due to an initiative, beginning
in the fourth quarter of 2005 and continuing through the first quarter of 2006,
to centralize the billing and collection function into a single location which
we believe slowed the pace of collections temporarily.
We had cash and cash equivalents of $3,051,000 as of March 31, 2006, compared to
$3,218,000 at December 31, 2005. Cash generated by operations was $1,218,000 in
the first quarter of 2006, compared to $2,465,000 in the first quarter of 2005.
Receivable balances, net of bad debt expense, increased $5,357,000 in the first
quarter of 2006 compared to decreasing $300,000 in the first quarter of 2005,
reflecting continued growth in CBM and HBM revenue, improved net reimbursement
per transport for CBM operations, and the increase in days' sales outstanding
described above. Balances for accounts payable and other accrued liabilities
increased $3,797,000 in 2006, compared to decreasing $1,411,000 in 2005, partly
because of the accrual of $1,654,000 of incremental salaries and benefits
related to the implementation of the CBA.
Cash used by investing activities totaled $3,868,000 in 2006 compared to
$2,009,000 in 2005. Equipment acquisitions in the first quarter of 2006
consisted primarily of a $1.4 million aircraft, as well as medical interior and
avionics installations and information systems hardware and software. Equipment
acquisitions in the first quarter of 2005 consisted primarily of rotable
equipment and upgrades to aircraft, engines, and avionics systems. In the first
quarter of 2005, the Company received $463,000 in insurance proceeds for an
aircraft destroyed in an accident.
Financing activities generated $2,483,000 in 2006 compared to using $298,000 in
2005. The primary use of cash in both 2006 and 2005 was regularly scheduled
payments of long-term debt and capital lease obligations. In 2006 these payments
were offset by draws against our line of credit and proceeds from the issuance
of common stock.
OUTLOOK FOR 2006
The statements contained in this Outlook are based on current expectations.
These statements are forward-looking, and actual results may differ materially.
We undertake no obligation to update any forward-looking statements.
Community-Based Model
In the first quarter of 2006, we began services under a one-year contract with a
military base in California and ceased operations at a base in Arizona. During
the second quarter of 2006, we expect to open three new CBM bases in the
southeast region, two in the northeast region, and one in California. CBM flight
volume at all other locations during 2006 is expected to be consistent with
historical levels, subject to seasonal, weather-related fluctuations. Effective
January 1, 2006, we increased prices for our CBM operations an average of
approximately 9%.
Hospital-Based Model
In the fourth quarter of 2005, we expanded one existing contract in North
Carolina to an additional satellite base. We have also been awarded a 3-year
contract to begin rotor wing operations in Montana during the second quarter of
2006. We expect three other contracts to open satellite bases in 2006. Thirteen
hospital contracts are due for renewal in 2006. We expect 2006 flight activity
for continuing hospital contracts to remain consistent with historical levels.
15
Products Division
As of March 31, 2006, eleven HH-60L units and 21 MEV units for the U.S. Army and
three modular medical interiors for commercial customers were in process.
Remaining revenue for all contracts in process is estimated at $1.9 million.
The current U.S. Army Aviation Modernization Plan defines a requirement for 180
HH-60L Multi-Mission Medevac units in total over an unspecified number of years.
We have already completed 28 HH-60L units under the program, in addition to the
eleven currently under contract. The U.S. Army has also forecasted a requirement
for a total of 119 MEV units over four years; we have previously delivered 82
units, in addition to the 21 units currently under contract. There is no
assurance that orders for additional units will be received in future periods.
All Segments
We expect to begin the implementation of new software for inventory tracking in
2006, with completion projected in 2007.
There can be no assurance that we will continue to maintain flight volume or
current levels of collections on receivables for CBM operations, successfully
complete planned expansions of CBM and HBM operations, renew operating
agreements for our HBM operations, or generate new profitable contracts for the
Products Division. Based on the anticipated levels of HBM and CBM flight
activity and the projects in process for the Products Division, we expect to
generate sufficient cash flow to meet our operational needs throughout the
remainder of 2006. We also have approximately $21,583,000 in borrowing capacity
available under our revolving credit facility as of March 31, 2006.
