UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2006
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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
COMMISSION FILE NUMBER 0-16079
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AIR METHODS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 84-0915893
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
7301 SOUTH PEORIA, ENGLEWOOD, COLORADO 80112
(Address of principal executive offices and zip code)
303-792-7400
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Not Applicable
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.06 PAR VALUE PER SHARE (THE "COMMON STOCK")
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
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]
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was last sold, or the average bid and asked price of such common equity, as of
the last business day of the registrant's most recently completed second fiscal
quarter: $270,469,000
The number of outstanding shares of Common Stock as of February 26, 2007, was
11,874,613.
TABLE OF CONTENTS
TO FORM 10-K
Page
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PART I
ITEM 1. BUSINESS. . . . . . . . . . . . . . . . . . . . . . . . . . 1
General . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Employees . . . . . . . . . . . . . . . . . . . . . . . . . 3
Government Regulation . . . . . . . . . . . . . . . . . . . 4
Internet Address. . . . . . . . . . . . . . . . . . . . . . 4
ITEM 1A. RISK FACTORS. . . . . . . . . . . . . . . . . . . . . . . . 4
ITEM 1B. UNRESOLVED STAFF COMMENTS . . . . . . . . . . . . . . . . . 8
ITEM 2. PROPERTIES. . . . . . . . . . . . . . . . . . . . . . . . . 8
Facilities. . . . . . . . . . . . . . . . . . . . . . . . . 8
Equipment and Parts . . . . . . . . . . . . . . . . . . . . 9
ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . 9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . . 10
ITEM 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . 12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . 14
Overview. . . . . . . . . . . . . . . . . . . . . . . . . . 14
Results of Operations . . . . . . . . . . . . . . . . . . . 16
Liquidity and Capital Resources . . . . . . . . . . . . . . 22
Outlook for 2007. . . . . . . . . . . . . . . . . . . . . . 25
Critical Accounting Policies. . . . . . . . . . . . . . . . 25
New Accounting Standards. . . . . . . . . . . . . . . . . . 27
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. 27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . 27
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . . . 27
ITEM 9A. CONTROLS AND PROCEDURES . . . . . . . . . . . . . . . . . . 28
ITEM 9B. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . 28
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE . . 29
ITEM 11. EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . . . . . 32
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT. . . . . . . . . . . . . . . . . . . . . . . . . 45
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND
DIRECTOR INDEPENDENCE . . . . . . . . . . . . . . . . . . . 48
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES. . . . . . . . . . . 48
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. . . . . . . . IV-1
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-4
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PART I
ITEM 1. BUSINESS
GENERAL
Air Methods Corporation, a Delaware corporation, (Air Methods or the Company)
was established in Colorado in 1982 and now serves as the largest provider of
air medical emergency transport services and systems throughout the United
States of America. We provide air medical emergency transport services under two
separate operating models: the Community-Based Model (CBM) and the
Hospital-Based Model (HBM). In October 2002, we acquired 100% of the membership
interest of Rocky Mountain Holdings, LLC (RMH), a Delaware limited liability
company which conducted both CBM and HBM operations. RMH, Mercy Air Service,
Inc. (Mercy Air), and LifeNet, Inc. (LifeNet) operate as wholly-owned
subsidiaries of Air Methods. As of December 31, 2006, our CBM division provided
air medical transportation services in 18 states, while our HBM division
provided air medical transportation services to hospitals located in 26 states
under operating agreements with original terms ranging from one to ten years.
Under both CBM and HBM operations, we transport persons requiring intensive
medical care from either the scene of an accident or general care hospitals to
highly skilled trauma centers or tertiary care centers. Under the CBM delivery
model, our employees provide medical care to patients en route, while under the
HBM delivery model, medical care en route is provided by employees or
contractors of our customer hospitals. Our Products Division designs,
manufactures, and installs aircraft medical interiors and other aerospace or
medical transport products. Financial information for each of our operating
segments is included in the notes to our consolidated financial statements
included in Item 8 of this report.
Community-Based Model
CBM services, also referred to as independent provider operations, are performed
by our LifeNet Division and include medical care, aircraft operation and
maintenance, 24-hour communications and dispatch, and medical billing and
collections. CBM aircraft are typically based at fire stations or airports. CBM
revenue consists of flight fees billed directly to patients, their insurers, or
governmental agencies. Due to weather conditions and other factors, the number
of flights is generally higher during the summer months than during the
remainder of the year, causing revenue generated from operations to fluctuate
accordingly.
The division operates 99 helicopters and two fixed wing aircraft under both
Instrument Flight Rules (IFR) and Visual Flight Rules (VFR) in 18 states, with
concentrations in the Southwest, Midwest, and Southeast. Although the division
does not generally contract directly with specific hospitals, it has
long-standing relationships with several leading healthcare institutions in the
metropolitan areas in which it operates.
During 2006 we opened three new bases in the southeast region, three in the
northeast region, and one in California. In addition, an HBM contract in Florida
converted to CBM operations. We closed bases in Arizona, South Carolina, and
California due to insufficient flight volume. In 2006 we began providing air
medical transportation services to two U.S. Army bases in California and
Georgia. The contracts have been extended through June and December 2007,
respectively, and further renewals are subject to continued government funding,
as well as to potential competitive bid processes. Throughout 2006, we also
provided air medical transportation services in the Gulfport, Mississippi,
region in the aftermath of Hurricane Katrina, pursuant to a contract with the
State of Mississippi. The contract converted to month-to-month status at the
beginning of 2007.
Communications and dispatch operations for substantially all CBM locations are
conducted from our national center in Omaha, Nebraska, or from the regional
center in St. Louis, Missouri. Medical billing and collections are processed
primarily from our offices in San Bernardino, California.
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Competition for the CBM division comes primarily from four national operators
(OmniFlight, Inc.; PHI, Inc.; CJ Systems, Inc.; and Air Evac Services, Inc.) and
from smaller regional carriers and alternative air ambulance providers such as
local governmental entities. We believe that our competitive strengths center on
the quality of our patient care and customer service and the medical capability
of the aircraft we deploy, as well as our ability to tailor the service delivery
model to a hospital's or community's specific needs. Availability of new
aircraft to respond to growth opportunities also provides a competitive
advantage. Unlike many other operators, we maintain in-house core competencies
in hiring, training, and management of medical staff; billing and collection
services; and dispatch and communication functions, in addition to aviation
operations. We believe that choosing not to outsource these services allows us
to better ensure the quality of patient care and enhance control over the
associated costs.
Hospital-Based Model
Our HBM division provides hospital clients with medically-equipped helicopters
and airplanes which are generally based at hospitals. Our responsibility is to
operate and maintain the aircraft in accordance with Federal Aviation
Regulations (FAR) Part 135 standards. Hospital clients provide medical personnel
and all medical care on board the aircraft. The division operates 99 helicopters
and 12 fixed wing aircraft in 26 states. Under the typical operating agreement
with a hospital, we earn approximately 60% of our revenue from a fixed monthly
fee and 40% from an hourly flight fee from the hospital, regardless of when, or
if, the hospital is reimbursed for these services by its patients, their
insurers, or the federal government. Both monthly and hourly fees are generally
subject to annual increases based on changes in the consumer price index, hull
and liability insurance premiums, or spare parts prices from aircraft
manufacturers. Because the majority of the division's flight revenue is
generated from fixed monthly fees, seasonal fluctuations in flight hours do not
significantly impact monthly revenue in total.
In 2006 we began rotor wing operations in Montana under a 3-year contract and
expanded two existing hospital contracts in Minnesota and West Virginia to new
satellite operations. Of the twelve hospital contracts whose terms expired in
2006, seven were renewed for terms ranging from one to three years; four
contracts are currently operating on month-to-month or short-term extensions
pending finalization of contract renewal negotiations. One contract with a
customer in Illinois was not renewed upon its expiration date in 2006. We also
closed operations under our contract in Puerto Rico.
We operate some of our HBM contracts under the service mark AIR LIFE(R), which
is generally associated within the industry with our standard of service.
Competition for the HBM division comes primarily from three national operators:
CJ Systems, Inc.; OmniFlight, Inc.; and PHI, Inc. Operators generally compete on
the basis of price, safety record, accident prevention and training, and the
medical capability of the aircraft. Price is a significant element of
competition as many healthcare organizations continue to move toward
consolidation and strict cost containment. We believe that our competitive
strengths center on the quality of our customer service and the medical
capability of the aircraft we deploy. Availability of new aircraft to respond to
customer needs also provides a competitive advantage.
Technical Services
Our technical services group is a full-service maintenance provider, performing
airframe inspection, modification, repair and refurbishment; engine repair;
component and hydraulic systems repair and overhaul; and non-destructive
component testing at our headquarters in metropolitan Denver, Colorado, for both
CBM and HBM divisions. We are a Customer Service Facility for American
Eurocopter Corporation (AEC), Bell Helicopter, Inc. (Bell), and several avionics
manufacturers and a Federal Aviation Administration (FAA) Certified Repair
Station authorized to perform airframe, avionics, and engine repairs. In-house
repair, maintenance, and testing capabilities provide cost savings and decrease
aircraft down time by avoiding the expense and delay of having this work
performed by nonaffiliated vendors. The technical services group also provides
aircraft procurement, spare parts and medical supplies procurement, inventory,
and aircraft recordkeeping services for our flight operations.
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Products Division
Our Products Division designs, manufactures, and certifies modular medical
interiors, multi-mission interiors, and other aerospace and medical transport
products. These interiors and other products range from basic life support to
intensive care suites to advanced search and rescue systems. With a full range
of engineering, manufacturing and certification capabilities, the division has
also designed and integrated aircraft communication and navigation systems,
environmental control systems, and structural and electrical systems.
Manufacturing capabilities include avionics, electrical, composites, machining,
welding, sheetmetal, and upholstery. The division also offers quality assurance
and certification services pursuant to its FAA Designated Alteration Station
(DAS) authorization, Parts Manufacturer Approvals (PMA's), and ISO9001:2000
(Quality Systems) certification.
We maintain patents covering several products, including the Litter Lift System,
used in the U.S. Army's HH-60L helicopter and in the Medical Evacuation Vehicle
(MEV), and the Articulating Patient Loading System and Modular Equipment Frame,
which were developed as part of the modular interior concept. Raw materials and
components used in the manufacture of interiors and other products are generally
widely available from several different vendors.
In 2006, we completed production of 21 litter systems for the U.S. Army's
Medical Evacuation Vehicle (MEV) and eleven modular, medical interior kits for
commercial customers. We also continued work on eleven Multi-Mission Medevac
Systems for the U. S. Army's HH-60L Black Hawk helicopter. In the fourth
quarter, we began production of 27 additional MEV units. Although the Products
Division teamed with four other companies to pursue the new U.S. Air Force
Combat Search & Rescue helicopter program, the program was awarded to another
bidder in 2006. The award has been contested by one of the bidders and is
currently under review.
Our competition in the aircraft interior design and manufacturing industry comes
primarily from three companies based in the United States and three in Europe.
Competition is based mainly on product availability, price, and product
features, such as configuration and weight. With the development of a line of
interiors for Eurocopter aircraft to complement our established line of
interiors for Bell aircraft, we believe that we have demonstrated the ability to
compete on the basis of each of these factors.
As of December 31, 2006, eleven HH-60L units and 27 MEV units for the U.S. Army
and two commercial medical interiors were in process. Deliveries under all
contracts in process are expected to be completed by the third quarter of 2007,
and remaining revenue is estimated at $2.6 million. As of December 31, 2005, the
revenue remaining to be recognized on medical interiors and other products in
process was estimated at $3.3 million.
EMPLOYEES
As of December 31, 2006, we had 1,837 full time and 318 part time employees,
comprised of 674 pilots; 381 aviation machinists, airframe and power plant (A&P)
engineers, and other manufacturing/maintenance positions; 648 flight nurses and
paramedics; and 452 business and administrative personnel. Our pilots are
IFR-rated where required by contract, and all have completed an extensive ground
school and flight training program at the commencement of their employment with
us, as well as local area orientation and annual training provided by us. All of
our aircraft mechanics must possess FAA A&P licenses. All flight nurses and
paramedics hold the appropriate state and county licenses, as well as
Cardiopulmonary Resuscitation, Advanced Cardiac Life Support, and/or Pediatric
Advanced Life Support certifications.
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. Significant
changes from our previous wage rates or benefits include increases in initial
base pay rates; 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. Other employee groups may also elect to be
represented by unions in the future.
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GOVERNMENT REGULATION
We are subject to the Federal Aviation Act of 1958, as amended. All of our
flight and maintenance operations are regulated and actively supervised by the
U.S. Department of Transportation through the FAA. Medical interiors and other
aerospace products developed by us are subject to FAA certification. Air Methods
and LifeNet each hold a Part 135 Air Carrier Certificate, and Air Methods, Mercy
Air, and LifeNet each hold Part 145 Repair Station Certificates from the FAA. A
Part 135 certificate requires that the voting interests of the holder of the
certificate cannot be more than 25% owned by foreign persons. As of December 31,
2006, we are not aware of any foreign person who holds more than 5% of
outstanding Common Stock.
In 2006 the FAA implemented changes to the minimum weather standards for flight
acceptance and to the definition of a local flying area for application of
minimum weather standards. The FAA also updated its interpretation of existing
standards regarding operational control. Operational control refers to the
ability of a Part 135 certificate holder to track, communicate with, and affect
a flight by its aircraft while en route. In response to the new interpretations,
we are in the process of implementing an FAA-approved training course for all
communication specialists, both employees and contractors, that perform flight
tracking on our aircraft and of establishing an operational control center which
will allow us, from a single location, to track flight plans and flight
conditions for all aircraft and to contact our pilots en route. Compliance with
the new interpretations is required by March 15, 2007, with an extension of time
possible if approved by the FAA.
We are also subject to laws, regulations, and standards relating to corporate
governance and public disclosure, including the Sarbanes-Oxley Act of 2002,
Securities and Exchange Commission regulations, and NASDAQ Market rules.
INTERNET ADDRESS
Our internet site is www.airmethods.com. We make available free of charge, on or
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through the website, all annual, quarterly, and current reports, as well as any
amendments to these reports, as soon as reasonably practicable after
electronically filing these reports with the Securities and Exchange Commission.
This reference to the website does not incorporate by reference the information
contained in the website and such information should not be considered a part of
this report.
ITEM 1A. RISK FACTORS
Our actual operating results may differ materially from those described in
forward-looking statements as a result of various factors, including but not
limited to, those discussed in "Outlook for 2007" and those described below.
- - Flight volume - Almost all CBM revenue and approximately 40% of HBM revenue
is dependent upon flight volume. Approximately 24% of our total operating
expenses also vary with the 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 our 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. The past several years have seen significant
increases in the number of community-based units operated within the
industry. Although to date we have not experienced an overall decrease in
patient transports for CBM bases open longer than one year (Same-Base
Transports) on an annual basis due to competition, further increases in the
total number of community-based units may create overcapacity which may, in
turn, lead to reductions in flight volume for any one provider.
- - Collection rates - We respond 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 provisions for contractual discounts and
estimated uncompensated care. Both provisions are estimated during the
period the related services are performed based on historical collection
experience and any known trends or changes in reimbursement rate schedules
and payor mix. The provisions are adjusted as
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required based on actual collections in subsequent periods. 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. In addition,
the collection rate is impacted by changes in the cost of healthcare and
health insurance; as the cost of healthcare increases, health insurance
coverage provided by employers may be reduced or eliminated entirely,
resulting in an increase in the uninsured population. Our ability to
collect price increases in our standard charge structure has generally been
limited to accounts covered by insurance providers. Although we have not
yet experienced increased limitations in the amount reimbursed by insurance
companies, continued price increases may cause insurance companies to limit
coverage for air medical transport to amounts less than our standard rates.
There is no assurance that we will be able to maintain historical
collection rates after the implementation of price increases for CBM
transports.
- - Dependence on third party suppliers - We currently obtain a substantial
portion of our helicopter spare parts and components from AEC and Bell and
maintain supply arrangements with other parties for our engine and related
dynamic components. As of December 31, 2006, AEC aircraft comprise 68% of
our helicopter fleet while Bell aircraft constitute 30%. All of the new
helicopters scheduled for delivery in 2007 are AEC aircraft. Since both
manufacturers are essentially sold out of new aircraft for the foreseeable
future, both have been passing through increases in the price of new
aircraft and spare parts which are higher than overall inflationary trends.
In addition, increases in spare parts prices tend to be higher for aircraft
which are no longer in production. Increases in our monthly and hourly
flight fees billed to our HBM customers in certain cases are limited to
changes in the consumer price index. As a result, an unusually high
increase in the price of parts may not be fully passed on to our HBM
customers. The ability to pass on price increases for CBM operations may be
limited by reimbursement rates established by Medicare, Medicaid, and
insurance providers and by other market considerations. Based upon the
manufacturing capabilities and industry contacts of AEC, Bell, and other
suppliers, we believe we will not be subject to material interruptions or
delays in obtaining aircraft parts and components but do not have an
alternative source of supply for AEC, Bell, 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 us.
- - Aircraft availability - The recent high rate of growth in the air medical
transportation and other helicopter services industries has generated
strong demand for new models of helicopters. Most major helicopter
manufacturers are sold out of the majority of new aircraft models suitable
for medical missions for at least the next two years. Quality used aircraft
are also in short supply worldwide. We have endeavored to mitigate the
shortage of suitable aircraft and limit our exposure to the effect of price
increases on new aircraft primarily through long-term arrangements with a
single aircraft manufacturer which provides us options to purchase up to
ten aircraft each year for the next several years. We also have a purchase
commitment with another aircraft manufacturer for fifteen aircraft, with
deliveries scheduled to begin in 2008, as well as options for an additional
fifteen aircraft in future years. Despite these purchase commitments and
options, if our future needs for aircraft exceed our current projections,
the shortage of aircraft could prevent us from pursuing certain expansion
opportunities. If our future needs for aircraft are less than our current
projections, the ownership costs for new deliveries could exceed our
ability to recover them through increased revenue. Presently, a vibrant
secondary market for these models of aircraft exists which may allow us to
sell aircraft not needed in our operations.
- - 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. We
recorded approximately $7,711,000 in incremental salary and benefit costs
during 2006 as a result of implementing the CBA provisions. Union personnel
have also actively attempted to organize other of our employee groups in
the past and these groups may elect to be represented by unions in the
future.
5
- - Employee recruitment and retention - An important aspect of our 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 we are
unable to recruit and retain a sufficient number of these employees, the
ability to maintain and grow the business could be negatively impacted. A
limited supply of qualified applicants may also contribute to wage
increases which outpace the rate of inflation.
- - Competition - HBM operations face significant competition from several
national and regional air medical transportation providers for contracts
with hospitals and other healthcare institutions. In addition to the
national and regional providers, 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 the medical capability
of the aircraft. There can be no assurance that we will be able to continue
to compete successfully for new or renewing contracts in the future.
- - Fuel costs - Fuel accounted for 3.3% of total operating expenses for the
year ended December 31, 2006. Both the cost and availability of fuel are
influenced by many economic and political factors and events occurring in
oil-producing countries throughout the world, and fuel costs fluctuate
widely. The price per barrel of oil has maintained near record levels over
the past several years. We cannot predict the future cost and availability
of fuel. The unavailability of adequate fuel supplies could have an adverse
effect on our cost of operations and profitability. Generally, our HBM
customers pay for all fuel consumed in medical flights. However, our
ability to pass on increased fuel costs for CBM operations may be limited
by economic and competitive conditions and by reimbursement rates
established by Medicare, Medicaid, and insurance providers. We do not
currently have any agreements in place to hedge our fuel costs.
- - Aviation industry hazards and insurance limitations - Hazards are inherent
in the aviation industry and may result in loss of life and property,
thereby exposing us to potentially substantial liability claims arising out
of the operation of aircraft. We may also be sued in connection with
medical malpractice claims arising from events occurring during a medical
flight. Under HBM operating agreements, hospital customers have agreed to
indemnify us 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, our personnel perform medical procedures on transported
patients, which may expose us to significant direct legal exposure to
medical malpractice claims. We maintain general liability aviation
insurance, aviation product liability coverage, and medical malpractice
insurance, and believe 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 our cost of
operations. Approximately 40% of any increases in hull and liability
insurance may be passed through to our HBM 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 our operating
results and relationship with such hospitals. The fatal accident we
experienced in December 2006 is not expected to have a material impact on
our hull and liability insurance rates when renewed in July 2007. In the
year ended December 31, 2006, we recorded an increase in expense of
$500,000 for the self-insured portion of workers compensation premiums as a
result of the accident.
- - Restrictive debt covenants - Our senior credit facility contains
restrictive financial and operating covenants, including restrictions on
our 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 covenants may restrict future growth through the
limitation on capital expenditures and acquisitions, and may adversely
impact our ability to implement our business plan. Failure to comply with
the covenants defined in the agreement or to maintain the required
financial ratios could result in an event of default and accelerate payment
of the principal balances due under the senior credit facility. Given
6
factors beyond our control, such as interruptions in operations from
unusual weather patterns not included in current projections, there can be
no assurance that we will be able to remain in compliance with financial
covenants in the future, or that, in the event of non-compliance, we will
be able to obtain waivers from the lenders, or that to obtain such waivers,
we will not be required to pay lenders significant cash or equity
compensation.
- - Governmental regulation - The air medical transportation services and
products industry is subject to extensive regulation by governmental
agencies, including the FAA, which impose significant compliance costs on
us. 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 customers. Changes in laws or
regulations, such as the minimum weather standards for flight acceptance
and interpretations regarding operational control as described above in
Item 1, or in reimbursement rates could have a material adverse impact on
our cost of operations or revenue from flight operations. Periodically the
FAA issues airworthiness directives covering one or more models of
aircraft. Although we believe that our aircraft are currently in compliance
with all FAA-issued airworthiness directives, additional airworthiness
directives likely will be issued in the future and may result in additional
operating costs or make a particular model of aircraft uneconomical to
operate. In December 2006 we experienced a fatal accident which is
currently under investigation by the National Transportation Safety Board.
We are not aware of any regulatory action resulting from the progress of
this investigation. In recent years, the accident rate for the entire air
medical transportation industry has exceeded historical levels, leading to
increased scrutiny from government regulatory agencies. Such increased
scrutiny could result in new regulations and increases in the cost of
compliance with regulations.
- - Compliance with corporate governance and public disclosure regulations -
New laws, regulations, and standards relating to corporate governance and
public disclosure-including the Sarbanes-Oxley Act of 2002, new SEC
regulations, and NASDAQ Market rules-are subject to varying interpretations
in many cases due to lack of specificity. Their application may evolve over
time as new guidance is provided by regulatory and governing bodies, which
may result in continuing uncertainty regarding compliance matters and
higher costs necessitated by ongoing revisions to disclosure and governance
practices. Our efforts to maintain high standards of corporate governance
and public disclosure in compliance with evolving laws and regulations have
resulted in, and are likely to continue to result in, increased general and
administrative expenses and a diversion of management's time and attention
from revenue-generating activities to compliance activities. In particular,
compliance with Section 404 of the Sarbanes-Oxley Act of 2002, which
requires us to include management and auditor reports on internal controls
as part of our annual report, has required commitment of significant
financial and managerial resources. In addition, board members, the chief
executive officer, and the chief financial officer could face an increased
risk of personal liability in connection with the performance of their
duties. As a result, we may have difficulty attracting and retaining
qualified board members and executive officers. If efforts to comply with
new or changed laws, regulations, and standards differ from the activities
intended by regulatory or governing bodies due to ambiguities related to
practice, our reputation may be harmed.
- - Internal controls - We are required by Section 404 of the Sarbanes-Oxley
Act of 2002 to include management and auditor reports on internal controls
as part of our annual report. Management concluded that internal control
over financial reporting was effective at December 31, 2006, and our
independent auditors attested to that conclusion. There can be no assurance
that material weaknesses in internal controls over financial reporting will
not be discovered in the future or that we and our independent auditors
will be able to conclude that internal control over financial reporting is
effective in the future. Although it is unclear what impact failure to
comply fully with Section 404 or the discovery of a material weakness in
internal controls over financial reporting would have on us, it may subject
us to regulatory scrutiny and result in additional expenditures to meet the
requirements, a reduced ability to obtain financing, or a loss of investor
confidence in the accuracy of our financial reports.
- - Debt and lease obligations - We are obligated under debt facilities
providing for up to approximately $107.3 million of indebtedness, of which
approximately $77.7 million was outstanding (net of $4.2 million of cash)
at December 31, 2006, and operating lease obligations which total $177.6
million over the remaining terms of the leases. If we fail to meet our
payment obligations or otherwise default under the agreements governing
indebtedness or lease obligations, the lenders under those agreements will
have the right to accelerate the
7
indebtedness and exercise other rights and remedies against us. These
rights and remedies include the rights to repossess and foreclose upon the
assets that serve as collateral, initiate judicial foreclosure against us,
petition a court to appoint a receiver for us, and initiate involuntary
bankruptcy proceedings against us. If lenders exercise their rights and
remedies, our assets may not be sufficient to repay outstanding
indebtedness and lease obligations, and there may be no assets remaining
after payment of indebtedness and lease obligations to provide a return on
common stock.
- - 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.
- - 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 we are 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 December 31, 2006, we are not aware of any
foreign person who holds more than 5% of outstanding Common Stock. Because
we are unable to control the transfer of our stock, we are unable to assure
that we can remain in compliance with these requirements in the future.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
FACILITIES
We lease our headquarters, consisting of approximately 108,000 square feet of
office and hangar space, in metropolitan Denver, Colorado, at Centennial
Airport. The lease is presently on a month-to-month basis pending final
negotiation of terms and conditions to extend the lease through October 2008.
The approximate annual rent is $1,109,000. We also own and lease various
properties for depot level maintenance and administration purposes. We believe
that these facilities are in good condition and suitable for our present
requirements.
8
EQUIPMENT AND PARTS
As of December 31, 2006, we managed and operated a fleet of 212 aircraft,
composed of the following:
Number of Number of Number of
Company-Owned Company-Leased Customer-
Type Aircraft Aircraft Owned Aircraft Total
- ------------------------------------------------------------------------
Helicopters:
Bell 206 5 -- -- 5
Bell 222 13 8 -- 21
Bell 230 -- -- 1 1
Bell 407 5 9 6 20
Bell 412 4 2 1 7
Bell 430 -- 2 4 6
Eurocopter AS 350 14 35 4 53
Eurocopter AS 355 1 -- -- 1
Eurocopter BK 117 18 22 -- 40
Eurocopter BO 105 2 3 1 6
Eurocopter EC 130 -- 10 -- 10
Eurocopter EC 135 -- 16 3 19
Eurocopter EC 145 -- 2 4 6
Boeing MD 902 -- 2 -- 2
Sikorsky S 76 -- -- 1 1
----------------------------------------------------
62 111 25 198
----------------------------------------------------
Airplanes:
King Air E 90 1 -- 2 3
King Air B 100 -- 1 -- 1
King Air B 200 1 -- 2 3
Pilatus PC 12 -- 2 5 7
----------------------------------------------------
2 3 9 14
----------------------------------------------------
TOTALS 64 114 34 212
====================================================
We generally pay all insurance, taxes, and maintenance expense for each aircraft
in our fleet. Because helicopters are insured at replacement cost which usually
exceeds book value, we believe that helicopter accidents covered by hull and
liability insurance will generally result in full reimbursement of any damages
sustained. In the ordinary course of business, we may from time to time purchase
and sell helicopters in order to best meet the specific needs of our operations.
We have experienced no significant difficulties in obtaining required parts for
our helicopters. Repair and replacement components are purchased primarily
through AEC and Bell, since AEC and Bell aircraft make up the majority of our
fleet. Based upon the manufacturing capabilities and industry contacts of AEC
and Bell, we believe we will not be subject to material interruptions or delays
in obtaining aircraft parts and components. Any termination of production by AEC
or Bell would require us to obtain spare parts from other suppliers, which are
not currently in place.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter ended
December 31, 2006.
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our common stock is traded on the NASDAQ Global Select Market System under the
trading symbol "AIRM." The following table shows, for the periods indicated, the
high and low closing prices for our common stock. The quotations for the common
stock represent prices between dealers and do not reflect adjustments for retail
mark-ups, mark-downs or commissions, and may not represent actual transactions.
YEAR ENDED DECEMBER 31, 2006
----------------------------
Common Stock High Low
----------------------------------------
First Quarter . . . . $30.00 $17.45
Second Quarter. . . . 31.00 20.44
Third Quarter . . . . 26.30 18.28
Fourth Quarter. . . . 29.55 22.77
YEAR ENDED DECEMBER 31, 2005
----------------------------
Common Stock High Low
----------------------------------------
First Quarter . . . . $ 8.47 $ 7.01
Second Quarter. . . . 8.17 6.55
Third Quarter . . . . 11.92 7.85
Fourth Quarter. . . . 17.87 11.20
As of February 26, 2007, there were approximately 242 holders of record of our
common stock. We estimate that we have approximately 5,800 beneficial owners of
common stock.
We have not paid any cash dividends since inception and intend to retain any
future earnings to finance the growth of our business rather than to pay
dividends. In addition, our senior credit facility contains a covenant which
prohibits the payment of dividends.
STOCK PERFORMANCE GRAPH
The following graph compares our cumulative total stockholder return for the
period from December 31, 2001 through December 31, 2006, against the Standard &
Poor's 500 Index (S&P 500) and "peer group" companies in industries similar to
those of the Company. The S&P 500 is a widely used composite index reflecting
the returns of five hundred publicly traded companies in a variety of
industries. The Peer Group consists of all publicly traded companies in SIC
Group 4522: "Non-scheduled Air Transport," including Airnet Systems Income;
Atlas Air Worldwide Holdings, Inc.; Elite Flight Solutions, Inc.; Offshore
Logistics, Inc.; and PHI, Inc. We believe that this Peer Group is our most
appropriate peer group for stock comparison purposes due to the limited number
of publicly traded companies engaged in air or ground medical transport and
because this Peer Group contains a number of companies with capital costs and
operating constraints similar to ours. The graph shows the value at the end of
each of the last five fiscal years of $100 invested in our common stock or the
indices on December 31, 2001, and assumes reinvestment of dividends. Historical
stock price performance is not necessarily indicative of future stock price
performance.
10
[GRAPH OMITED]
INDEXED RETURNS
Base Years Ending
Period --------------------------------------
Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06
----------------------------------------------
AIR METHODS CORPORATION 100.00 91.51 144.14 138.04 277.69 448.15
S & P 500 100.00 77.90 100.24 111.15 116.61 135.03
PEER GROUP 100.00 113.31 124.26 153.20 158.25 202.64
11
ITEM 6. SELECTED FINANCIAL DATA
The following tables present selected consolidated financial information of the
Company and our subsidiaries which has been derived from our audited
consolidated financial statements. This selected financial data should be read
in conjunction with our consolidated financial statements and notes thereto
appearing in Item 8 of this report. Revenue and expenses for the years ended
December 31, 2003 and 2002, increased in part as a result of the acquisition of
RMH in October 2002. See "Business - General" in Item 1 of this report. Revenue
for all years has been adjusted to reflect the presentation of revenue exclusive
of uncompensated care, as discussed in Note 2 to the consolidated financial
statements.
SELECTED FINANCIAL DATA OF THE COMPANY
(Amounts in thousands except share and per share amounts)
Year Ended December 31,
-----------------------
2006 2005 2004 2003 2002
---------------------------------------------------------------
STATEMENT OF OPERATIONS DATA:
Revenue $ 319,504 276,178 230,211 209,936 115,082
Operating expenses (244,227) (211,072) (184,458) (169,164) (89,539)
General and administrative expenses (40,710) (36,971) (33,691) (25,209) (14,390)
Other expense, net (4,223) (8,110) (6,698) (7,197) (2,694)
---------------------------------------------------------------
Income before income taxes 30,344 20,025 5,364 8,366 8,459
Income tax expense (13,144) (8,193) (2,121) (3,263) (3,299)
---------------------------------------------------------------
Income before cumulative effect of change in
accounting principle 17,200 11,832 3,243 5,103 5,160
Cumulative effect of change in method of
accounting for maintenance costs, net of
income taxes - - 8,595 - -
---------------------------------------------------------------
Net income $ 17,200 11,832 11,838 5,103 5,160
===============================================================
Basic income per common share:
Income before cumulative effect of
change in accounting principle $ 1.46 1.07 .30 .53 .56
Cumulative effect of change in method of
accounting for maintenance costs, net of
income taxes - - .79 - -
---------------------------------------------------------------
Net income $ 1.46 1.07 1.09 .53 .56
===============================================================
Diluted income per common share:
Income before cumulative effect of change
in accounting principle $ 1.40 1.02 .29 .51 .54
Cumulative effect of change in method of
accounting for maintenance costs, net of
income taxes - - .76 - -
---------------------------------------------------------------
Net income $ 1.40 1.02 1.05 .51 .54
===============================================================
Weighted average number of shares
of Common Stock outstanding - basic 11,748,107 11,058,971 10,894,863 9,665,278 9,184,421
===============================================================
Weighted average number of shares
of Common Stock outstanding - diluted 12,306,047 11,654,885 11,314,827 10,052,989 9,478,502
===============================================================
12
SELECTED FINANCIAL DATA OF THE COMPANY
(Amounts in thousands)
As of December 31,
--------------------------------------------
2006 2005 2004 2003 2002
--------------------------------------------
BALANCE SHEET DATA:
Total assets $250,157 221,532 204,723 215,649 196,396
Long-term liabilities 95,014 89,649 89,490 114,657 115,225
Stockholders' equity 107,314 86,211 73,079 60,688 46,218
SELECTED OPERATING DATA
2006 2005 2004 2003 2002
--------------------------------------
FOR YEAR ENDED DECEMBER 31:
CBM patient transports 34,116 31,841 30,159 25,676 12,870
HBM medical missions 50,670 49,644 46,630 46,570 26,367
AS OF DECEMBER 31:
CBM bases 76 69 64 59 48
HBM bases 90 87 86 78 77
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the results of operations and financial condition
should be read in conjunction with our consolidated financial statements and
notes thereto included in Item 8 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; flight
volume and collection rates for CBM operations; 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;
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 quarterly
reports on Form 10-Q. 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
and medical transport products. 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 2006 the CBM Division generated 65% of our total revenue,
compared to 61% in 2005 and 58% in 2004.
- - Hospital-Based Model (HBM) - provides air medical transportation services
to hospitals throughout the U.S. under exclusive operating agreements.
Revenue consists primarily of fixed monthly fees (approximately 60% of
total contract revenue) and hourly flight fees (approximately 40% of total
contract revenue) billed to hospital customers. In 2006 the HBM Division
generated 34% of our total revenue, compared to 36% in 2005 and 38% in
2004.
- - Products Division - designs, manufactures, and installs aircraft medical
interiors and other aerospace and medical transport products for domestic
and international customers. In 2006 the Products Division generated 1% of
our total revenue, compared to 3% in 2005 and 4% in 2004.
See Note 13 to the consolidated financial statements included in Item 8 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 almost all of CBM revenue is derived
from flight fees, as compared to approximately 40% of HBM revenue. By
contrast, 76% of our 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 34,100 for 2006 compared to approximately 31,800 for 2005.
Patient transports for CBM bases open longer than one year (Same-Base
Transports) were approximately 31,700 in 2006 compared to 31,000 in 2005.
Cancellations due to unfavorable weather conditions for bases open longer
than one year did not change materially over the prior year.
14
- - REIMBURSEMENT PER TRANSPORT. We respond to calls for air medical transports
without pre-screening the creditworthiness of the patient and are subject
to collection risk on services provided to insured and uninsured patients.
Medicare and Medicaid also receive contractual discounts from our standard
charges for flight services. Flight revenue is recorded net of provisions
for contractual discounts and estimated uncompensated care. Both provisions
are estimated during the period the related services are performed based on
historical collection experience and any known trends or changes in
reimbursement rate schedules and payor mix. The provisions are adjusted as
required based on actual collections in subsequent periods. 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. In addition,
the collection rate is impacted by changes in the cost of healthcare and
health insurance; as the cost of healthcare increases, health insurance
coverage provided by employers may be reduced or eliminated entirely,
resulting in an increase in the uninsured population. We have increased
average prices for our CBM operations a total of 27.5% since March 2005,
contributing to an increase of 13.9% in net reimbursement per transport in
2006 compared to 2005. Provisions for contractual discounts and estimated
uncompensated care for CBM operations are as follows:
For years ended December 31,
2006 2005 2004
-----------------------------------
Gross billings 100% 100% 100%
Provision for contractual discounts 29% 26% 32%
Provision for uncompensated care 20% 19% 16%
The increase in the total percentage of uncollectible accounts is
primarily attributable to price increases. Although price increases
generally increase the net reimbursement per transport from insurance
payers, the amount per transport collectible from private patient payers
and Medicare and Medicaid does not increase proportionately with price
increases. Therefore, depending upon overall payer mix, price increases
will usually result in an increase in the percentage of uncollectible
accounts. Although we have not yet experienced increased limitations in the
amount reimbursed by insurance companies, continued price increases may
cause insurance companies to limit coverage for air medical transport to
amounts less than our standard rates.
- - 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 (OEM's) tend to be higher for aircraft which are no
longer in production. Five models of aircraft within our fleet,
representing 35% of the rotor wing fleet, are no longer in production and
are, therefore, susceptible to price increases which outpace general
inflationary trends. In addition, on-condition components are more likely
to require replacement with age. Since January 1, 2006, we have taken
delivery of seventeen new aircraft and have the option to purchase eighteen
additional aircraft through the end of 2007. We plan to replace
discontinued models and other older aircraft with the new aircraft expected
to be delivered under these options, as well as to provide capacity for
base expansion. Replacement models of aircraft typically have higher
ownership costs than the models targeted for replacement but lower
maintenance costs. Total maintenance expense for CBM and HBM operations
increased 15.8% from 2005 to 2006, while total flight volume for CBM and
HBM operations increased 3.5% over the same period. The number of engine
events, including overhauls, increased approximately 12.5% during 2006
compared to 2005.
- - AIRCRAFT AVAILABILITY. The recent high rate of growth in the air medical
transportation and other helicopter services industries has generated
strong demand for new models of helicopters. Quality used aircraft are also
in short supply worldwide. We have endeavored to mitigate the shortage of
suitable aircraft primarily through long-term arrangements with a single
aircraft manufacturer which provides us options to purchase up to ten
aircraft each year for the next several years. We also have a purchase
commitment with another aircraft manufacturer for fifteen aircraft, with
deliveries scheduled to begin in 2008, as well as options for an additional
fifteen aircraft in future years.
15
- - COMPETITIVE PRESSURES FROM LOW-COST PROVIDERS. We are recognized within the
industry for our standard of service and our use of cabin-class aircraft.
Many of our competitors utilize aircraft with lower ownership and operating
costs and do not require a similar level of experience for aviation and
medical personnel. Reimbursement rates established by Medicare, Medicaid,
and most insurance providers are not contingent upon the type of aircraft
used or the experience of personnel. However, we believe that higher
quality standards help to differentiate our service from competitors and,
therefore, lead to higher utilization. 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 CBA on March 31, 2006. The
agreement is effective January 1, 2006, through April 30, 2009. Significant
changes from our previous wage rates or benefits include increases in
initial base pay rates; 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. The CBA provides for annual
increases in base pay in each year of the agreement. We recorded
approximately $7,711,000 in incremental salary and benefit costs during
2006 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
Year ended December 31, 2006 compared to 2005
We reported net income of $17,200,000 for the year ended December 31, 2006,
compared to $11,832,000 for the year ended December 31, 2005. Net income for the
year ended December 31, 2005, included a loss on early extinguishment of debt of
$3,104,000 (with a tax effect of approximately $1,211,000).
Operating income was $34,567,000 for the year ended December 31, 2006, compared
to $28,135,000 for the year ended December 31, 2005. Net reimbursement (revenue
after provisions for contractual discounts and uncompensated care) for CBM
operations improved 13.9% for 2006 compared to the prior year, while Same-Base
Transports for CBM operations increased approximately 2%. Improvement in net
reimbursement during 2006 was offset in part by increases in the cost of
aircraft maintenance and in salaries and benefits, primarily as a result of the
implementation of the CBA.
FLIGHT OPERATIONS - COMMUNITY-BASED MODEL AND HOSPITAL-BASED MODEL
NET FLIGHT REVENUE increased $45,630,000, or 17.0%, from $268,249,000 for the
year ended December 31, 2005, to $313,879,000 for the year ended December 31,
2006. Flight revenue is generated by both CBM and HBM operations and is recorded
net of provisions for contractual discounts and uncompensated care.
- - CBM - Net flight revenue increased $37,396,000, or 22.1%, to $206,786,000
for the following reasons:
- Average price increases totaling approximately 27.5% for all CBM
operations since March 2005, including 6.5% in mid-June 2006. Net
reimbursement per transport increased approximately 13.9% in 2006
compared to 2005.
- Incremental net revenue of $21,319,000 from the addition of
fifteen new CBM bases during either 2006 or 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 five bases during either 2006 or 2005, resulting in a
decrease in net revenue of approximately $3,581,000.