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of these financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period.
On an on-going basis, management evaluates our estimates and judgments,
including those related to revenue recognition, uncollectible receivables,
deferred income taxes, and depreciation and residual values. Management bases
its estimates and judgments on historical experience and on various other
factors that are believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions.
Management believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
Revenue Recognition
Fixed flight fee revenue under our operating agreements with hospitals is
recognized monthly over the terms of the agreements. Flight revenue relating to
patient transports is recognized upon completion of the services. Revenue and
accounts receivable are recorded net of estimated contractual allowances under
agreements with third-party payors (i.e., Medicare and Medicaid). 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 discounts realized are more or less than those
projected by management, adjustments to contractual allowances may be required.
Based on related flight revenue for the quarter ended March 31, 2006, a change
of 100 basis points in the percentage of estimated contractual discounts would
have resulted in a change of approximately $897,000 in flight revenue.
16
Revenue related to fixed fee medical interior and products contracts is recorded
as costs are incurred using the percentage of completion method of accounting.
We estimate the percentage of completion based on costs incurred to date as a
percentage of an estimate of the total costs to complete the project. Losses on
contracts in process are recognized when determined. If total costs to complete
a project are greater or less than estimated, the gross margin on the project
may be greater or less than originally recorded under the percentage of
completion method.
Uncollectible Receivables
We respond to calls for air medical transports without pre-screening the credit
worthiness of the patient. 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 more or
less than those projected by management, adjustments to allowances for
uncollectible accounts may be required. There can be no guarantee that we will
continue to experience the same collection rates that we have in the past. Based
on related net flight revenue for the quarter ended March 31, 2006, a change of
100 basis points in the percentage of estimated uncollectible accounts would
have resulted in a change of approximately $630,000 in flight revenue.
Deferred Income Taxes
In preparation of the consolidated financial statements, we are required to
estimate income taxes in each of the jurisdictions in which we operate. This
process involves estimating actual current tax exposure together with assessing
temporary differences resulting from differing treatment of items, such as
depreciable assets, for tax and accounting purposes. These differences result in
deferred tax assets and liabilities, which are included in the consolidated
balance sheets. We then assess the likelihood that deferred tax assets will be
recoverable from future taxable income and record a valuation allowance for
those amounts we believe are not likely to be realized. Establishing or
increasing a valuation allowance in a period increases income tax expense. We
consider estimated future taxable income, tax planning strategies, and the
expected timing of reversals of existing temporary differences in assessing the
need for a valuation allowance against deferred tax assets. In the event we were
to determine that we would not be able to realize all or part of our net
deferred tax assets in the future, an adjustment to the valuation allowance
would be charged to income in the period such determination was made. Likewise,
should we determine that we would be able to realize our deferred tax assets in
the future in excess of our net recorded amount, an adjustment to the valuation
allowance would increase income in the period such determination was made.
Depreciation and Residual Values
In accounting for long-lived assets, we make estimates about the expected useful
lives, projected residual values and the potential for impairment. Estimates of
useful lives and residual values of aircraft are based upon actual industry
experience with the same or similar aircraft types and anticipated utilization
of the aircraft. Changing market prices of new and used aircraft, government
regulations and changes in our maintenance program or operations could result in
changes to these estimates. Long-lived assets are evaluated for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of long-lived assets is measured
by a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset.
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 our
product sales and related receivables are payable in U.S. dollars. We are
subject to interest rate risk on our debt obligations and notes receivable, most
of which have fixed interest rates, except $10,974,000 outstanding against the
line of credit and $26,874,000 in notes payable. Based on the amounts
outstanding at March 31, 2006, the annual impact of a change of 100 basis points
in interest rates would be approximately $378,000. Interest rates on these
instruments approximate current market rates as of March 31, 2006.