- Increase of approximately 2.0% in Same Base Transports in 2006
compared to 2005. Cancellations due to unfavorable weather conditions
did not change materially over the prior year.
16
- - HBM - Net flight revenue increased $8,234,000, or 8.3%, to $107,093,000 for
the following reasons:
- Incremental revenue of $4,012,000 generated from the addition of
two new contracts and the expansion of seven contracts during either
2006 or 2005.
- Discontinuation of service under two contracts and the conversion
of one contract to CBM in 2006, resulting in a decrease in revenue of
approximately $887,000.
- Annual price increases in the majority of contracts based on
changes in the Consumer Price Index or spare parts prices from
aircraft manufacturers and the renewal of contracts at higher rates.
- Decrease of 2.3% in flight volume for all contracts excluding the
new contracts, contract expansions, and the discontinued contracts
discussed above.
FLIGHT CENTER COSTS (consisting primarily of pilot, mechanic, and medical staff
salaries and benefits) increased $23,599,000, or 21.4%, to $133,796,000 for the
year ended December 31, 2006, compared to 2005. Changes by business segment were
as follows:
- - CBM - Flight center costs increased $15,595,000, or 21.8%, to $87,142,000
for the following reasons:
- Increase of $10,246,000 for the addition of personnel and
facilities for the new base locations described above.
- Decrease of $2,014,000 due to the closure of base locations
described above.
- Increase of approximately $4,118,000 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 $8,004,000, or 20.7%, to $46,654,000
primarily due to the following:
- Increase of approximately $1,197,000 for the addition of
personnel to staff new base locations described above.
- Decrease of approximately $110,000 due to the base closures
described above.
- Increase of approximately $3,594,000 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 $9,831,000, or 15.1%, for the year ended
December 31, 2006, in comparison to 2005. Aircraft operating expenses consist of
fuel, insurance, and maintenance costs and generally are a function of the size
of the fleet, the type of aircraft flown, and the number of hours flown. The
increase in costs is due to the following:
- - Addition of 25 helicopters for CBM operations and fifteen for HBM
operations during either 2006 or 2005, resulting in an increase of
approximately $2,367,000.
- - Increase of approximately $534,000 in fuel costs as a result of the
addition of new CBM bases, net of the impact of closed CBM bases. The
addition of new HBM bases and expansion of HBM programs did not have a
material impact on fuel costs because HBM customers typically pay for all
fuel consumed in medical flights.
- - Increase of approximately 11.9% in the cost of aircraft fuel per hour
flown.
- - Decreases in hull insurance rates effective July 2005 and July 2006.
- - Changes in flight volume for both CBM and HBM as described above.
- - Increases in the number of engine and transmission events, including
overhauls.
- - Annual price increases in the cost of spare parts and overhauls, most of
which exceeded the rate of inflation.
AIRCRAFT RENTAL EXPENSE increased $3,543,000, or 19.6%, for the year ended
December 31, 2006, in comparison to the year ended December 31, 2005.
Incremental rental expense incurred in 2006 for 26 leased aircraft added to our
fleet during either 2006 or 2005 totaled $4,369,000. The increase for new
aircraft was offset in part by refinancing nine aircraft at lower lease rates
during 2006 and twelve during 2005 and by the buyout of an aircraft under an
operating lease during 2006.
17
MEDICAL INTERIORS AND PRODUCTS
SALES OF MEDICAL INTERIORS AND PRODUCTS decreased $2,573,000, or 32.8%, from
$7,836,000 for the year ended December 31, 2005, to $5,263,000 for the year
ended December 31, 2006. In 2006, we completed production of 21 MEV litter
systems and eleven modular, medical interior kits for commercial customers. We
also continued work on eleven HH-60L units. In the fourth quarter, we began
production of 27 additional MEV units. Revenue by product line for the year
ended December 31, 2006, was as follows:
- - $2,291,000 - multi-mission interiors
- - $2,538,000 - modular medical interiors
- - $434,000 - other aerospace and medical transport products
In 2005, we completed production of thirteen HH-60L units and nineteen MEV
litter systems. We also began production of eleven additional HH-60L units and
21 additional MEV units. Other significant projects in 2005 included production
of a multi-mission interior for a Sikorsky FIREHAWK helicopter for the Los
Angeles County Fire Department and four modular medical interiors for commercial
customers. Revenue by product line for the year ended December 31, 2005, was as
follows:
- - $3,857,000 - multi-mission interiors
- - $2,191,000 - modular medical interiors
- - $1,788,000 - other aerospace and medical transport products
COST OF MEDICAL INTERIORS AND PRODUCTS decreased $2,877,000, or 54.4%, for the
year ended December 31, 2006, as compared to the previous year, consistent with
the change in sales volume. The average net margin earned on projects during
2006 was 40.0% compared to 26.1% in 2005, primarily due to the change in product
mix and to efficiencies realized in the manufacturing process for commercial
customers.
GENERAL EXPENSES
DEPRECIATION AND AMORTIZATION EXPENSE increased $889,000, or 7.4%, for the year
ended December 31, 2006, 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. In
the third quarter of 2006, we also exercised our purchase option on an aircraft
valued at approximately $700,000 which had previously been leased under an
operating lease.
LITIGATION SETTLEMENT of $1,417,000 recorded during 2006 represents the net
amount received in settlement of a lawsuit we filed against a company related to
the fatal crash of one of our helicopters in September 2002. The amount recorded
is net of attorney fees and is related primarily to revenue lost in the Nevada
CBM program during the period following the accident.
GENERAL AND ADMINISTRATIVE (G&A) EXPENSES increased $3,739,000, or 10.1%, for
the year ended December 31, 2006, compared to the year ended December 31, 2005.
G&A expenses include executive management, accounting and finance, billing and
collections, information services, 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 Utah billing office to the California billing
office. We also increased staffing in our Information Services department to
support the expanded information technology infrastructure and scheduled
software systems upgrades. In addition, premiums for medical malpractice
insurance and directors and officers liability insurance increased 39.8% in 2006
compared to the prior year. G&A expenses were 12.7% of revenue in 2006 compared
to 13.4% of revenue in 2005.
INTEREST EXPENSE decreased $135,000, or 2.3%, for the year ended December 31,
2006, compared to 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 was approximately $14.6 million during
2006, compared to $15.4 million during 2005. These decreases were offset in part
by new notes and capital lease obligations totaling $7,240,000 originated during
2006 with a weighted average interest rate of 7.2%.
18
INCOME TAX EXPENSE was $13,144,000, or 43.3% of income before taxes, in 2006 and
$8,193,000, or 40.9% of income before taxes, in 2005. For years prior to 2006,
our income tax expense was determined using a federal statutory rate of 34%
because we believed that our deferred tax assets and liabilities would be
recovered or settled at that rate. Due to an increase in projected taxable
income for the year ended December 31, 2006, and for future years, we revised
our estimated tax rate to 35% in 2006. Deferred income tax expense of $525,000
was recognized for the year ended December 31, 2006, as a result of applying the
new estimated rate to deferred tax assets and liabilities. The effective tax
rate for 2006, excluding the effect of applying the new estimated rate against
deferred tax balances, was 41.6%. The remainder of the increase in the effective
tax rate for 2006 compared to 2005 was primarily due to an increase in certain
permanent book-tax differences. In 2005 we changed our year-end for income tax
filing from June 30 to December 31 to coincide with our fiscal year-end and
filed a short-period return for the six months ended December 31, 2004. The
true-up of deferred tax assets and liabilities resulted in an increase of
$368,000 to deferred tax liabilities and income tax expense in 2005. The
effective tax rate for 2005 prior to the true-up of deferred tax assets and
liabilities was 39.1%.
Year ended December 31, 2005 compared to 2004
We reported net income of $11,832,000 for the year ended December 31, 2005,
compared to $11,838,000 for the year ended December 31, 2004. Net income for the
year ended December 31, 2005, included a loss on early extinguishment of debt of
$3,104,000 (with a tax effect of approximately $1,211,000). Net income for the
year ended December 31, 2004, included the cumulative effect of a change in
accounting principle of $8,595,000, as discussed more fully below.
Operating income was $28,135,000 for the year ended December 31, 2005, compared
to $12,062,000 for the year ended December 31, 2004. Growth in operating income
for 2005 was partly due to an increase in flight volume for CBM and HBM
operations, resulting primarily from the opening of new bases or base
expansions. In addition, net reimbursement for CBM operations improved 19.4% for
the year ended December 31, 2005, compared to the prior year.
FLIGHT OPERATIONS - COMMUNITY-BASED MODEL AND HOSPITAL-BASED MODEL
NET FLIGHT REVENUE increased $45,444,000, or 20.4%, from $222,805,000 for the
year ended December 31, 2004, to $268,249,000 for the year ended December 31,
2005. Changes by business segment were as follows:
- - CBM - Net flight revenue increased $35,029,000, or 26.1%, to $169,390,000
for the following reasons:
- Average price increases of approximately 10% for all CBM
operations effective September 2004, approximately 7% effective March
2005, and approximately 5% effective October 2005.
- Incremental net revenue of $11,603,000 generated from the
addition of eleven new CBM bases during either 2004 or 2005.
- $2,247,000 generated from the provision of air medical
transportation services in New Orleans, Louisiana, and Gulfport,
Mississippi, in the aftermath of Hurricane Katrina, pursuant to
contracts with FEMA.
- Closure of three bases during either 2005 or 2004, resulting in a
decrease in net revenue of approximately $1,604,000 for the year ended
December 31, 2005.
- Consistent Same-Base Transports. Excluding the impact of the new
bases and base closures discussed above, total flight volume for all
CBM operations for 2005 was unchanged from the prior year. Higher
cancellations due to unfavorable weather conditions in the first
quarter of 2005, compared to the first quarter of 2004, were offset by
milder weather conditions during the remainder of the year.
- - HBM -Net flight revenue increased $10,415,000, or 11.8%, to $98,859,000 for
the following reasons:
- Incremental net revenue of $6,682,000 generated from the addition
of two new contracts and the expansion of nine contracts during either
2005 or 2004.
- Discontinuation of service under one contract during the first
quarter of 2004, resulting in a decrease in net revenue of
approximately $88,000 in 2005.
- Annual price increases in the majority of contracts based on
changes in the Consumer Price Index.
- Increase of 1.5% in flight volume for all contracts excluding the
new contracts, contract expansions, and the discontinued contract
discussed above.
19
FLIGHT CENTER COSTS increased $14,787,000, or 15.5%, to $110,197,000 for the
year ended December 31, 2005, compared to 2004. Changes by business segment were
as follows:
- - CBM - Flight center costs increased $10,681,000, or 17.5%, to $71,547,000
for the following reasons:
- Increase of $6,457,000 for the addition of personnel and
facilities for the new base locations described above.
- Decrease of $1,381,000 due to the closure of base locations
described above.
- Incremental costs of $444,000 incurred in providing air medical
transportation services in the aftermath of Hurricane Katrina pursuant
to contracts with FEMA. Incremental costs include employee travel and
fuel costs and do not include the base salaries of the employees
deployed nor the cost of the aircraft deployed.
- Increases in salaries for merit pay raises.
- - HBM - Flight center costs increased $4,106,000, or 11.9%, to $38,650,000
primarily due to the following:
- Increase of approximately $2,279,000 for the addition of
personnel to staff new base locations described above.
- Decrease of approximately $35,000 due to the base closure described
above.
- Increases in salaries for merit pay raises.
AIRCRAFT OPERATING EXPENSES increased $5,125,000, or 8.6%, for the year ended
December 31, 2005, in comparison to 2004. The increase in costs is due to the
following:
- - Addition of 21 helicopters for CBM operations and nine for HBM operations
during either 2005 or 2004, resulting in an increase in aircraft operating
expenses of approximately $3,328,000.
- - Increase of $313,000 in fuel costs as a result of the addition of new CBM
bases, net of the impact of closed CBM bases.
- - Increase of approximately 20.5% in the cost of aircraft fuel per hour
flown.
- - Decrease in hull insurance rates effective July 2004 and again in July
2005.
- - Containment of maintenance costs. Excluding the impact of new aircraft
described above, maintenance costs increased approximately 1.7% in 2005.
Engine upgrades performed in prior periods and standard pricing contracts
covering several key components of certain models of aircraft helped to
contain operating costs. In addition, deliveries of new aircraft allowed
the Company to redeploy some older models into lower utilization markets or
into the backup fleet. Approximately 20% fewer engine overhauls were also
performed during 2005 compared to the prior year, due to normal operating
cycles.
AIRCRAFT RENTAL EXPENSE increased $2,975,000, or 19.7%, for the year ended
December 31, 2005, in comparison to the year ended December 31, 2004.
Incremental rental expense incurred in 2005 for 21 leased aircraft added to our
fleet during either 2005 or 2004 totaled $3,626,000. The increase for new
aircraft was offset in part by refinancing twelve aircraft at lower lease rates
during 2005.
MEDICAL INTERIORS AND PRODUCTS
SALES OF MEDICAL INTERIORS AND PRODUCTS increased $536,000, or 7.3%, from
$7,300,000 for the year ended December 31, 2004, to $7,836,000 for the year
ended December 31, 2005. In 2005, we completed production of thirteen HH-60L
units and nineteen MEV litter systems. We also began production of eleven
additional HH-60L units and 21 additional MEV units. Other significant projects
in 2005 included production of a multi-mission interior for a Sikorsky FIREHAWK
helicopter for the Los Angeles County Fire Department and four modular medical
interiors for commercial customers. Revenue by product line for the year ended
December 31, 2005, was as follows:
- - $3,857,000 - multi-mission interiors
- - $2,191,000 - modular medical interiors
- - $1,788,000 - other aerospace and medical transport products
20
Significant projects in 2004 included production of thirteen HH-60L units, forty
MEV litter systems, a multi-mission interior for a Sikorsky FIREHAWK helicopter
for the Los Angeles County Fire Department, and four modular medical interiors
for three commercial customers. Revenue by product line for the year ended
December 31, 2004, was as follows:
- - $4,244,000 - multi-mission interiors
- - $811,000 - modular medical interiors
- - $2,245,000 - other aerospace and medical transport products
COST OF MEDICAL INTERIORS AND PRODUCTS increased $2,579,000, or 95.0%, for the
year ended December 31, 2005, as compared to the previous year. The average net
margin earned on projects during 2005 was 26.1% compared to 43.9% in 2004,
primarily due to the change in product mix. The margin earned on multi-mission
interiors is typically higher than the margins earned on modular medical
interiors for commercial customers. 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 and which are absorbed by both
projects for external customers and interdivisional projects.
GENERAL EXPENSES
DEPRECIATION AND AMORTIZATION EXPENSE increased $1,038,000, or 9.5%, for the
year ended December 31, 2005, primarily as a result of upgrades to aircraft,
engines, and avionics systems and the purchase of rotable equipment, a new
patient billing software system and related hardware, and office and medical
equipment for the new bases described above.
GENERAL AND ADMINISTRATIVE EXPENSES increased $3,280,000, or 9.7%, for the year
ended December 31, 2005, compared to the year ended December 31, 2004,
reflecting an increase in billing and collections and CBM program administration
staff and in pilot training costs to manage the growth in our operations. G&A
expenses in 2005 also include performance bonuses for executive officers and
other management personnel. G&A expenses were 13.4% of revenue in 2005, compared
to 14.6% in 2004.
INTEREST EXPENSE decreased $1,900,000, or 24.2%, for the year ended December 31,
2005, compared to 2004, partly 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 was approximately $15.4 million during
2005, compared to $16.9 million during 2004. 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 6.9% during 2005. The remainder of the
repayment was funded by draws against the line of credit.
LOSS ON EARLY EXTINGUISHMENT OF DEBT for 2005 totaled $3,104,000 and related to
the repayment of $23 million in subordinated debt in May 2005. We wrote off
approximately $1,724,000 in debt origination costs and note discount related to
the subordinated debt and paid a prepayment penalty of $1,380,000 to the holders
of the subordinated debt.
INCOME TAX EXPENSE was $8,193,000, or 40.9% of income before taxes, in 2005 and
$2,121,000, or 39.5% of income before taxes, in 2004. In 2005 we changed our
year-end for income tax filing from June 30 to December 31 to coincide with our
fiscal year-end and filed a short-period return for the six months ended
December 31, 2004. The true-up of deferred tax assets and liabilities resulted
in an increase of $368,000 to deferred tax liabilities and income tax expense in
2005. During 2005, net operating loss carryforwards (NOL's) of $1.4 million, for
which a valuation allowance had previously been established, expired. Based on
management's assessment, realization of net deferred tax assets through future
taxable earnings is considered more likely than not.
21
LIQUIDITY AND CAPITAL RESOURCES
We had working capital of $92,032,000 as of December 31, 2006, compared to
$66,839,000 as of December 31, 2005. The change in working capital position is
primarily attributable to an increase of $16,992,000 in net trade receivables
consistent with increased net revenue for the CBM and HBM divisions and
increased net reimbursement for CBM operations. In addition, at December 31,
2006, we had a receivable for refundable income taxes of $4,898,000, primarily
as a result of the prepayment of federal income taxes.
CASH REQUIREMENTS
Debt and Other Long-term Obligations
The following table outlines our contractual obligations as of December 31, 2006
(amounts in thousands):
Less than 1 After 5
Total year 1-3 years 4-5 years years
----------------------------------------------------
Long-term debt principal $ 69,315 8,749 21,126 39,440 --
Interest payments (1) 16,210 5,129 7,961 3,120 --
----------------------------------------------------
Total long-term debt obligations 85,525 13,878 29,087 42,560 --
----------------------------------------------------
Capital leases 2,994 1,214 1,681 99 --
Interest payments 351 203 144 4 --
----------------------------------------------------
Total capital lease obligations 3,345 1,417 1,825 103 --
----------------------------------------------------
Operating leases 177,583 26,290 49,928 43,378 57,987
Aircraft purchase commitments 124,470 52,338 42,532 29,600 --
----------------------------------------------------
Total $390,923 93,923 123,372 115,641 57,987
====================================================
(1) Interest payments include an estimate of variable-rate interest on our
revolving credit facility and notes with principal balances totaling
$25,392,000 as of December 31, 2006. Variable interest was estimated using
the weighted average rate in effect during 2006 for each note and the
average balance outstanding against the revolving credit facility during
2006.
Balloon payments on long-term debt are due as follows:
- $997,000 in 2007
- $5,523,000 in 2008
- $1,918,000 in 2009
- $34,205,000 in 2010
- $579,000 in 2011
OFF-BALANCE SHEET ARRANGEMENTS
Residual Value Guarantees
We have entered into various aircraft operating leases under which we provide
residual value guarantees to the lessor. As of December 31, 2006, the
undiscounted maximum amount of potential future payments under the guarantees is
$3,311,000. No amounts have been accrued for any estimated losses with respect
to the guarantees, since it is not probable that the residual value of the
aircraft will be less than the amounts stipulated in the guarantee. The
assessment of whether it is probable that we will be required to make payments
under the terms of the guarantee is based on current market data and our actual
and expected loss experience.
22
Aircraft Purchase Commitments
In July 2004, we entered into a commitment agreement to purchase fifteen Bell
429 helicopters for approximately $55.5 million, beginning in 2007, with a
minimum of three deliveries per year. The agreement provides for special
incentives, including a trade-in option for up to fifteen Bell 222 helicopters,
with minimum guaranteed trade-in values. Due to delays in the manufacturer's
processes, delivery of the first Bell 429 helicopter is currently expected in
late 2008, with the remaining units to be delivered over approximately the
following two and a half years.
In August 2005, we entered into a commitment agreement to purchase six
Eurocopter EC135 helicopters for approximately $23.0 million, with deliveries
scheduled in 2006. In October 2005, we also entered into a purchase commitment
for four Eurocopter AS350 helicopters for approximately $6.1 million. As of
December 31, 2006, we had taken delivery of all aircraft under these agreements.
During 2006, we entered into additional purchase commitments for various models
of Bell and Eurocopter helicopters. As of December 31, 2006, commitments for 23
aircraft for approximately $69.0 million are still open. Deliveries under these
commitments are expected in 2007 and 2008. We also have options to enter into
additional purchase commitments for future years dependent upon our aircraft
requirements.
We intend to use the new aircraft for base expansion opportunities as well as to
replace older models of aircraft in our fleet. We plan to either sell the
aircraft which are replaced or redeploy them into the backup fleet. Typically we
have financed aircraft acquired under these or similar commitments through
operating lease or debt agreements. As of the first quarter of 2007, we have
received financing commitments, subject to routine credit approval and aircraft
inspection processes, in excess of the cost of aircraft to be delivered in 2007.
If financing arrangements cannot be arranged and we are, therefore, prevented
from taking delivery of aircraft under the commitments described above, we would
forfeit nonrefundable deposits up to 2% of the aircraft value. There can be no
assurance that we will be able to continue to obtain aircraft financing on
favorable terms. At the present, a vibrant secondary market for these models of
aircraft exists which may allow us to sell aircraft which are not needed in our
operations or which we are unable to finance.
Letters of Credit
In January 2005, we entered into a $1,400,000 letter of credit with an insurance
underwriter in lieu of increasing cash deposits on our workers compensation
insurance policy. The letter of credit may be renewed annually and reduces the
available borrowing capacity under our revolving credit facility.
SOURCES AND USES OF CASH
We had cash and cash equivalents of $4,219,000 at December 31, 2006, compared to
$3,218,000 at December 31, 2005. Cash generated by operations totaled $8,847,000
in 2006 compared to $20,507,000 in 2005. Net receivable balances increased
$20,239,000 in 2006 compared to $18,393,000 in 2005, reflecting continued growth
in CBM and HBM revenue and an improved net reimbursement rate for CBM
operations, as described above. During 2006 we made payments of $15,142,000 for
income taxes, compared to $715,000 in 2005. At December 31, 2006, we had a
receivable for refundable income taxes of $4,898,000, primarily as a result of
the prepayment of federal income taxes.
Cash used for investing activities totaled $11,797,000 in 2006, compared to
$5,984,000 in 2005. Equipment acquisitions in 2006 consisted primarily of two
used aircraft for a total of approximately $2.6 million and information systems
hardware and software, as well as medical interior and avionics installations.
In 2006, we received $1.5 million from the sale of land and buildings which had
previously served as the headquarters for Rocky Mountain Holdings, LLC, prior to
the acquisition by the Company in 2002 and $459,000 from the sale of an aircraft
no longer needed in our operations. Equipment acquisitions in 2005 consisted
primarily of rotable equipment, medical and office equipment for new bases,
information systems hardware and software, and upgrades to aircraft, engines,
and avionics systems. In 2005 we received $463,000 in insurance proceeds for an
aircraft destroyed in an accident and sold an aircraft previously classified as
held for sale for $607,000.
23
Financing activities generated $3,951,000 in 2006, compared to using $13,908,000
in 2005. In 2006 we used proceeds from new note agreements to refinance existing
debt with higher interest rates and to fund the acquisition of an aircraft. In
2005, we used $20 million of term loan proceeds and additional draws against our
line of credit to fund the early repayment of $23 million in subordinated debt
and the related prepayment penalty of $1,380,000. We also paid $611,000 in debt
issuance costs, primarily associated with the amendment to our senior credit
facility in May 2005. The other primary use of cash in both 2006 and 2005 was
regularly scheduled payments of long-term debt and capital lease obligations. In
2005 we also paid down our line of credit balance by $7,864,000.
Senior Credit Facility
Our senior credit facility consists of $24,575,000 in term loans as of December
31, 2006, and a revolving credit facility. In October 2006, the revolving credit
facility was amended to increase the maximum revolving advance amount from $35
million to $45 million. The amendment also increased the limitation on annual
capital expenditures, inclusive of leased assets, from $40 million to $50
million. All other terms and conditions of the credit facility remained
unchanged. As of December 31, 2006, we had $15,335,000 outstanding against the
$45 million revolving credit facility and available capacity on the facility of
$28,186,000. The capacity available on the revolving credit facility is reduced
by letters of credit outstanding.
Borrowings under the credit facility are secured by thirteen aircraft and
substantially all of our accounts receivable, inventory, equipment and general
intangibles. Indebtedness under the credit facility has a first priority claim
to the assets pledged to secure it. The facility matures December 14, 2010, but
can be prepaid at any time, subject to payment of an early termination fee
ranging from .25% to 1% if the termination occurs prior to December 14, 2010.
The revolving loans bear interest, at our option, at either (i) the higher of
the federal funds rate plus 0.50% or the prime rate as announced by the lenders
or (ii) a rate equal to LIBOR plus an applicable margin ranging from 1.75% to
3.00%. The term loans bear interest, at our option, at either (i) the higher of
the federal funds rate plus 3.00% or the prime rate as announced by the lenders
plus 2.50% or (ii) a rate equal to LIBOR plus 4.00%. As of December 31, 2006,
the interest rate on the outstanding balance against the revolving credit
facility was 8.25% and the interest rate on the term loans was 9.38%.
Payment obligations under the credit facility accelerate upon the occurrence of
defined events of default, including the following: failure to pay principal or
interest or to perform covenants under the credit facility or other
indebtedness; events of insolvency or bankruptcy; failure to timely discharge
judgments of $250,000 or more; failure to maintain the first priority status of
liens under the credit facility; levy against a material portion of our assets;
default under other indebtedness; suspension of material governmental permits;
interruption of operations at any of our facilities that has a material adverse
effect; and a change of control in the Company.
The credit facility contains various covenants that limit, among other things,
our ability to create liens, declare dividends, make loans and investments,
enter into real property leases exceeding specified expenditure levels, make any
material change to the nature of our business, enter into any transaction with
affiliates other than on arms' length terms, prepay indebtedness, enter into a
merger or consolidation, or sell assets. The credit facility also places limits
on the amount of new indebtedness, operating lease obligations, and unfinanced
capital expenditures which we can incur in a fiscal year. We are required to
maintain certain financial ratios as defined in the credit facility and other
notes. As of December 31, 2006, we were in compliance with the covenants of the
credit facility.
New Community-based Operations
Opening a new community-based operation typically requires an investment in an
additional aircraft, aviation and medical personnel, and crew quarters. We may
take possession of the additional aircraft up to three months prior to the
commencement of operations in order to retrofit the aircraft for medical
transport. Staff may also be hired a month in advance of the operation start
date. Because of the delay between date of transport and collection of
receivables from the patients or their insurers, new community-based operations
may not produce positive cash flow during at least the first three months of
operation.
24
OUTLOOK FOR 2007
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
We opened two new bases in the northeast region during the fourth quarter of
2006. In the first quarter of 2007, we acquired certain business assets from
another air medical service provider in Florida, resulting in the addition of
two new base locations. During the first quarter of 2007, we also expect to open
three new bases in the southeast and one in the western region. CBM flight
volume at all other locations during 2007 is expected to be consistent with
historical levels, subject to seasonal, weather-related fluctuations. Effective
January 1, 2007, we increased prices for our CBM operations an average of
approximately 7%.
Hospital-Based Model
During the fourth quarter of 2006, one of our customers expanded to an
additional satellite location and we expect one other contract to open a
satellite base in early 2007. Fifteen hospital contracts are due for renewal in
2007. We expect 2007 flight activity for continuing hospital contracts to remain
consistent with historical levels.
Products Division
As of December 31, 2006, eleven HH-60L units and 27 MEV units for the U.S. Army
and two commercial medical interiors were in process. Deliveries under all
contracts in process are expected to be completed by the third quarter of 2007,
and remaining revenue is estimated at $2.6 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 in process. The new contract for 27 MEV units completes the
current U.S. Army requirement for this program. There is no assurance that
orders for additional units will be received in future periods.
All Segments
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.
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of these financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period.
On an on-going basis, management evaluates our estimates and judgments,
including those related to revenue recognition, deferred income taxes, and
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.
25
Revenue Recognition
Fixed flight fee revenue under our operating agreements with hospitals is
recognized monthly over the terms of the agreements. Flight revenue relating to
patient transports is recognized upon completion of the services and is recorded
net of provisions for contractual discounts and estimated uncompensated care.
Both provisions are estimated during the period the related services are
performed based on historical collection experience and any known trends or
changes in reimbursement rate schedules and payor mix. The provisions are
adjusted as required based on actual collections in subsequent periods. We have
from time to time experienced delays in reimbursement from third-party payors.
In addition, third-party payors may disallow, in whole or in part, claims for
reimbursement based on determinations that certain amounts are not reimbursable
under plan coverage, determinations of medical necessity, or the need for
additional information. Laws and regulations governing the Medicare and Medicaid
programs are very complex and subject to interpretation. We also provide
services to patients who have no insurance or other third-party payor coverage.
There can be no guarantee that we will continue to experience the same
collection rates that we have in the past. If actual future collections are more
or less than those projected by management, adjustments to allowances for
contractual discounts and uncompensated care may be required. Based on related
flight revenue for the year ended December 31, 2006, a change of 100 basis
points in the percentage of estimated contractual discounts and uncompensated
care would have resulted in a change of approximately $4,145,000 in flight
revenue.
Revenue related to fixed fee medical interior and products contracts is recorded
as costs are incurred using the percentage of completion method of accounting.
We estimate the percentage of completion based on costs incurred to date as a
percentage of an estimate of the total costs to complete the project. Losses on
contracts in process are recognized when determined. If total costs to complete
a project are greater or less than estimated, the gross margin on the project
may be greater or less than originally recorded under the percentage of
completion method.
Deferred Income Taxes
In preparation of the consolidated financial statements, we are required to
estimate income taxes in each of the jurisdictions in which we operate. This
process involves estimating actual current tax exposure together with assessing
temporary differences resulting from differing treatment of items, such as
depreciable assets, for tax and accounting purposes. These differences result in
deferred tax assets and liabilities, which are included in the consolidated
balance sheets. We then assess the likelihood that deferred tax assets will be
recoverable from future taxable income and record a valuation allowance for
those amounts we believe are not likely to be realized. Establishing or
increasing a valuation allowance in a period increases income tax expense. We
consider estimated future taxable income, tax planning strategies, and the
expected timing of reversals of existing temporary differences in assessing the
need for a valuation allowance against deferred tax assets. In the event we were
to determine that we would not be able to realize all or part of our net
deferred tax assets in the future, an adjustment to the valuation allowance
would be charged to income in the period such determination was made. Likewise,
should we determine that we would be able to realize our deferred tax assets in
the future in excess of our net recorded amount, an adjustment to the valuation
allowance would increase income in the period such determination was made. The
effect on deferred income tax assets and liabilities of a change in statutory
tax rates applicable to the Company is also recognized in income in the period
of the change.
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.
26
NEW ACCOUNTING STANDARDS
In September 2006, the Securities and Exchange Commission staff (SEC staff)
issued Staff Accounting Bulletin 108 (SAB 108), Financial Statements -
Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements, providing guidance on how
prior year misstatements should be taken into consideration when quantifying
misstatements in current year financial statements for purposes of determining
whether the current year's financial statements are materially misstated. SAB
108 requires a company to consider the impact of all prior year misstatements
reflected in the current year's balance sheet, without consideration of the
period in which the misstatement occurred, as well as to consider the amount of
the misstatement that occurred in the current year in order to determine the
materiality of the misstatement. SAB 108 is effective for years ending after
November 15, 2006. The implementation of the guidance in SAB 108 had no effect
on our financial position or results of operations.
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, to
clarify the accounting for uncertainty in income taxes recognized in accordance
with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 prescribes a
recognition threshold and measurement attribute for recognition and measurement
of a tax position taken or expected to be taken in a tax return. FIN 48 also
provides guidance on de-recognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. The cumulative effect
upon adoption shall be reported as an adjustment to the opening balance of
retained earnings for that fiscal year. FIN 48 is effective for years beginning
after December 15, 2006. We have not yet determined the effect of FIN 48 on our
financial position or results of operations.
In September 2006, the FASB issued FASB Statement No. 157 (Statement 157), Fair
Value Measurements. Statement 157 defines fair value, establishes a framework
for measuring fair value in generally accepted accounting principles, and
expands disclosures about fair value measurements. It applies under other
accounting pronouncements that require or permit fair value measurements but
does not require any new fair value measurements. Statement 157 is effective for
years beginning after November 15, 2007. We do not expect implementation of
Statement 157 to have a material effect on our financial position or results of
operations.
ITEM 7A. 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, some
of which have fixed interest rates, except $15,335,000 outstanding against the
line of credit and $25,392,000 in notes payable. Based on the amounts
outstanding at December 31, 2006, the annual impact of a change of 100 basis
points in interest rates would be approximately $407,000. Interest rates on
these instruments approximate current market rates as of December 31, 2006.
Periodically we enter into interest rate risk hedges to minimize exposure to the
effect of an increase in interest rates. As of December 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 $817,000 of notional principal and receive a
floating interest rate (LIBOR plus 2.50%) on the same amount of notional
principal from the counterparty.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Consolidated Financial Statements attached hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
27
ITEM 9A. 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 December 31, 2006, pursuant to Rule 13a-15(b) under the Exchange Act. Based
on that evaluation, the Certifying Officers have concluded that, as of December
31, 2006, the Company's 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.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rule 13a-15(f) under the
Securities Exchange Act of 1934, as amended). Management assessed the
effectiveness of our internal control over financial reporting as of December
31, 2006, using criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) and concluded that we maintained effective internal control over
financial reporting as of December 31, 2006.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies and procedures may deteriorate.
Management's assessment of the effectiveness of internal control over financial
reporting as of December 31, 2006, has been audited by KPMG LLP, an independent
registered public accounting firm, as stated in their report which is included
herein.
ITEM 9B. OTHER INFORMATION
None.
28
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
Summary information concerning our directors and executive officers is set forth
below:
CLASS/YEAR
TERM AS
DIRECTOR
NAME Age Position EXPIRES(1)
- ----------------------------- --- ------------------------------------------------ -----------
George W. Belsey 67 Chairman of the Board I/2007
Ralph J. Bernstein 49 Director III/2009
Samuel H. Gray 69 Director II/2008
C. David Kikumoto 57 Director I/2007
MG Carl H. McNair, Jr. (Ret.) 72 Director I/2007
Lowell D. Miller, Ph.D. 73 Director III/2009
Morad Tahbaz 51 Director II/2008
Paul H. Tate 55 Director III/2009
Aaron D. Todd 45 Director and Chief Executive Officer II/2008
David L. Dolstein 58 Senior Vice President, Community Based Services N/A
Michael D. Allen 44 Senior Vice President, Air Medical Services N/A
Trent J. Carman 46 Chief Financial Officer, Secretary and Treasurer N/A
Sharon J. Keck 40 Chief Accounting Officer and Controller N/A
__________________
(1) Refers to the calendar year in which the annual meeting of stockholders is
expected to be held and at which the term of the pertinent director class
shall expire.
MR. GEORGE W. BELSEY has served as Chairman of the Board of Directors since
April 1994, having been appointed a director in December 1992. Mr. Belsey was
appointed Chief Executive Officer of the Company effective June 1, 1994, and
served in that capacity until July 2003. Mr. Belsey previously served in
executive and administrative positions at the American Hospital Association and
at a number of hospitals. He received his Bachelor's Degree in Economics from
DePauw University in Greencastle, Indiana, and holds a Master's Degree in
Business Administration from George Washington University, Washington, D.C.
MR. RALPH J. BERNSTEIN became a director in February 1994. He is a co-founder
and General Partner of Americas Partners, an investment firm. He holds a
Bachelor of Arts Degree in Economics from the University of California at Davis.
Mr. Bernstein currently serves on the board of Empire Resorts, Inc.
MR. SAMUEL H. GRAY became a director in March 1991. From 1989 to 2000, he was
Chief Executive Officer of The Morris Consulting Group, Inc., a health care
industry consulting firm, and between 2000 and 2006 served as a Vice President
of the Mattson Jack Group, Inc., also a health care consulting firm. Currently,
he is an independent health care consultant. In 1959 Mr. Gray received a
Bachelor of Science Degree from the University of Florida.
MR. C. DAVID KIKUMOTO became a director in June 2004. Mr. Kikumoto is the
founder and Chief Executive Officer of Denver Management Advisors. From 1999 to
2000, Mr. Kikumoto was President and Vice Chairman at Anthem Blue Cross and Blue
Shield, Colorado and Nevada, and from 1987 to 1999, he served in several roles
at Blue Cross and Blue Shield of Colorado, Nevada and New Mexico. He received
his Bachelor of Science degree in accounting from the University of Utah,
pursued graduate studies at the University of Utah, and graduated from the
Executive Development Program at the University of Chicago.
29
MAJOR GENERAL CARL H. MCNAIR, JR. (RET.) was appointed to the board of directors
in March 1996. In April 1999, General McNair retired from his position as
Corporate Vice President and President, Enterprise Management, for DynCorp, a
technical and professional services company headquartered in Reston, Virginia,
where he was responsible for the company's core businesses in facility
management, marine operations, test and evaluation, administration and security,
and biotechnology and health services. He currently serves as Special Assistant,
Government Relations and Legislative Affairs, to the Vice President of Corporate
Communications and Marketing for the Computer Sciences Corporation. General
McNair has a Bachelor of Science Degree in Engineering from the U.S. Military
Academy at West Point, a Bachelor's Degree and Master's Degree in Aerospace
Engineering from Georgia Institute of Technology, and a Master of Science Degree
in Public Administration from Shippensburg University.
DR. LOWELL D. MILLER was named a director in June 1990. Since 1989, Dr. Miller
has been involved with various scientific endeavors including a pharmaceutical
consulting business. The University of Missouri awarded Dr. Miller a Bachelor of
Science Degree in 1957 as well as a Master's Degree in Biochemistry in 1958 and
a Biochemistry Doctorate Degree in 1960.
MR. MORAD TAHBAZ was elected to the board of directors in February 1994. He is
a co-founder and General Partner of Americas Partners, an investment firm.
Additionally, Mr. Tahbaz is the founder and a partner of M.T. Capital, L.L.C.,
an investment company for real estate and private equity transactions. Mr.
Tahbaz received his Bachelor's Degree in Philosophy and Fine Arts from Colgate
University and attended the Institute for Architecture and Urban Studies in New
York City. He holds a Master's Degree in Business Administration from Columbia
University Graduate School of Business.
MR. PAUL H. TATE was elected to the board of directors in September 2003. Mr.
Tate is the Chief Financial Officer and a Senior Vice President of Frontier
Airlines. Prior to joining Frontier in October 2001, he was Executive Vice
President and Chief Financial Officer for Colgan Air, Inc., a U.S. Airways
Express carrier. Mr. Tate served as Senior Vice President-Finance and Chief
Financial Officer of Atlantic Coast Airlines Holdings, Inc. from 1997 to 2000,
and has served in financial officer positions with Midway Airlines and Reno Air,
Inc. Mr. Tate, a certified public accountant, received his undergraduate degree
in economics and his Master's Degree in Business Administration from
Northwestern University in 1973 and 1975, respectively.
MR. AARON D. TODD became a director in June 2002 and Chief Executive Officer in
July 2003. He joined the Company as Chief Financial Officer in July of 1995 and
was appointed Secretary and Treasurer during that same year. He was appointed
Chief Operating Officer in January 2002. Mr. Todd holds a Bachelor of Science
Degree in Accounting from Brigham Young University.
MR. DAVID L. DOLSTEIN joined the Company with the July 1997 acquisition of Mercy
Air Service, Inc. He serves as Senior Vice President, Community Based Services
and as President of Mercy Air Service, a continuation of his responsibilities
preceding the acquisition. Mr. Dolstein received a Bachelor of Science degree in
1974 from Central Missouri State University with postgraduate studies in
industrial safety.
MR. MICHAEL D. ALLEN was named Senior Vice President of the Air Medical Services
Division in January 2006. Since 1992, Mr. Allen has served the Company in
several other positions including line pilot, safety representative, aviation
site manager, training captain/check airman and operations manager. Prior to
joining the Company, Mr. Allen was a commercial pilot for two years and served
as a pilot in the US Army for five years. Mr. Allen graduated from Portland
State University with a Bachelor of Science in Mathematics.
MR. TRENT J. CARMAN joined the Company in April 2003 and is the Chief Financial
Officer, Secretary and Treasurer. Prior to joining the Company, Mr. Carman
served as Chief Financial Officer of StorNet, Inc. from January 2000 until April
2003, and served in various capacities including Senior Vice President and Chief
Financial Officer for United Artists Theatre Circuit, Inc., from June 1992 until
January 2000. Mr. Carman received his Bachelor of Science Degree in Accounting
from Utah State University and holds a Master's Degree in Business
Administration-Finance from Indiana University.
30
MS. SHARON J. KECK joined the Company as Accounting Manager in October 1993 and
was named Controller in July of 1995. She assumed the additional position of
Chief Accounting Officer in January 2002. Ms. Keck holds a Bachelor of Science
Degree in Accounting from Bob Jones University.
AUDIT COMMITTEE
The Audit Committee currently consists of Messrs. McNair (Chairman), Kikumoto
and Tate. The Board of Directors has determined that all members of the Audit
Committee are "independent" within the meaning of the listing standards of the
NASDAQ Stock Market, Inc. and the Securities and Exchange Commission rules
governing audit committees. In addition, the Board of Directors has determined
that Mr. Tate meets the SEC criteria of an "audit committee financial expert" as
defined under the applicable SEC rules.