Periodically we enter into interest rate risk hedges to minimize exposure to the
effect of an increase in interest rates. As of March 31, 2006, we were party to
one interest rate swap agreement. The swap agreement provides that we will pay a
3.62% fixed interest rate on $854,000 of notional principal and receive a
floating interest rate (LIBOR plus 2.50%) on the same amount of notional
principal from the counterparty.
ITEM 4. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our reports filed or submitted to the
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 the principal executive
and financial officers (referred to in this report as the Certifying Officers),
as appropriate to allow timely decisions regarding required disclosure.
Management, under the supervision and with the participation of the Certifying
Officers, evaluated the effectiveness of disclosure controls and procedures as
of March 31, 2006, pursuant to Rule 13a-15(b) under the Exchange Act. Based on
that evaluation, the Certifying Officers have concluded that, as of March 31,
2006, our disclosure controls and procedures were effective.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no significant changes in our internal control over financial
reporting that occurred during the most recently completed fiscal quarter that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
18
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable.
ITEM 1A. RISK FACTORS
There have been no material changes in our risk factors from those disclosed in
our annual report on Form 10-K for the year ended December 31, 2005, except as
noted below:
- - Employee unionization - In September 2003, our pilots voted to be
represented by a collective bargaining unit, and we signed a CBA on March
31, 2006. The agreement is effective January 1, 2006, through April 30,
2009. The CBA establishes procedures for training, addressing grievances,
discipline and discharge, among other matters, and defines vacation,
holiday, sick, health insurance, and other employee benefits. The CBA also
establishes wage scales, including adjustments for geographic locations,
covering each year of the agreement. Significant changes from our previous
wage rates or benefits include increases in initial base pay rates,
dependent upon each pilot's level of seniority; increase in pay for
overtime shifts from regular pay rates to 1.5 times regular pay rates; and
changes in our contributions to defined contribution retirement plans (401k
plans). Previously, under one 401k plan, we contributed 2% of gross pay for
all eligible employees and matched 60% of the employees' contributions up
to 6% of their gross pay. Under the other plan, we matched 30% of the
employees' contributions up to 6% of their gross pay. The CBA provides for
Company contributions up to 5.6% of gross pay to both 401k plans, depending
on the level of each employee's participation. We recorded approximately
$1,654,000 in incremental salary and benefit costs during the first quarter
as a result of implementing the CBA provisions. Other employee groups may
also elect to be represented by unions in the future.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
On May 5, 2006, we entered into an Employment Agreement with Michael D. Allen as
Senior Vice President of Air Medical Services. Effective January 4, 2006, the
agreement will continue for an initial term of one year, subject to successive
one-year extensions. The agreement provides for initial annual compensation of
$180,000, which may be adjusted annually. The agreement may be terminated either
by us or by Mr. Allen upon 90 days' written notice, or immediately by us for
cause. In the event we terminate the agreement without cause, Mr. Allen is
entitled to severance payments for twelve months following termination (or six
months if termination occurs on or before December 31, 2006) at an annual rate
equal to his highest cash compensation during any 12-month period of his
employment. During his term of employment and for twelve months following the
termination of employment (or six months if termination occurs on or before
December 31, 2006), Mr. Allen may not engage in any business which competes with
us anywhere in the United States.
19
ITEM 6. EXHIBITS
10.1 Employment Agreement between the Company and Michael D.
Allen, dated January 4, 2006
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
20
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: May 10, 2006 By \s\ Aaron D. Todd
--------------------------------------
Aaron D. Todd
Chief Executive Officer
(Principal Executive Officer)
Date: May 10, 2006 By \s\ Trent J. Carman
--------------------------------------
Trent J. Carman
Chief Financial Officer
(Principal Financial Officer)
Date: May 10, 2006 By \s\ Sharon J. Keck
--------------------------------------
Sharon J. Keck
Chief Accounting Officer
(Principal Accounting Officer)
21