CODE OF ETHICS
We have adopted a Code of Ethics for directors, officers, and employees. This
Code of Ethics is intended to promote honest and ethical conduct, compliance
with applicable laws, full and accurate reporting, and prompt internal reporting
of violations of the code, as well as other matters. We will provide a copy of
our Code of Ethics to any person without charge, upon written request to:
Secretary, Air Methods Corporation, 7301 S. Peoria, Englewood, Colorado 80112.
The Code of Ethics is also available on our corporate website, which is
www.airmethods.com.
- -------------------
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based on our review of the copies of reports filed and upon written
representations, we believe that during 2006, executive officers, directors and
ten percent stockholders of the Company were in compliance with their filing
requirements under Section 16(a) of the Exchange Act of 1934, as amended, except
for the following:
1. Form 4 related to two purchase transactions by Mr. David Kikumoto
was filed late due to a delay of notification to the administrative staff. The
filing related to a same date, single buy order which was fulfilled via two
transactions.
2. Pursuant to a pre-determined trading plan adopted by Mr. George
Belsey, which is intended to comply with the requirements of Rule 10b51 of the
Securities Exchange Act of 1934, a sell transaction was executed on Mr. Belsey's
behalf in December 2006. A transition in administrative personnel tasked with
the filing resulted in the transaction being filed late.
BOARD NOMINEES
There have been no material changes to the procedures by which stockholders may
recommend nominees to the Board of Directors.
31
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION DISCUSSION AND ANALYSIS
OBJECTIVES
Our compensation programs are intended to provide a link between increasing the
long-term value of shareholder investment in the Company and the compensation
earned by our executive officers. The objectives of our compensation programs
are to: - Attract and retain executives capable of leading us to meet our
business objectives;
- - Adequately compensate our senior executives for achieving important
near-term objectives;
- - Align the interests of executive officers and shareholders through the use
of equity and other long-term incentives; and
- - Reward executives for achieving sustainable increases in the value of
shareholders' investments.
BUSINESS STRATEGY
Our business strategy is to build the long-term value of shareholder investment
in the Company by achieving the following shorter term objectives:
- - Growth of our community-based model
- - Addition and retention of aeromedical service contracts
- - Growth of our Products Division
- - Securing necessary capital and financing to fund business expansion
- - Achievement of earnings per share goals
- - Achievement of divisional earnings goals
ELEMENTS OF EXECUTIVE COMPENSATION
Our compensation structure consists of two tiers of remuneration, as follows:
- - The first tier consists of competitive base pay for executive officers,
plus a competitive suite of retirement, health, and welfare benefits. Our
executives enjoy the same retirement, health and welfare package as all our
exempt employees, except that we also provide disability income protection
insurance coverage to our executives. Our base pay and benefits are
designed to attract and retain world-class executives and to be
sufficiently robust to sustain them during times when incentive
compensation is low.
- - The second tier consists of a short-term (annual) incentive plan, which is
linked to individual and Company performance on a year by year basis. It
also consists of the 2006 Equity Compensation Plan, which allows for grants
of incentive stock options, non-statutory stock options, shares of
restricted stock, and stock appreciation rights. This plan is designed to
reward executive officers for increasing the value of shareholders'
investment.
REASONS FOR PAYING EACH ELEMENT OF COMPENSATION
The reasons for paying each element of compensation are as follows:
- - Salary and benefits are paid for ongoing performance throughout the year.
- - The annual bonus component of executive compensation is in place to
encourage and reward the achievement of the various components of the
Business Strategy referenced above. The annual bonus rewards the
achievement of short-term objectives which should eventually translate into
a sustainable increase in stock price.
- - The long-term incentive compensation currently consists of options and is
designed to reward executives if they are successful in increasing the
value of shareholder investment. It also helps encourage executives to
avoid behavior which results in short-term benefit at the expense of
long-term share value.
32
DETERMINATION OF THE AMOUNT AND FORMULA FOR EACH ELEMENT OF PAY
Generally, we choose to pay various elements of compensation based on market
norms and individual performance. Specific factors considered for each element
of compensation are as follows:
- - Base pay is paid around the midpoint of the market range, and better
performers are paid slightly higher than the midpoint.
- - Target bonus opportunity is set around the midpoint of the market range and
is expressed as a percentage of base salary.
- - The bonus amount for each executive officer, other than the Chief
Accounting Officer, is tied to a formula, which takes into account
corporate performance, divisional performance, and quantifiable individual
goals. The bonus amount for the Chief Accounting Officer is determined
according to whether annual individual goals, which are set by the Chief
Financial Officer and the Chief Executive Officer, are attained. The Chief
Financial Officer and the Chief Executive Officer make a recommendation to
the Compensation Committee and the Committee determines the bonus for the
Chief Accounting Officer, taking into account their recommendation. The
rationale for excluding the Chief Accounting Officer from the formula bonus
is to help avoid the appearance of financial self-interest on the part of
the Chief Accounting Officer in the achievement of key financial measures.
- - The amount of actual bonus paid to executive officers, other than the Chief
Accounting Officer, depends on the extent to which the corporate
performance goals and each of the individual goals have been met.
- - A total amount of $150,000 for executive officers, other than the Chief
Accounting Officer, was available in 2006 to pay executive officers above
formula-driven bonuses for the achievement of outstanding individual
performance. The Compensation Committee retains the discretion to pay all,
some, or none of this amount, depending on the extent, if any, to which
executives exceed their individual performance targets set at the beginning
of 2006. The Committee determines whether and to what extent the executives
exceeded their individual performance targets.
- - The long-term incentives granted in 2006 consisted of stock options. The
size of the grant to each officer was designed to be around the midpoint of
the market range. In addition, the Committee considered both individual
performance and the financial impact of the grant on the Company, when
determining the size of the grants.
POLICIES FOR ALLOCATING BETWEEN LONG-TERM AND CURRENTLY PAID OUT COMPENSATION
Our philosophy is to place the executive team in the shoes of the shareholders
to the greatest extent possible. Therefore, while the base pay and annual bonus
are competitive, the largest potential component of compensation comes from the
long-term incentive. That is, when the value of shareholders' investment is
increased, executives have the greatest opportunity for gain.
ALLOCATION BETWEEN CASH AND NON-CASH COMPENSATION
The most significant form of non-cash compensation is the long-term incentive,
and it is the most significant portion of the total compensation package for the
reasons stated above. The only other sources of non-cash compensation are the
401(k) retirement plan and the health and welfare plans, including disability
income protection coverage. While they are competitive, they are considerably
less in amount than our other forms of compensation. The reason for this is that
we prefer that the executive officers have a significant amount of pay at risk.
LONG-TERM COMPENSATION - BASIS FOR REWARD AND DOWNSIDE RISK
To date, we have awarded only stock options but will consider other equity-based
incentives in the future. Options bear a relationship to our long-term goals in
that they increase in value as the stock increases in value. Management bears
significant exposure to downside risk through options. Management is also
exposed to downside risk through shares of common stock the executive officers
own outright. We have carefully evaluated the cost of options we grant to our
executive officers. We will continue to evaluate the cost of options and other
forms of equity compensation vehicles against the benefit those vehicles are
likely to yield in building long-term share value.
33
EQUITY GRANTS AND MARKET TIMING
Our 2006 fiscal-year plan to grant options was independent of the timing of our
release of material, non-public information. We currently intend to maintain
this practice in the future. We have no program, plan, or practice of awarding
options and setting the exercise price based on any price other than the fair
market value of our stock on the grant date.
SPECIFIC FORMS OF COMPENSATION AND THE ROLE OF DISCRETION
In the past, the Compensation Committee has retained the authority to review
executive officer base compensation and to make increases based on general
performance and market norms. Also, the Compensation Committee has retained the
authority to make long-term incentive grants (historically stock options) based
on executive performance and market norms. The Committee intends to retain the
discretion to make decisions about executive officer base compensation and
certain levels of stock option grants, with or without predetermined performance
goals.
The Committee may make future grants of options, restricted stock, or other
equity compensation, subject to objective performance goals. At this time, it
has not determined whether it would exercise discretion and reduce the size of
an award or payout even if performance goals are met. However, the Committee has
no current intention to increase the size of any objectively determined equity
compensation award, especially if performance goals are not met.
With respect to the annual executive bonus plan, the Compensation Committee uses
an objective formula to determine payouts to executive officers, other than the
Chief Accounting Officer. The objective measures relate to corporate earnings
performance and divisional earnings performance, as compared to budgeted
objectives. The formula also includes objectively measured individual goals.
However, these individual goals do not amount to more than 25% of the total
award. With respect to the Chief Accounting Officer, at the beginning of each
year, individual goals are set by the Chief Financial Officer and the Chief
Executive Officer. At the close of the year, they inform the Compensation
Committee the extent to which the individual goals have been met. The Committee
exercises a certain amount of discretion in determining whether the individual
goals of the executive officers have been met, as well as the size of any award.
A predetermined target bonus is paid to executives to the extent the
predetermined goals are met. A total amount of $150,000 for executive officers,
other than the Chief Accounting Officer, was available in 2006 to pay executive
officers above formula-driven bonuses for the achievement of outstanding
individual performance. The Committee has the discretion not to pay part or all
of the $150,000, even if all individual goals are exceeded.
HOW INDIVIDUAL FORMS OF COMPENSATION ARE STRUCTURED AND IMPLEMENTED TO REFLECT
THE EXECUTIVE OFFICERS' INDIVIDUAL PERFORMANCE AND CONTRIBUTION
The Compensation Committee considers a variety of factors, both qualitative and
quantitative, in evaluating our executive officers and making compensation
decisions. Market factors and the individual contribution of each officer of the
Company impact decisions regarding each executive officer's base pay, the size
of each executive officer's annual bonus opportunity, and the size of each
executive officer's long-term incentive opportunity.
Specific objectives against which executive performance is gauged determine the
amount each executive receives under the annual bonus plan. These objectives
include the addition and retention of aeromedical service contracts, growth of
our community-based model, growth of the Products Division, securing of capital
to finance expansion, and meeting the growth goals of particular divisions.
Success in these areas is determined both on an individual and team basis.
Certain goals are corporate goals against which the executive officers'
performance is judged as a team. These include earnings per share goals and
growth in the value of shareholder investment. Rewards under the long-term
incentive plans are primarily tied to the extent these corporate goals are
achieved.
34
POLICY REGARDING ADJUSTMENT OF AWARDS IF RELEVANT PERFORMANCE MEASURES ARE
RESTATED OR ADJUSTED
The annual bonus and other incentive compensation must be forfeited by the Chief
Executive Officer and the Chief Financial Officer if, during the 12-month period
following the issuance of financial statements, those financial statements must
be restated due to material noncompliance as a result of misconduct in the
preparation of financial those financial statements, as required under Section
304 of the Sarbanes-Oxley Act of 2002.
FACTORS CONSIDERED IN DECISIONS TO INCREASE OR DECREASE COMPENSATION MATERIALLY
The Committee would consider clear, sustained market trends in approving a
material increase or decrease in executive compensation.
IMPACT AMOUNTS RECEIVED BY PREVIOUSLY EARNED COMPENSATION HAVE ON OTHER
COMPENSATION
We maintain no supplemental pension plans or other programs in which gains from
prior compensation could influence amounts earned currently. The Compensation
Committee may consider gains from prior awards when determining the appropriate
size of long-term incentive grants.
BASIS FOR ANY PAYMENTS MADE ON TERMINATION OF EMPLOYMENT OR A CHANGE OF CONTROL
Currently, all options granted to executives will become vested immediately upon
a change of control.
If executives are terminated for any reason except cause, executives receive the
following:
- - Mr. Todd: 18 months severance at an annual rate equal to his highest cash
compensation during any 12-month period of employment.
- - Messrs. Carman, Dolstein, and Allen and Ms. Keck: 12 months severance at an
annual rate equal to each executive's highest cash compensation during any
12-month period of employment.
IMPACT OF ACCOUNTING AND TAX TREATMENT ON VARIOUS FORMS OF COMPENSATION
The accounting and tax treatments of each particular form of compensation are
taken into account when determining amounts and awards. Our incentive payments
are designed so that they are deductible under Section 162(m) of the Internal
Revenue Code, and we intend that all compensation payments be deductible.
We monitor the treatment of options under FAS 123R in determining the form and
size of option grants.
Nonqualified options are deductible by the Company when they are exercised, to
the extent that the optionee recognizes ordinary income rather than capital gain
on exercise.
OWNERSHIP REQUIREMENTS AND POLICIES REGARDING HEDGING RISK ON COMPANY'S EQUITY
SECURITIES
We currently have no security ownership requirements for executives, and no
policies regarding hedging economic risk and ownership.
ROLE OF EXECUTIVE OFFICERS IN DETERMINING COMPENSATION
The Compensation Committee makes all base, bonus, and equity compensation
decisions regarding executive officers, with the exception of Mr. Todd. The
entire Board, with Mr. Todd abstaining, makes all compensation decisions
regarding Mr. Todd. However, executive officers give the Committee input in the
following areas:
- - Financial projections for Company and divisional performance goals
- - Input on the individual goals for Mr. Todd's direct reports
- - Input on equity compensation grants, base pay increases, and annual bonus
incentive opportunity
35
BENCHMARKING OF COMPENSATION
In the course of determining compensation of executive officers in 2006, we
looked at publicly traded companies of a similar size. We also looked at
businesses in similar industries and businesses headquartered in the Rocky
Mountain West. We looked at the compensation paid to the executive officers of
these businesses to compare our compensation levels to market. Our compensation
philosophy does not include an effort to pay at a particular percentile of
market. Accordingly, we did not attempt to use these companies as a benchmark
against which to set our compensation. Nevertheless, we view these companies as
competitors for executive officer talent, so we believe it is useful to examine
their pay practices from time to time.
SUMMARY COMPENSATION
The following table sets forth the total compensation earned by the Chief
Executive Officer, Chief Financial Officer, and each of the three other most
highly compensated executive officers (the "named executive officers") for the
year ended December 31, 2006.
2006 SUMMARY COMPENSATION
OPTION ALL OTHER
AWARDS(2) COMPENSATION TOTAL
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS(1) ($) ($) ($) ($)
- -----------------------------------------------------------------------------------------------
Aaron D. Todd 2006 339,500 220,675 - 26,684(3) 586,859
Chief Executive Officer
- -----------------------------------------------------------------------------------------------
Trent J. Carman 2006 217,600 89,216 - 16,841(4) 323,657
Chief Financial Officer and
Secretary and Treasurer
- -----------------------------------------------------------------------------------------------
David L. Dolstein 2006 227,085 196,064 - 18,643(5) 441,792
Senior Vice President,
Community Based Services
- -----------------------------------------------------------------------------------------------
Michael D. Allen 2006 179,372 60,000 236,500 10,562(6) 486,434
Senior Vice President,
Air Medical Services
- -----------------------------------------------------------------------------------------------
Sharon J. Keck 2006 167,000 35,000 94,600 9,213 305,813
Chief Accounting Officer
and Controller
- -----------------------------------------------------------------------------------------------
(1) Bonus amounts earned in 2006 will be paid in 2007. Does not include bonus
amounts earned by executive officers in 2005 which were paid in 2006. Those
amounts are: Aaron Todd, $395,500; Trent Carman, $158,400; David Dolstein,
$162,200; Michael Allen, $30,000; Sharon Keck, $50,000.
(2) Valuation assumptions are discussed in Note 8 to the consolidated financial
statements included in Item 8 of this report.
(3) Consists of a $18,477 match to the 401(k) plan and a disability income
protection premium of $8,207.
(4) Consists of $13,653 match to the 401(k) plan and a disability income
protection premium of $3,188.
(5) Consists of a $16,829 match to the 401(k) plan and a disability income
protection premium of $1,814.
(6) Consists of a $10,562 match to the 401(k) plan.
36
STOCK OPTION GRANTS
Stock option grants to the named executive officers were as follows for the year
ended December 31, 2006:
2006 GRANTS OF PLAN-BASED AWARDS
GRANT
OPTION AWARDS: DATE FAIR
NUMBER OF EXERCISE OR VALUE OF
SECURITIES BASE PRICE STOCK AND
UNDERLYING OF OPTION OPTION
GRANT APPROVAL OPTIONS AWARDS AWARDS
NAME DATE DATE (#) ($/ SHARE) ($)
- ------------------------------------------------------------------------------------------
Aaron D. Todd N/A N/A N/A N/A N/A
Chief Executive Officer
- ------------------------------------------------------------------------------------------
Trent J. Carman N/A N/A N/A N/A N/A
Chief Financial Officer and
Secretary and Treasurer
- ------------------------------------------------------------------------------------------
David L. Dolstein N/A N/A N/A N/A N/A
Senior Vice President,
Community Based
Services
- ------------------------------------------------------------------------------------------
Michael D. Allen 5/3/2006 5/2/2006 25,000 28.70 236,500
Senior Vice President,
Air Medical Services
- ------------------------------------------------------------------------------------------
Sharon J. Keck 5/3/2006 5/2/2006 10,000 28.70 94,600
Chief Accounting Officer
and Controller
Respective to the "Option Awards" column and footnote number 2 in the above
Summary Compensation Table, Mr. Allen and Ms. Keck were awarded option grants
during fiscal year 2006 which are reported as a dollar figure. That amount was
calculated in accordance with the requirements of FAS 123R, as explained in Note
8 to the consolidated financial statements included in Item 8 of this report.
Total compensation includes the valuation of these option grants, as required.
However, none of the optioned shares became vested and, therefore, none was
exercisable during 2006. The options granted in 2006 vest in equal 1/3
installments upon each of the first, second and third anniversaries of the grant
date of May 3, 2006.
Our stock option plans provide that the exercise price of option grants shall be
set at the closing price of the common stock upon the date of the grant. For
awards reported in the above Grants Of Plan-Based Awards Table, the exercise
price was determined in that same manner. Should options be granted on a
non-business day, the closing price of the common stock on the next business day
will be the exercise price. In the event the holder of a stock option grant
terminates employment prior to complete vesting of the grant, the optionee has
90 days beyond the termination date to exercise vested shares. Shares subject to
the stock option grant which were not vested upon the date of termination are
canceled. Canceled shares then become subject to reissue under the particular
plan provisions.
37
OUTSTANDING EQUITY AWARDS AND OPTION EXERCISES
The following table provides certain summary information concerning stock option
values as of December 31, 2006, for the named executive officers.
OUTSTANDING EQUITY AWARDS AT DECEMBER 31, 2006
OPTION AWARDS
------------------------------------------------------
NUMBER OF NUMBER OF
SECURITIES SECURITIES
UNDERLYING UNDERLYING
UNEXERCISED UNEXERCISED OPTION
OPTIONS OPTIONS EXERCISE OPTION
(EXERCISABLE) (UNEXERCISABLE) PRICE EXPIRATION
NAME (#) (#) ($) DATE
- -----------------------------------------------------------------------------------
Aaron D. Todd 25,000 8.98 01/01/09(1)
Chief Executive Officer 125,000 8.98 01/01/10(2)
20,000 7.92 06/11/08(4)
- -----------------------------------------------------------------------------------
Trent J. Carman 15,000 8.98 01/01/09(1)
Chief Financial Officer and 20,500 7.92 06/11/08(4)
Secretary and Treasurer 60,000 8.98 01/01/10(2)
- -----------------------------------------------------------------------------------
David L. Dolstein 100,000 8.98 01/01/10(2)
Senior Vice President
Community Based Services
- -----------------------------------------------------------------------------------
Michael D. Allen 25,000 28.70 05/03/11(3)
Senior Vice President
Air Medical Services
- -----------------------------------------------------------------------------------
Sharon J. Keck 10,000 8.98 01/01/09(1)
Chief Accounting Officer 50,000 8.98 01/01/10(2)
and Controller 10,000 28.70 05/03/11(3)
- -----------------------------------------------------------------------------------
(1) Options became fully vested on January 1, 2006, the third anniversary
date of grant.
(2) Options granted under this award will fully vest on January 1, 2009.
(3) 1/3 of the total number of options vest upon each of the first, second
and third anniversaries of the grant date, May 3, 2006.
(4) Options became fully vested on June 11, 2005, the second anniversary
date of grant.
38
The following table summarizes information regarding option exercises by the
Executive Officers during the year ended December 31, 2006.
2006 OPTION EXERCISES
OPTION AWARDS
----------------------------------------
NUMBER OF SHARES VALUE REALIZED
ACQUIRED ON EXERCISE(1) ON EXERCISE(2)
NAME (#) ($)
- ------------------------------------------------------------------------------------------
Aaron D. Todd 41,357 771,642
Chief Executive Officer
- ------------------------------------------------------------------------------------------
Trent J. Carman 17,000 301,610
Chief Financial Officer, Secretary and Treasurer
- ------------------------------------------------------------------------------------------
David L. Dolstein 40,000 699,700
Senior Vice President, Community Based Services
- ------------------------------------------------------------------------------------------
Michael D. Allen N/A N/A
Senior Vice President, Air Medical Services
- ------------------------------------------------------------------------------------------
Sharon J. Keck 15,000 287,100
Chief Accounting Officer and Controller
- ------------------------------------------------------------------------------------------
(1) Represents aggregate number of shares acquired upon exercise in fiscal
year 2006.
(2) Represents aggregate net gain on shares acquired by options exercised in
fiscal year 2006. Value is based upon the closing price of our common stock on
the date of share acquisition.
39
POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL
We entered into an Employment Agreement with Mr. Todd effective July 1, 2003,
for an initial term of two years, subject to successive one-year extensions. The
agreement may be terminated by either party upon 90 days' written notice, or
immediately by us for cause. In the event we terminate the agreement without
cause, Mr. Todd is entitled to severance payments for eighteen months following
termination at an annual rate equal to his highest cash compensation during any
12-month period of his employment. In the event of termination resulting from a
change in control of the Company, Mr. Todd is entitled to severance payments for
36 months following termination at an annual rate equal to his highest cash
compensation during any 12-month period of his employment. During the term of
employment and for eighteen months following the termination of employment, Mr.
Todd may not engage in any business which competes with us anywhere in the
United States.
We entered into Employment Agreements with Mr. Dolstein and Ms. Keck effective
January 1, 2003; with Mr. Carman effective April 28, 2003; and with Mr. Allen
effective January 4, 2006. Each agreement was for an initial term of one year
starting on the effective date, and is subject to successive one-year
extensions. Each agreement may be terminated either by us or by the executive
upon 90 days' written notice, or immediately by us for cause. In the event we
terminate an agreement without cause, the executive is entitled to severance
payments for twelve months following termination at an annual rate equal to his
highest cash compensation during any 12-month period of the executive's
employment. In the event of termination resulting from a change in control of
the Company, the executive is entitled to severance payments for 24 months
following termination at an annual rate equal to his highest cash compensation
during any 12-month period of the executive's employment. During the term of
employment and for twelve months following the termination of employment, the
executive may not engage in any business which competes with us anywhere in the
United States.
In addition to the severance payments described above, the executive is entitled
to continue to receive at our expense, coverage under our health insurance
policies, or comparable coverage, during the term of such severance payments,
but only until the executive begins other employment in connection with which he
is entitled to health insurance coverage. As a condition of the executive's
right to receive severance compensation, the executive must sign and deliver to
the Company a release of all claims that the executive might otherwise assert
against the Company. During the term of employment and for five years following
the termination of employment, the executive may not directly or indirectly use,
disseminate, or disclose any of our confidential information or trade secrets.
40
The following table summarizes potential payments that would be made to the
Executive Officers upon termination or a change in control of the Company,
assuming the triggering event took place on December 31, 2006, and the stock
price was the closing market price as of that date.
2006 POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL
- -----------------------------------------------------------------------------------------------------------------------
EVENT
- -----------------------------------------------------------------------------------------------------------------------
AFTER CHANGE IN
BEFORE CHANGE CONTROL
IN CONTROL TERMINATION
TERMINATION W/O W/O CAUSE OR DEATH DISABILITY CHANGE IN
CAUSE OR FOR FOR GOOD ($) ($) CONTROL(2)
NAME BENEFIT GOOD REASON ($) REASON(3) ($) ($)
- -----------------------------------------------------------------------------------------------------------------------
Aaron D. Todd Severance(1) 1,137,416 2,274,831 -- -- --
Chief Executive Officer Death(1) -- -- 29,412 -- --
Disability(1) -- -- -- 176,650 --
Accelerated Vesting of
Stock Options -- -- -- -- 2,367,500
- -----------------------------------------------------------------------------------------------------------------------
Trent J. Carman Severance(1) 394,453 788,906 -- -- --
Chief Financial Officer Death(1) -- -- 19,323 -- --
Secretary and Treasurer Disability(1) -- -- -- 115,940 --
Accelerated Vesting of
Stock Options -- -- -- -- 1,136,400
- -----------------------------------------------------------------------------------------------------------------------
David L. Dolstein Severance(1) 415,914 831,828 -- -- --
Senior Vice President Death(1) -- -- 20,370 -- --
Community Based Disability(1) -- -- -- 122,221 --
Services Accelerated Vesting of
Stock Options -- -- -- -- 1,894,000
- -----------------------------------------------------------------------------------------------------------------------
Michael D. Allen Severance(1) 224,733 449,466 -- -- --
Senior Vice President Death(1) -- -- 16,110 -- --
Air Medical Services Disability(1) -- -- -- 96,658 --
Accelerated Vesting of
Stock Options -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------
Sharon J. Keck Severance(1) 230,220 460,440 -- -- --
Chief Accounting Death(1) -- -- 14,871 -- --
Officer and Controller Disability(1) -- -- -- 89,225 --
Accelerated Vesting of
Stock Options -- -- -- -- 947,000
- -----------------------------------------------------------------------------------------------------------------------
(1) Includes amounts for health care benefits and 401(k) matching.
(2) Represents the number of options which vest immediately upon a change of
control times the difference between the closing market price of our stock on
December 31, 2006, and the exercise price of each option. No value is reflected
for options if the exercise price was greater than the closing price of our
stock on December 31, 2006.
(3) The After Change of Control cash payment is reduced by the amount in excess
-----------------------
of the safe harbor amount calculated under IRC Sec. 280g. This reduction in
estimated to be $1,414,527 for Mr. Todd, $335,659 for Mr. Carman, $489,000 for
Mr. Dolstein, $75,153 for Mr. Allen and $179,751 for Ms. Keck. The valuation of
the acceleration of the options is based on the safe harbor valuation method
provided by Rev. Proc. 2003-68.
41
DIRECTOR COMPENSATION
The following table summarizes all compensation earned by members of the Board
of Directors during the year ended December 31, 2006.
2006 DIRECTOR COMPENSATION TABLE
FEES EARNED OR ALL OTHER
PAID IN CASH COMPENSATION TOTAL
NAME ($) ($) ($)
- --------------------------------------------------------------------------
George W. Belsey -- 150,000(1) 150,000
Ralph J. Bernstein(4) 25,400 7,451(3) 32,851
Samuel H. Gray 34,400 7,492(3) 41,892
David Kikumoto(5) 32,000 -- 32,000
MG Carl H. McNair, Jr. (Ret.)(6) 60,000 9,302(3) 69,302
Lowell D. Miller(7) 34,400 7,916(3) 42,316
Morad Tahbaz(8) 32,400 7,469(3) 39,869
Paul H. Tate(9) 30,000 7,762(3) 37,762
Aaron D. Todd(2) N/A N/A N/A
(1) Compensation paid in accordance with an April 15, 2003, Post-Retirement
Consulting Agreement between Mr. Belsey and the Company. The agreement provides
that Mr. Belsey will continue to serve as Chairman of the Board and as a
consultant, thereby receiving an annual fee, paid monthly, through June 30,
2008.
(2) Mr. Todd is an employee director and earns no additional fees nor
compensation above his salary (and other compensation elsewhere reported herein)
for duties performed in the capacity of a director.
(3) Tax gross up paid to directors in fiscal year 2006. See narrative below.
(4) As of December 31, 2006, Mr. Bernstein holds four stock option awards
exercisable for an aggregate 32,000 shares of the Company's common stock.
(5) As of December 31, 2006, Mr. Kikumoto holds two stock option awards
exercisable for an aggregate 7,000 shares of the Company's common stock.
(6) As of December 31, 2006, Mr. McNair holds four stock option awards
exercisable for an aggregate 32,000 shares of the Company's common stock.
(7) As of December 31, 2006, Mr. Miller holds two stock option awards
exercisable for an aggregate 12,000 shares of the Company's common stock.
(8) As of December 31, 2006, Mr. Tahbaz holds four stock option awards
exercisable for an aggregate 32,000 shares of the Company's common stock.
(9) As of December 31, 2006, Mr. Tate holds two stock option awards exercisable
for an aggregate 12,000 shares of the Company's common stock.
42
We entered into an Executive Consulting Agreement with Mr. Belsey effective July
1, 2003, for an initial term of five years. Under the Agreement, Mr. Belsey
agreed to serve as Chairman of the Board of Directors, at the pleasure of the
Board of Directors, through the completion of the Annual Meeting of Stockholders
in 2004. Upon expiration of that term of service and his re-election to the
Board of Directors, Mr. Belsey was reappointed as Chairman through the Annual
Meeting of Stockholders in 2007. Mr. Belsey also agreed to serve as a consultant
with those responsibilities designated to him by the Board of Directors, for a
consulting fee of $750,000, payable in equal monthly installments from July 1,
2003 through June 30, 2008. This fee is payable regardless of the amount of time
Mr. Belsey spends performing his services as Chairman and consultant, and
whether or not he becomes disabled or dies during such period. During the term
of this Agreement and for a period of eighteen months following the termination
of the agreement with us, Mr. Belsey may not engage in any business which
competes with us anywhere in the United States.
During fiscal year 2006, directors did not receive stock option grants. However,
option grants held by directors at fiscal year-end are reflected in the
footnotes to the above table. All shares so indicated were fully vested and
exercisable at December 31, 2006. Historically, on an annual basis, each
non-employee director received a five-year option to purchase 10,000 shares,
exercisable at the then-current grant date closing price of our common stock.
As of December 31, 2006, directors held stock options granted for
director-related services to purchase a total of 127,000 shares of common stock.
Each non-employee director may elect to receive shares of common stock in lieu
of cash payments pursuant to our Equity Compensation Plan for Non-Employee
Directors. We also reimburse our non-employee directors for their reasonable
expenses incurred in attending Board of Directors' and committee meetings. Board
members who are also officers do not receive any separate compensation or fees
for attending Board of Directors' or committee meetings.
We have adopted compensation and incentive benefit plans to enhance our ability
to continue to attract, retain and motivate qualified persons to serve as our
directors. Effective January 1, 2006, the payments to our non-employee
directors, except for Mr. Belsey, were as follows:
- - Annual retainer of $15,000
- - $1,000 per Board of Directors meeting (raised to $2,000 effective November
2006)
- - $600 per committee meeting for all committees except the Audit Committee
- - $1,000 per Audit Committee meeting
- - Fee per committee meeting for committee chairman as follows: $4,000 for
Audit Committee, $3,000 for Compensation/Stock Option Committee, $3,000 for
Nominating and Corporate Governance Committee and $2,000 for
Finance/Strategic Planning Committee.
In 2003 we purchased $50,000 life insurance policies for each non-employee
director who had served longer than one year, excluding Messrs. Belsey and
McNair. A life insurance policy was purchased for Mr. Tate in 2004 and for Mr.
Kikumoto in 2005. Effective December 22, 2003, an annuity policy was purchased
on behalf of Mr. McNair in the amount of $50,000 in lieu of insurance policies
purchased for other members of the Board of Directors. All policies vest over
two years.
The terms of the life insurance policies provide for each director to vest 50%
in the cash surrender value of the policy after the first subsequent year of
service as director and 50% after the second subsequent year of service as
director. We agreed to reimburse each Board member for the estimated federal
income taxes associated with the vesting in the life insurance policies. These
reimbursements are made in the year subsequent to the year of vesting. For all
directors except Mr. Belsey, the amounts reflected in the table above under "All
Other Compensation" represent payments we made to the directors in 2006 for
their estimated federal income taxes attributable to their vesting in the life
insurance policies for the prior year.
43
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
COMPENSATION/STOCK OPTION COMMITTEE
The Compensation/Stock Option Committee currently consists of Dr. Miller
(Chairman) and Messrs. Bernstein and Gray. The Compensation/Stock Option
Committee is responsible for making recommendations to the Board of Directors
regarding executive compensation matters. The Board of Directors has determined
that all members of the Compensation/Stock Option Committee are "independent" in
accordance with applicable SEC rules and NASDAQ listing standards. There are no
relationships or transactions relating to the members of the Compensation/Stock
Option Committee that require disclosure under Item 407(e)(4) of Regulation S-K.
COMPENSATION COMMITTEE REPORT
The information contained in this report shall not be deemed to be "soliciting
material" or to be "filed" with the Securities and Exchange Commission or
subject to Regulation 14A or 14C other than as set forth in Item 407 of
Regulation S-K, or subject to the liabilities of Section 18 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), except to the extent that
we specifically request that the information contained in this report be treated
as soliciting material, nor shall such information be incorporated by reference
into any past or future filing under the Securities Act of 1933, as amended (the
"Securities Act"), or the Exchange Act, except to the extent that we
specifically incorporate it by reference in such filing.
The Compensation Committee has reviewed and discussed the Compensation
Discussion and Analysis required by Item 402(b) of Regulation S-K with
management and, based on such review and discussions, the Compensation Committee
recommended to the Board that the Compensation Discussion and Analysis be
included in this annual report.
By the Compensation/Stock Option Committee:
Lowell D. Miller, Ph.D., Chairman
Ralph J. Bernstein
Samuel H. Gray
44
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
EQUITY COMPENSATION PLANS
The following equity compensation plans have been previously approved by our
shareholders:
- 2006 Equity Compensation Plan - provides for the granting of
incentive stock options, non-statutory stock options, shares of
restricted stock, stock appreciation rights and supplemental bonuses
consisting of shares of common stock, cash or a combination thereof to
employees, directors, and consultants.
- 1995 Employee Stock Option Plan - provides for the granting of
incentive stock options and nonqualified stock options, stock
appreciation rights, and supplemental stock bonuses to employees as
well as third party consultants and directors.
- Nonemployee Director Stock Option Plan - provides for the
granting of nonqualified stock options to nonemployee directors of the
Company upon the completion of each full year of service.
- Equity Compensation Plan for Nonemployee Directors - provides for
the issuance of shares of common stock to nonemployee directors, at
their election, in lieu of cash as payment for their director
services.
Further description of these plans is contained in Note 8 to the consolidated
financial statements included in Item 8 of this report. Information regarding
the securities under all of these plans was as follows as of December 31, 2006:
Number of securities
remaining available for
Number of securities to be future issuance under equity
issued upon exercise of Weighted-average exercise compensation plans
outstanding options, price of outstanding options, (excluding securities
Plan Category warrants, and rights warrants, and rights reflected in column (a))
(a) (b) (c)
- ------------------------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by security holders 712,499 $ 10.58 705,541
Equity compensation plans
not approved by security
holders -- N/A --
-------------------------------------------------------------------------------------------
Total 712,499 $ 10.58 705,541
===========================================================================================
45
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The following table sets forth, as of February 26, 2007, the beneficial
ownership of our outstanding Common Stock: (i) by each person who owns (or is
known by us to own beneficially) more than 5% of the Common Stock, (ii) by each
of our directors and executive officers, and (iii) by all directors and
executive officers as a group.
Number Percentage of
Name and Address of Shares Common Stock
- ------------------------------------------------------------ ------------- --------------
Michael D. Allen 171(1) *
7301 S. Peoria St.
Englewood, CO. 80112
George W. Belsey 49,936(2) *
7301 South Peoria
Englewood, CO 80112
Ralph J. Bernstein 1,286,252(3) 10.8%
57 Wilton Rd.
Weston, CT 06880
Trent J. Carman 35,500(4) *
7301 South Peoria
Englewood, CO 80112
David L. Dolstein 2,175(5) *
7301 South Peoria
Englewood, CO 80112
Samuel H. Gray 1,875(6) *
126 Summit Road
Elizabeth, NJ 07208
Sharon J. Keck 10,394(7) *
7301 South Peoria
Englewood, CO 80112
David Kikumoto 13,875(8) *
6412 S. Fiddler's Green Circle, Suite 200 East
Greenwood Village, CO 80111
MG Carl H. McNair, Jr. (Ret.) 64,262(9) *
3170 Fairview Park Drive, MC 256
Falls Church, VA 22042
Lowell D. Miller, Ph.D. 43,875(10) *
16940 Stonehaven
Belton, MO 64012
Morad Tahbaz 155,058(11) 1.3%
57 Wilton Rd.
Weston, CT 06880
46
Paul H. Tate 13,875(12) *
7001 Tower Road
Denver, CO 80249
Aaron D. Todd 65,110(13) *
7301 South Peoria
Englewood, CO 80112
All Directors and Executive Officers as a group (13 persons) 1,742,358(14) 14.3%
Independence Investments LLC.
160 Federal Street
Boston, MA 02110 830,204(15) 7.0%
FMR Corp.
82 Devonshire Street
Boston, MA 02109 641,508(16) 5.4%
___________________
* Less than one percent (1%) of Common Stock outstanding on February 26,
2007.
(1) Consists of 171 shares directly owned.
(2) Consists of 49,936 shares directly owned by George and Phyllis Belsey.
(3) Consists of (i) 33,875 shares subject to stock options exercisable within
60 days, (ii) 1,157,877 shares directly owned, (iii) 60,500 shares owned by
Yasmeen Bernstein, Mr. Bernstein's spouse, and (iv) 34,000 shares subject
to currently exercisable warrants.
(4) Consists of 35,500 shares subject to stock options exercisable within 60
days.
(5) Consists of 2,175 shares directly owned by David and Kathi Dolstein.
(6) Consists of 1,875 shares subject to stock options exercisable within 60
days.
(7) Consists of (i) 10,000 shares subject to stock options exercisable within
60 days, and (ii) 394 shares directly owned.
(8) Consists of (i) 8,875 shares subject to stock options exercisable within 60
days, and (ii) 5,000 shares directly owned.
(9) Consists of (i) 30,387 shares jointly owned with spouse, Jo Ann McNair; and
(ii) 33,875 shares subject to stock options exercisable within 60 days.
(10) Consists of (i) 30,000 shares owned directly, and (ii) 13,875 shares
subject to stock options exercisable within 60 days.
(11) Consists of (i) 33,875 shares subject to stock options exercisable within
60 days, (ii) 55,183 shares directly owned, and (iii) 66,000 shares subject
to currently exercisable warrants.
(12) Consists of 13,875 shares subject to stock options exercisable within 60
days.
(13) Consists of (i) 17,843 shares directly owned, (ii) 2,267 shares
beneficially owned by Mr. Todd in our 401(k) plan; and (iii) 45,000 shares
subject to stock options exercisable within 60 days.
(14) Includes (i) 230,625 shares subject to stock options exercisable within 60
days and (ii) 100,000 shares subject to currently exercisable warrants.
(15) Based solely on Schedule 13G filed by the beneficial owner with the
Securities and Exchange Commission on January 11, 2007.
(16) Based solely on Schedule 13G filed by the beneficial owner with the
Securities and Exchange Commission on February 14, 2007.
47
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Audit Committee charter charges the committee with the responsibility to
investigate, review, and report to the Board the propriety and ethical
implications of any transactions between the Company and any employee, officer,
or Board member, or any affiliates of the foregoing. Applicable transactions may
be reported to the Committee by our independent auditors, employees, officers,
Board members, or other parties. The retention of a Board member as a consultant
for financial consideration in addition to regular Board retainer and meeting
fees requires the advance approval of the Compensation Committee.
We have no transactions with related parties which are subject to disclosure
under this item.
DIRECTOR INDEPENDENCE
We have adopted standards for director independence pursuant to NASDAQ listing
standards and SEC rules. The Board considered relationships, transactions and/or
arrangements with each of the directors and concluded that all of the directors,
except Mr. Todd and Mr. Belsey, meet the applicable criteria for independence.
Mr. Todd is our Chief Executive Officer and Mr. Belsey serves as a consultant to
the Company in addition to serving as Chairman of the Board of Directors. In
addition, the Board has determined that each member of our Audit Committee,
Compensation Committee, and Nominating and Corporate Governance Committee is
independent under applicable SEC rules and NASDAQ listing standards.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
KPMG LLP, independent registered public accounting firm, audited our
consolidated financial statements for the years ended December 31, 2006 and
2005. In addition to retaining KPMG LLP to audit the consolidated financial
statements for the year ended December 31, 2006, we retained KPMG LLP to provide
other services. The aggregate fees incurred by us for audit, audit-related, tax
and other services provided by KPMG LLP during the years ended December 31, 2006
and 2005, were as follows:
2006 2005
-----------------
Audit fees $601,718 490,000
Audit-related fees 3,510 9,000
Tax fees -- 42,522
All other fees -- --
-----------------
Total $605,228 541,522
=================
Audit fees include fees for the audit of the annual consolidated financial
statements, review of unaudited consolidated financial statements included in
quarterly reports on Form 10-Q, the audit of management's assessment of the
effectiveness of internal control over financial reporting as of December 31,
2006 and 2005, review of Securities and Exchange Commission filings, consents,
registration statements, comfort letters and other services normally provided by
the accountant in connection with statutory and regulatory filings or
engagements for those years.
Audit-related fees include assurance and related services that are reasonably
related to the performance of the audit or review of financial statements. These
services include the review of registration statements and other services not
directly impacting the audit of the annual financial statements and related
services.
Tax fees include tax services related to the preparation and/or review of, and
consultations with respect to, federal, state, and local tax returns.
48
All other fees include fees for services not considered audit or tax services.
KPMG LLP performed no such services during 2006 or 2005.
PRE-APPROVAL POLICIES AND PROCEDURES
All audit and non-audit services performed by our independent registered public
accounting firm during the fiscal year ended December 31, 2006, were
pre-approved by the Audit Committee, which concluded that the provision of such
services by KPMG, LLP was compatible with the maintenance of that firm's
independence in the conduct of its auditing functions.
The Audit Committee's pre-approval policy provides for categorical pre-approval
of specified audit and permissible non-audit services. In addition, audit
services not covered by the annual engagement letter, audit-related services and
tax services require the specific pre-approval by the Audit Committee prior to
engagement. In addition, services to be provided by the independent registered
public accounting firm that are not within the category of pre-approved services
must be pre-approved by the Audit Committee prior to engagement, regardless of
the service being requested or the dollar amount involved.
The Audit Committee may delegate pre-approval authority to one or more of its
members. The member or members to whom such authority is delegated are required
to report any pre-approval decisions to the Audit Committee at the meeting of
the Audit Committee following the decision. The Audit Committee is not permitted
to delegate to management its responsibilities to pre-approve services to be
performed by our independent registered public accounting firm.
49
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Documents filed as part of the report:
1. Financial Statements included in Item 8 of this report:
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets, December 31, 2006 and 2005
Consolidated Statements of Operations for the years ended
December 31, 2006, 2005, and 2004
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 2006, 2005, and 2004
Consolidated Statements of Cash Flows for the years ended
December 31, 2006, 2005, and 2004
Notes to Consolidated Financial Statements
2. Financial Statement Schedules included in Item 8 of this
report:
Schedule II - Valuation and Qualifying Accounts for the years
ended December 31, 2006, 2005, and 2004
All other supporting schedules have been omitted because the
information required is included in the financial statements or
notes thereto or have been omitted as not applicable or not
required.
3. Exhibits:
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
3.1 Certificate of Incorporation1
3.2 Amendments to Certificate of Incorporation2
3.3 By-Laws as Amended11
4.1 Specimen Stock Certificate2
4.2 Form of Common Stock Purchase Agreement, dated November 26, 20039
10.1 1995 Air Methods Corporation Employee Stock Option Plan4
10.2 Amendment to 1995 Air Methods Corporation Employee Stock Option Plan6
10.3 2006 Equity Compensation Plan10
10.4 Nonemployee Director Stock Option Plan, as amended5
10.5 Equity Compensation Plan for Nonemployee Directors, adopted March 12, 19933
10.6 Employment Agreement between the Company and Aaron D. Todd, dated July 1, 20037
10.7 Employment Agreement between the Company and David L. Dolstein, dated January 1, 20037
IV-1
10.8 Employment Agreement between the Company and Company and Michael D. Allen, dated January 4, 200613
10.9 Consulting Agreement between the Company and George W. Belsey, dated April 15, 20037
10.10 Employment Agreement between the Company and Trent J. Carman, dated April 28, 20037
10.11 Employment Agreement between the Company and Sharon J. Keck, dated January 1, 20037
10.12 Separation Agreement and Release between the Company and Neil M. Hughes, dated April 2, 200615
10.13 Amended and Restated Revolving Credit, Term Loan and Security Agreement, dated as of May 9, 2005,
among the Company, Rocky Mountain Holdings, L.L.C., Mercy Air Service, Inc. and LifeNet, Inc. and PNC
Bank, National Association, Wells Fargo Bank, N.A., and Keybank, N.A.8
10.14 Amendment No. 1 to Amended and Restated Revolving Credit, Term Loan and Security Agreement, dated
as of December 15, 2005, among the Company, Rocky Mountain Holdings, L.L.C., Mercy Air Service, Inc.,
LifeNet, Inc., the lenders parties thereto and PNC Bank, National Association, as agent for the
lenders.12
10.15 Amendment No. 2 to Amended and Restated Revolving Credit, Term Loan and Security Agreement, dated
as of October 31, 2006, among the Company, Rocky Mountain Holdings, L.L.C., Mercy Air Service, Inc.,
LifeNet, Inc., the lenders parties thereto and PNC Bank, National Association, as agent for the
lenders.14
10.16 Collective Bargaining Agreement by and between Air Methods Corporation and Office and Professional
Employees International Union, Local 109, from January 1, 2006, through April 30, 200916
18 Letter from KPMG LLP regarding Change in Accounting Principle
21 Subsidiaries of Registrant
23 Consent of KPMG LLP
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
____________________
1 Filed as an exhibit to the Company's Registration Statement on Form S-1
(Registration No. 33-15007), as declared effective on August 27, 1987, and
incorporated herein by reference.
2 Filed as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1992, and incorporated herein by reference.
IV-2
3 Filed as an exhibit to the Company's Registration Statement on Form S-8
(Registration No. 33-65370), filed with the Commission on July 1, 1993, and
incorporated herein by reference.
4 Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1995, and incorporated herein by reference.
5 Filed as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1993, and incorporated herein by reference.
6 Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2003, and incorporated herein by reference.
7 Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2003, and incorporated herein by reference.
8 Filed as an exhibit to the Company's Current Report on Form 8-K dated May
9, 2005, and incorporated herein by reference.
9 Filed as an exhibit to the Company's Current Report on Form 8-K dated
December 3, 2003, and incorporated herein by reference.
10 Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2006, and incorporated herein by reference.
11 Filed as an exhibit to the Company's Current Report on Form 8-K dated June
20, 2006, and incorporated herein by reference.
12 Filed as an exhibit to the Company's Current Report on Form 8-K dated
December 15, 2005, and incorporated herein by reference.
13 Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2006, and incorporated herein by reference.
14 Filed as an exhibit to the Company's Current Report on Form 8-K dated
October 31, 2006, and incorporated herein by reference.
15 Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 2005, and incorporated herein by reference.
16 Filed as an exhibit to the Company's Current Report on Form 8-K dated April
5, 2006, and incorporated herein by reference.
IV-3
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AIR METHODS CORPORATION
Date: March 9, 2007 By: /s/Aaron D. Todd
--------------- ----------------------
Aaron D. Todd
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the registrant in the
capacities and on the date indicated.
/s/ Aaron D. Todd Chief Executive Officer and Director March 9, 2007
- -----------------------
Aaron D. Todd
/s/ Trent J. Carman Chief Financial Officer March 9, 2007
- -----------------------
Trent J. Carman Secretary and Treasurer
/s/ Sharon J. Keck Chief Accounting Officer March 9, 2007
- -----------------------
Sharon J. Keck
/s/ George W. Belsey Chairman of the Board March 9, 2007
- -----------------------
George W. Belsey
/s/ Ralph J. Bernstein Director March 9, 2007
- -----------------------
Ralph J. Bernstein
/s/ Samuel H. Gray Director March 9, 2007
- -----------------------
Samuel H. Gray
/s/ David Kikumoto Director March 9, 2007
- -----------------------
David Kikumoto
/s/ Carl H. McNair, Jr. Director March 9, 2007
- -----------------------
Carl H. McNair, Jr.
/s/ Lowell D. Miller Director March 9, 2007
- -----------------------
Lowell D. Miller, Ph.D.
/s/ Morad Tahbaz Director March 9, 2007
- -----------------------
Morad Tahbaz
/s/ Paul H. Tate Director March 9, 2007
- -----------------------
Paul H. Tate
IV-4
AIR METHODS CORPORATION
AND SUBSIDIARIES
TABLE OF CONTENTS
- -------------------------------------------------------------------------------
Independent Registered Public Accounting Firm's Reports . . . . . . F-1
Consolidated Financial Statements
- ---------------------------------
CONSOLIDATED BALANCE SHEETS,
December 31, 2006 and 2005. . . . . . . . . . . . . . . . . . . F-3
CONSOLIDATED STATEMENTS OF OPERATIONS,
Years Ended December 31, 2006, 2005, and 2004 . . . . . . . . . F-5
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY,
Years Ended December 31, 2006, 2005, and 2004 . . . . . . . . . F-7
CONSOLIDATED STATEMENTS OF CASH FLOWS,
Years Ended December 31, 2006, 2005, and 2004 . . . . . . . . . F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,
December 31, 2006 and 2005. . . . . . . . . . . . . . . . . . . F-11
Schedules
- ----------
II - VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 2006, 2005, and 2004 . . . . . . . . . F-31
All other supporting schedules are omitted because they are inapplicable, not
required, or the information is presented in the consolidated financial
statements or notes thereto.
IV-5
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
Air Methods Corporation:
We have audited the accompanying consolidated balance sheets of Air Methods
Corporation and subsidiaries (the Company) as of December 31, 2006 and 2005, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
2006. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Air Methods
Corporation and subsidiaries as of December 31, 2006 and 2005, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2006, in conformity with U.S. generally accepted
accounting principles.
As discussed in notes 2 and 3 to the accompanying consolidated financial
statements, the Company changed its method of accounting for revenue and
estimated uncompensated care in 2006 and its method of accounting for major
engine and airframe component overhaul costs from the accrual method of
accounting to the direct expense method in 2004. As discussed in note 1 to the
accompanying consolidated financial statements, effective January 1, 2006, the
Company adopted SFAS No. 123(R), Share-Based Payment.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Air Methods
Corporation's internal control over financial reporting as of December 31, 2006,
based on criteria established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and
our report dated March 9, 2007, expressed an unqualified opinion on management's
assessment of, and the effective operation of, internal control over financial
reporting.
KPMG LLP
Denver, Colorado
March 9, 2007
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
Air Methods Corporation:
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting appearing under
Item 9A, that Air Methods Corporation and subsidiaries (the Company) maintained
effective internal control over financial reporting as of December 31, 2006,
based on criteria established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Air
Methods Corporation's management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility
is to express an opinion on management's assessment and an opinion on the
effectiveness of the Company's internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorization of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that Air Methods Corporation maintained
effective internal control over financial reporting as of December 31, 2006, is
fairly stated, in all material respects, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Also, in our opinion, Air
Methods Corporation maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2006, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Air Methods Corporation and subsidiaries as of December 31, 2006 and 2005, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
2006, and our report dated March 9, 2007, expressed an unqualified opinion on
those consolidated financial statements.
KPMG LLP
Denver, Colorado
March 9, 2007
F-2
AIR METHODS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2006 AND 2005
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
2006 2005
--------- --------
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 4,219 3,218
Current installments of notes receivable 161 65
Receivables:
Trade, net (note 5) 100,559 83,567
Refundable income taxes 4,898 --
Other 2,298 2,524
--------- --------
107,755 86,091
Inventories (note 5) 10,819 9,197
Work-in-process on medical interior and products contracts 2,026 762
Assets held for sale (note 5) 9,560 6,446
Costs and estimated earnings in excess of billings
on uncompleted contracts (note 4) 2,982 3,548
Deferred income taxes (note 10) 421 1,133
Prepaid expenses and other current assets 1,918 2,051
--------- --------
Total current assets 139,861 112,511
--------- --------
Property and equipment (notes 5 and 6):
Land 251 441
Flight and ground support equipment 155,478 143,342
Buildings and office equipment 13,868 13,354
--------- --------
169,597 157,137
Less accumulated depreciation and amortization (74,022) (63,607)
--------- --------
Net property and equipment 95,575 93,530
Goodwill 6,485 6,485
Notes and other receivables, less current installments 198 99
Other assets, net of accumulated amortization of $3,710 and $2,773 at
December 31, 2006 and 2005, respectively 8,038 8,907
--------- --------
Total assets $250,157 221,532
========= ========
(Continued)
F-3
AIR METHODS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
2006 2005
-------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------
Current liabilities:
Notes payable (note 5) $ 9,560 6,446
Current installments of long-term debt (note 5) 8,749 9,399
Current installments of obligations under capital leases (note 6) 1,214 657
Accounts payable 8,532 8,405
Deferred revenue 2,329 3,913
Billings in excess of costs and estimated earnings on uncompleted contracts
(note 4) 329 332
Accrued wages and compensated absences 6,894 7,217
Due to third party payors 2,709 1,858
Other accrued liabilities 7,513 7,445
-------- -------
Total current liabilities 47,829 45,672
Long-term debt, less current installments (note 5) 60,566 57,704
Obligations under capital leases, less current installments (note 6) 1,780 688
Deferred income taxes (note 10) 21,062 19,997
Other liabilities 11,606 11,260
-------- -------
Total liabilities 142,843 135,321
-------- -------
Stockholders' equity (notes 7 and 8):
Preferred stock, $1 par value. Authorized 5,000,000 shares,
none issued -- --
Common stock, $.06 par value. Authorized 16,000,000 shares; issued
11,874,613 and 11,605,590 shares at December 31, 2006 and 2005,
respectively 712 696
Additional paid-in capital 70,106 66,219
Retained earnings 36,496 19,296
-------- -------
Total stockholders' equity 107,314 86,211
-------- -------
Commitments and contingencies (notes 5, 6, 11, and 12)
Total liabilities and stockholders' equity $250,157 221,532
======== =======
See accompanying notes to consolidated financial statements.
F-4
AIR METHODS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
Year Ended December 31
------------------------------
2006 2005 2004
--------- --------- --------
Revenue:
Flight revenue, net (notes 2 and 9) $313,879 268,249 222,805
Sales of medical interiors and products 5,263 7,836 7,300
Parts and maintenance sales and services 362 93 106
--------- --------- --------
319,504 276,178 230,211
--------- --------- --------
Operating expenses:
Flight centers 133,796 110,197 95,410
Aircraft operations 74,872 65,041 59,916
Aircraft rental (note 6) 21,591 18,048 15,073
Cost of medical interiors and products sold 2,416 5,293 2,714
Cost of parts and maintenance sales and services 290 106 120
Depreciation and amortization 12,910 12,021 10,983
Loss (gain) on disposition of assets, net (231) 366 242
Litigation settlement (1,417) -- --
General and administrative 40,710 36,971 33,691
--------- --------- --------
284,937 248,043 218,149
--------- --------- --------
Operating income 34,567 28,135 12,062
Other income (expense):
Interest expense (5,821) (5,956) (7,856)
Loss on extinguishment of debt -- (3,104) --
Other, net 1,598 950 1,158
--------- --------- --------
Income before income taxes 30,344 20,025 5,364
Income tax expense (note 10) (13,144) (8,193) (2,121)
--------- --------- --------
Income before cumulative effect of change in accounting principle 17,200 11,832 3,243
Cumulative effect of change in method of accounting for maintenance
costs, net of income taxes (note 3) -- -- 8,595
--------- --------- --------
Net income $ 17,200 11,832 11,838
========= ========= ========
(Continued)
F-5
AIR METHODS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS, CONTINUED
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
Year Ended December 31
----------- ---------- ----------
2006 2005 2004
----------- ---------- ----------
Basic income per common share (note 7):
Income before cumulative effect of change in accounting principle $ 1.46 1.07 .30
Cumulative effect of change in method of accounting for maintenance
costs, net of income taxes -- -- .79
----------- ---------- ----------
Net income $ 1.46 1.07 1.09
=========== ========== ==========
Diluted income per common share (note 7):
Income before cumulative effect of change in accounting principle $ 1.40 1.02 .29
Cumulative effect of change in method of accounting for maintenance
costs, net of income taxes -- -- .76
----------- ---------- ----------
Net income $ 1.40 1.02 1.05
=========== ========== ==========
Weighted average number of common shares outstanding - basic 11,748,107 11,058,971 10,894,863
=========== ========== ==========
Weighted average number of common shares outstanding - diluted 12,306,047 11,654,885 11,314,827
=========== ========== ==========
See accompanying notes to consolidated financial statements.
F-6
AIR METHODS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2006, 2005, AND 2004
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- --------------------------------------------------------------------------------
Retained Total
Additional Earnings Stock-
Common Stock Treasury Stock Paid-in (Accumulated holders'
---------------------- -------------------
Shares Amount Shares Amount Capital Deficit) Equity
----------- --------- -------- --------- ----------- ------------- ---------
BALANCES AT JANUARY 1, 2004 10,817,594 $ 649 -- $ -- 64,413 (4,374) 60,688
Issuance of common shares for options
and warrants exercised 225,410 14 -- -- 992 -- 1,006
Purchase of treasury shares -- -- 49,664 (3) (450) -- (453)
Retirement of treasury shares (45,624) (3) (45,624) 3 -- -- --
Net income -- -- -- -- -- 11,838 11,838
----------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 2004 10,997,380 660 4,040 -- 64,955 7,464 73,079
Issuance of common shares for options
and warrants exercised 624,052 37 -- -- 1,077 -- 1,114
Tax benefit from exercise of stock
options -- -- -- -- 356 -- 356
Purchase of treasury shares -- -- 11,802 (1) (169) -- (170)
Retirement of treasury shares (15,842) (1) (15,842) 1 -- -- --
Net income -- -- -- -- -- 11,832 11,832
----------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 2005 11,605,590 696 -- -- 66,219 19,296 86,211
Issuance of common shares for options
and warrants exercised 269,023 16 -- -- 2,020 -- 2,036
Tax benefit from exercise of stock
options -- -- -- -- 1,425 -- 1,425
Stock-based compensation (note 8) -- -- -- -- 442 -- 442
Net income 17,200 17,200
----------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 2006 11,874,613 $ 712 -- $ -- 70,106 36,496 107,314
==================================================================================
See accompanying notes to consolidated financial statements.
F-7
AIR METHODS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
Year Ended December 31
------------------------------
2006 2005 2004
------------------------------
Cash flows from operating activities:
Net income $ 17,200 11,832 11,838
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense 12,910 12,021 10,983
Deferred income tax expense 1,777 6,193 2,130
Stock-based compensation 442 -- --
Tax benefit from exercise of stock options (1,425) (356) --
Loss on extinguishment of debt -- 3,104 --
Loss (gain) on disposition of assets (231) 366 242
Cumulative effect of change in method of accounting for maintenance (note 3) -- -- (8,595)
Changes in operating assets and liabilities:
Increase in receivables (16,992) (20,389) (1,970)
Decrease (increase) in other receivables (3,247) 1,996 (1,100)
Decrease (increase) in inventories (1,622) (530) 476
Decrease (increase) in prepaid expenses and other current assets 806 686 (866)
Increase in work-in-process on medical interior and products contracts and costs
in excess of billings (698) (727) (1,189)
Increase in accounts payable, other accrued liabilities, and other liabilities 1,514 6,258 2,312
Increase (decrease) in deferred revenue and billings in excess of costs (1,587) 53 1,120
------------------------------
Net cash provided by operating activities 8,847 20,507 15,381
------------------------------
Cash flows from investing activities:
Acquisition of property and equipment (13,744) (7,164) (15,080)
Proceeds from disposition and sale of equipment and assets held for sale 2,262 1,070 1,651
Decrease (increase) in notes and other receivables and other assets, net (315) 110 1,928
------------------------------
Net cash used by investing activities (11,797) (5,984) (11,501)
------------------------------
(Continued)
F-8
AIR METHODS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
Year Ended December 31
------------------------------
2006 2005 2004
------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock $ 2,036 1,114 1,006
Payments for purchases of common stock -- (170) (453)
Tax benefit from exercise of stock options 1,425 356 --
Net borrowings (payments) under lines of credit 8,480 (7,864) (482)
Proceeds from long-term debt 4,680 25,000 10,484
Payments for debt issue costs (138) (611) (392)
Payments of long-term debt (11,621) (29,775) (14,106)
Debt retirement costs -- (1,380) --
Payments of capital lease obligations (911) (578) (2,908)
------------------------------
Net cash provided (used) by financing activities 3,951 (13,908) (6,851)
------------------------------
Increase (decrease) in cash and cash equivalents 1,001 615 (2,971)
Cash and cash equivalents at beginning of year 3,218 2,603 5,574
------------------------------
Cash and cash equivalents at end of year $ 4,219 3,218 2,603
==============================
Interest paid in cash during the year $ 5,375 6,124 6,558
==============================
Income taxes paid in cash during the year $ 15,142 715 216
==============================
(Continued)
F-9
AIR METHODS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- --------------------------------------------------------------------------------
Non-cash investing and financing activities:
In the year ended December 31, 2006, the Company settled notes payable of $6,446
in exchange for the aircraft securing the debt. The Company also entered into
notes payable of $9,560 to finance the purchase of aircraft which are held for
sale as of December 31, 2006.
In the year ended December 31, 2006, the Company entered into a note payable of
$673 to finance insurance policies and into capital lease obligations of $2,560
to finance the purchase of equipment.
In the year ended December 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 $346 by applying a purchase deposit against it and entered into
a note payable of $396 to finance insurance policies and into capital lease
obligations of $1,264 to finance the purchase of equipment.
In the year ended December 31, 2005, the Company wrote off $1,724 in debt
origination costs and note discount related to the retirement of its
subordinated debt.
In the year ended December 31, 2005, the Company entered into notes payable of
$6,446 to finance the purchase of aircraft which were held for sale as of
December 31, 2005.
As described in note 3, effective January 1, 2004, the Company changed its
method of accounting for major engine and airframe component overhaul costs from
the accrual method of accounting to the direct expense method. Accordingly, the
Company reversed its major overhaul accrual totaling $33,809 for all owned and
leased aircraft and reversed the remaining capitalized maintenance included in
fixed assets relating to used aircraft purchases totaling $19,719, with the
balance reflected as the cumulative effect of change in accounting principle of
$8,595 ($14,090, net of income taxes of $5,495).
In the year ended December 31, 2004, the Company settled a note payable totaling
$288 by applying a purchase deposit against it. The Company also entered into a
note payable of $336 to finance insurance policies and originated a capital
lease obligation of $430 to finance the acquisition of equipment.
In the year ended December 31, 2004, the Company entered into notes payable of
$5,105 to finance the purchase of aircraft which were held for sale as of
December 31, 2004.
In the year ended December 31, 2004, the Company recorded a liability of $500
for the fee associated with the amendment to its subordinated debt agreement.
See accompanying notes to consolidated financial statements.
F-10
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Financial Statement Presentation and Business
Air Methods Corporation, a Delaware corporation, and its subsidiaries
(Air Methods or the Company) serves as the largest provider of aeromedical
emergency transport services and systems throughout the United States of
America. The Company also designs, manufactures, and installs medical
aircraft interiors and other aerospace and medical transport products for
domestic and international customers. Rocky Mountain Holdings, LLC (RMH),
Mercy Air Service, Inc. (Mercy Air), and LifeNet, Inc. (LifeNet) operate as
wholly-owned subsidiaries of Air Methods. LifeNet was formerly known as
ARCH Air Medical Service, Inc. All significant intercompany balances and
transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. The Company
considers its critical accounting policies involving more significant
judgments and estimates to be those related to revenue recognition,
deferred income taxes, and depreciation and residual values. Actual results
could differ from those estimates.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid instruments with original maturities of three
months or less to be cash equivalents. Cash equivalents of $1,601,000 and
$1,501,000 at December 31, 2006 and 2005, respectively, consist of
short-term money market funds.
Trade Receivables, net
Trade receivables are presented net of allowances for contractual
discounts and uncompensated care. The Company determines its allowances for
contractual discounts and uncompensated care based on payor mix, payor
reimbursement schedules, and historical collection experience. The
allowances are reviewed monthly and adjusted periodically based on actual
collections. Billings are charged off against the uncompensated care
allowance when it is probable that the receivable will not be recovered.
Write-offs against the contractual allowance occur when payment is
received. The allowance for uncompensated care is related primarily to
receivables recorded for self-pay patients. The allowances for contractual
discounts and uncompensated care are as follows at December 31 (amounts in
thousands):
2006 2005
---------------
Allowance for contractual discounts $33,070 24,700
Allowance for uncompensated care 51,544 45,540
---------------
Total $84,614 70,240
===============
F-11
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- -------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Inventories
Inventories are comprised primarily of expendable aircraft parts which
are recorded at the lower of cost (average cost) or market.
Work-in-Process on Medical Interior and Products Contracts
Work-in-process on medical interior and products contracts represents
costs to manufacture and install medical equipment and modify aircraft for
third parties. When the total cost to complete a project can be reasonably
estimated, revenue is recorded as costs are incurred using the percentage
of completion method of accounting. Losses on contracts in process are
recognized when determined.
Property and Equipment
Hangars, equipment, and leasehold improvements are recorded at cost.
All maintenance and repairs, including scheduled aircraft component
overhauls and replacements, are expensed when incurred. Major modifications
and costs incurred to place aircraft in service are capitalized.
Improvements to helicopters and airplanes leased under operating leases are
included in flight and ground support equipment in the accompanying
financial statements. Leasehold improvements to hangar and office space are
included in buildings and office equipment in the accompanying financial
statements. Depreciation is computed using the straight-line method over
the shorter of the useful lives of the equipment or the lease term, as
follows:
Estimated
Description Lives Residual value
---------------------------------------- ------------ ---------------
Buildings, including hangars 40 years 10%
Helicopters, including medical equipment 8 - 25 years 10 - 25%
Ground support equipment and rotables 5 - 10 years 0 - 10%
Furniture and office equipment 3 - 10 years 0%
Goodwill
The Company accounts for goodwill under Financial Accounting Standards
Board (FASB) Statement No. 142, Accounting for Goodwill and Intangible
Assets (Statement 142). Under Statement 142, goodwill and certain
identifiable intangible assets are not amortized, but instead are reviewed
for impairment at least annually in accordance with the provisions of the
statement. The Company did not recognize any losses related to impairment
of existing goodwill during 2006.
F-12
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- -------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Long-lived Assets
The Company periodically reviews long-lived assets, including
intangible assets, 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. No impairment has been recognized in
the accompanying consolidated financial statements.
Assets to be disposed of are reported at the lower of the carrying
amount or fair value less estimated selling costs. As of December 31, 2006,
assets held for sale consisted of four aircraft, which the Company intends
to sell within one year. Related debt is classified as short-term notes
payable in the consolidated financial statements. The aircraft are expected
to be sold and leased back under operating leases.
Revenue Recognition
Fixed fee revenue under the Company's operating agreements with
hospitals is recognized monthly over the terms of the agreements.
Revenue relating to emergency flights is recognized upon completion of
the services and is recorded net of provisions for contractual discounts
and estimated uncompensated care. Provisions for contractual discounts and
estimated uncompensated care as a percentage of related gross billings are
as follows:
2006 2005 2004
-------------------
Gross billings 100% 100% 100%
Provision for contractual discounts 29% 26% 32%
Provision for uncompensated care 20% 19% 16%
The Company has from time to time experienced delays in reimbursement
from third-party payors. In addition, third-party payors may disallow, in
whole or in part, claims for reimbursement based on determinations that
certain amounts are not reimbursable under plan coverage, determinations of
medical necessity, or the need for additional information. Laws and
regulations governing the Medicare and Medicaid programs are very complex
and subject to interpretation. The Company also provides services to
patients who have no insurance or other third-party payor coverage. As a
result, there is a reasonable possibility that recorded estimates will
change materially in the short-term. Retroactive adjustments may change the
amounts realized from third-party payors and are considered in the
recognition of revenue on an estimated basis in the period the related
services are rendered. Such amounts are adjusted in future periods, as
adjustments become known.
F-13
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- -------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Stock-based Compensation
Effective January 1, 2006, the Company implemented FASB Statement No.
123R (Statement 123R), Share-Based Payment, an amendment of FASB Statement
No. 123, adopting the modified prospective method of implementation. 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).
Income Taxes
Deferred tax assets and liabilities are recognized for future income
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
income tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
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
outstanding and potentially dilutive common shares during the period.
Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments:
Cash and cash equivalents, accounts receivable, notes payable,
accounts payable, and accrued liabilities:
The carrying amounts approximate fair value because of the short
maturity of these instruments.
Notes receivable and long-term debt:
The Company believes that the overall effective interest rates on
these instruments approximate fair value in the aggregate.
F-14
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- -------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
New Accounting Standards
In September 2006, the Securities and Exchange Commission staff (SEC
staff) issued Staff Accounting Bulletin 108 (SAB 108), Financial Statements
- Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements, providing guidance on
how prior year misstatements should be taken into consideration when
quantifying misstatements in current year financial statements for purposes
of determining whether the current year's financial statements are
materially misstated. SAB 108 requires a company to consider the impact of
all prior year misstatements reflected in the current year's balance sheet,
without consideration of the period in which the misstatement occurred, as
well as to consider the amount of the misstatement that occurred in the
current year in order to determine the materiality of the misstatement. SAB
108 is effective for years ending after November 15, 2006. The
implementation of the guidance in SAB 108 had no effect on the Company's
financial position or results of operations.
In June 2006, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income
Taxes, to clarify the accounting for uncertainty in income taxes recognized
in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN
48 prescribes a recognition threshold and measurement attribute for
recognition and measurement of a tax position taken or expected to be taken
in a tax return. FIN 48 also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. The cumulative effect upon adoption shall be
reported as an adjustment to the opening balance of retained earnings for
that fiscal year. FIN 48 is effective for years beginning after December
15, 2006. The Company has not yet determined the effect of FIN 48 on its
financial position or results of operations.
In September 2006, the FASB issued FASB Statement No. 157 (Statement
157), Fair Value Measurements. Statement 157 defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value
measurements. It applies under other accounting pronouncements that require
or permit fair value measurements but does not require any new fair value
measurements. Statement 157 is effective for years beginning after November
15, 2007. The Company does not expect implementation of Statement 157 to
have a material effect on its financial position or results of operations.
(2) ACCOUNTING CHANGE - REVENUE AND UNCOMPENSATED CARE
Effective December 31, 2006, the Company changed its method of
accounting for revenue and estimated uncompensated care. The Company now
presents revenue exclusive of estimated uncompensated care within the
consolidated statement of operations. Previously the Company recorded
revenue at full established rates and recorded a provision for estimated
amounts not expected to be realized as an operating expense, as was common
practice under the AICPA Guide, Accounting for Health Care Organizations
(Guide). The Company believes that the new method of accounting is a
preferable interpretation of the Guide in their circumstances, because
flight revenue recognized will be more consistent with the criteria for
revenue recognition pursuant to Staff Accounting Bulletin No. 104. All
prior period financial statements included in this report have been
adjusted to reflect the new method of accounting. Previously reported
revenue and operating expenses have been reduced by $60,792,000 and
$42,892,000 for the years ended December 31, 2005 and 2004, respectively.
Previously reported operating income, net income and earnings per share did
not change.
F-15
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- -------------------------------------------------------------------------------
(3) ACCOUNTING CHANGE - COMPONENT OVERHAUL COSTS
Effective January 1, 2004, the Company changed its method of
accounting for major engine and airframe component overhaul costs from the
accrual method of accounting to the direct expense method. Under the new
accounting method, maintenance costs are recognized as expense as
maintenance services are performed. The Company believes the direct-expense
method is preferable in the circumstances because the maintenance liability
is not recorded until there is an obligating event (when the maintenance
event is actually being performed), the direct expense method eliminates
significant estimates and judgments inherent under the accrual method, and
it is the predominant method used in the transportation industry.
Accordingly, effective January 1, 2004, the Company reversed its major
overhaul accrual totaling $33,809,000 for all owned and leased aircraft and
reversed the remaining capitalized maintenance included in fixed assets
relating to used aircraft purchases totaling $19,719,000, with the balance
reflected as the cumulative effect of change in accounting principle of
$8,595,000 ($14,090,000, net of income taxes of $5,495,000).
In 2002, the impact of the major overhaul accrual relating to aircraft
purchased in the RMH acquisition was considered a component of the
valuation of the aircraft and did not affect the allocation of the purchase
price to goodwill. Accordingly, the change in method to the direct expense
method in 2004 resulted in a reduction in the asset value assigned to RMH
aircraft. The amount of the cumulative effect of the change in accounting
principle related to RMH aircraft was due exclusively to depreciation of
the asset value or changes in the liability balances which had been
expensed subsequent to the acquisition. Therefore, the majority of the
cumulative effect of the change in accounting principle related to aircraft
which were in the Company's fleet prior to the RMH acquisition.
(4) COSTS IN EXCESS OF BILLINGS AND BILLINGS IN EXCESS OF COSTS
As of December 31, 2006, the estimated period to complete contracts in
process ranges from three to twelve months, and the Company expects to
collect all related accounts receivable and costs and estimated earnings in
excess of billings on uncompleted contracts within one year. The following
summarizes contracts in process at December 31 (amounts in thousands):
2006 2005
---------- -------
Costs incurred on uncompleted contracts $ 6,248 6,061
Estimated contribution to earnings 3,099 1,922
---------- -------
9,347 7,983
Less billings to date (6,694) (4,767)
---------- -------
Costs and estimated earnings in excess of billings, net $ 2,653 3,216
========== =======
(5) NOTES PAYABLE AND LONG-TERM DEBT
Short-term notes payable as of December 31, 2006, consist of four
notes with an aircraft manufacturer for the purchase of four aircraft. The
notes are non-interest-bearing and mature in the first quarter of 2007. The
four aircraft collateralizing the notes are expected to be sold and leased
back under operating leases and are classified in the consolidated
financial statements as assets held for sale.
F-16
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- -------------------------------------------------------------------------------
(5) NOTES PAYABLE AND LONG-TERM DEBT, CONTINUED
Long-term debt consists of the following at December 31 (amounts in
thousands):
2006 2005
-------- -------
Notes payable due in quarterly installments of principal and interest with
all remaining principal due in 2010. Weighted average interest rate at
December 31, 2006, is 9.38%. $24,575 25,000
Borrowings under revolving credit facility with monthly interest payments
and all principal due in 2010. Weighted average interest rate at
December 31, 2006, is 8.25%. 15,335 6,855
Note payable with interest at 6.60%, due in monthly installments of
principal and interest with all remaining principal due in 2009,
collateralized by aircraft. 4,426 5,259
Notes payable with interest rates from 6.53% to 6.70%, due in monthly
installments of principal and interest at various dates through 2009,
collateralized by aircraft and other flight equipment 531 1,334
Note payable, non-interest bearing, due in annual principal payments
through 2007. Annual principal payment amounts are contingent upon
transport volume for Community-Based Model operations in Nevada. 250 750
Notes payable with interest rates from 5.80% to 8.49%, due in monthly
payments of principal and interest with all remaining principal due in
2008, collateralized by aircraft 7,546 8,935
Notes payable with interest rates from 5.25% to 9.27%. Paid in full in
2006. -- 2,879
Notes payable with interest at 8.96%, due in monthly payments of
principal and interest with all remaining principal due in 2007,
collateralized by aircraft 1,275 1,553
Notes payable with interest at LIBOR plus 2.50%, due in monthly
payments of principal and interest with all remaining principal due in
2008, collateralized by buildings. Weighted average rate at December
31, 2006, is 6.01%. 817 1,925
Note payable with interest rate at 6.46%, due in monthly installments of
principal and interest with all remaining principal due in 2011,
collateralized by aircraft 1,912 --
Note payable with interest rate at 5.60%, due in monthly installments of
principal and interest with all remaining principal due in 2010,
collateralized by aircraft 4,332 5,583
Notes payable with interest rates from 5.08% to 6.66%, due in monthly
installments of principal and interest at various dates through 2011,
collateralized by aircraft 8,191 7,030
Other 125 --
-------- -------
69,315 67,103
Less current installments (8,749) (9,399)
-------- -------
$60,566 57,704
======== =======
F-17
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- -------------------------------------------------------------------------------
(5) NOTES PAYABLE AND LONG-TERM DEBT, CONTINUED
The Company's senior credit facility consists of $24,575,000 in term
loans as of December 31, 2006, and a revolving credit facility. In October
2006, the revolving credit facility was amended to increase the maximum
revolving advance amount from $35 million to $45 million. The amendment
also increased the limitation on annual capital expenditures, inclusive of
leased assets, from $40 million to $50 million. All other terms and
conditions of the credit facility remained unchanged. As of December 31,
2006, the Company had $15,335,000 outstanding against the $45 million
revolving credit facility and available capacity on the facility of
$28,186,000. The capacity available on the revolving credit facility is
reduced by letters of credit outstanding.
Borrowings under the credit facility are secured by thirteen aircraft
and substantially all of the Company's accounts receivable, inventory,
equipment and general intangibles. Indebtedness under the credit facility
has a first priority claim to the assets pledged to secure it. The facility
matures December 14, 2010, but can be prepaid at any time, subject to
payment of an early termination fee ranging from .25% to 1% if the
termination occurs prior to December 14, 2010.
The revolving loans bear interest, at the Company's option, at either
(i) the higher of the federal funds rate plus 0.50% or the prime rate as
announced by the lenders or (ii) a rate equal to LIBOR plus an applicable
margin ranging from 1.75% to 3.00%. The term loans bear interest, at the
Company's option, at either (i) the higher of the federal funds rate plus
3.00% or the prime rate as announced by the lenders plus 2.50% or (ii) a
rate equal to LIBOR plus 4.00%. As of December 31, 2006, the interest rate
on the outstanding balance against the revolving credit facility was 8.25%
and the interest rate on the term loans was 9.38%.
Payment obligations under the credit facility accelerate upon the
occurrence of defined events of default, including the following: failure
to pay principal or interest or to perform covenants under the credit
facility or other indebtedness; events of insolvency or bankruptcy; failure
to timely discharge judgments of $250,000 or more; failure to maintain the
first priority status of liens under the credit facility; levy against a
material portion of the Company's assets; default under other indebtedness;
suspension of material governmental permits; interruption of operations at
any Company facility that has a material adverse effect; and a change of
control in the Company.
The credit facility contains various covenants that limit, among other
things, the Company's ability to create liens, declare dividends, make
loans and investments, enter into real property leases exceeding specified
expenditure levels, make any material change to the nature of the Company's
business, enter into any transaction with affiliates other than on arms'
length terms, prepay indebtedness, enter into a merger or consolidation, or
sell assets. The credit facility also places limits on the amount of new
indebtedness, operating lease obligations, and unfinanced capital
expenditures which the Company can incur in a fiscal year. The Company is
required to maintain certain financial ratios as defined in the credit
facility and other notes. As of December 31, 2006, the Company was in
compliance with the covenants of the credit facility.
Substantially all of the Company's property and equipment is pledged
as collateral under the Company's various notes payable.
F-18
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- -------------------------------------------------------------------------------
(5) NOTES PAYABLE AND LONG-TERM DEBT, CONTINUED
Aggregate maturities of long-term debt are as follows (amounts in
thousands):
Year ending December 31:
2007 $ 8,749
2008 13,297
2009 7,829
2010 38,375
2011 1,065
Thereafter --
-------
$69,315
=======
(6) LEASES
The Company leases hangar and office space under noncancelable
operating leases and leases certain equipment and aircraft under
noncancelable operating and capital leases. The majority of aircraft leases
contain purchase options, either at the end of the lease term or at a
stipulated early buyout date. As of December 31, 2006, future minimum lease
payments under capital and operating leases are as follows (amounts in
thousands):
Capital Operating
leases leases
---------------------
Year ending December 31:
2007 $ 1,417 26,290
2008 1,067 25,614
2009 758 24,314
2010 103 22,587
2011 -- 20,791
Thereafter -- 57,987
---------------------
Total minimum lease payments 3,345 $ 177,583
==========
Less amounts representing interest (351)
---------
Present value of minimum capital lease payments 2,994
Less current installments (1,214)
---------
$ 1,780
=========
Rent expense relating to operating leases totaled $26,100,000,
$22,996,000, and $19,508,000, for the years ended December 31, 2006, 2005,
and 2004, respectively.
At December 31, 2006 and 2005, leased property held under capital
leases included in equipment, net of accumulated depreciation, totaled
$3,745,000 and $1,590,000, respectively. Amortization of leased property
held under capital leases is included in depreciation expense.
F-19
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- -------------------------------------------------------------------------------
(7) STOCKHOLDERS' EQUITY
(A) WARRANTS
As of December 31, 2006, warrants to purchase 100,000 shares of
the Company's common stock at an exercise price of $5.28 are
outstanding. The warrants expire on October 16, 2007.
During the year ended December 31, 2006, warrants with an
exercise price of $6.60 were exercised for 25,000 shares of common
stock. During the year ended December 31, 2005, warrants with an
exercise price of $0.06 were exercised for 449,716 shares of common
stock.
(B) INCOME PER SHARE
The reconciliation of basic to diluted weighted average common
shares outstanding is as follows for the years ended December 31:
2006 2005 2004
---------- ---------- ----------
Weighted average number of common shares
outstanding - basic 11,748,107 11,058,971 10,894,863
Dilutive effect of:
Common stock options 476,090 138,217 79,141
Common stock warrants 81,850 457,697 340,823
----------------------------------
Weighted average number of common shares
outstanding - diluted 12,306,047 11,654,885 11,314,827
==================================
Common stock options totaling 55,000, 16,000, and 662,000, were
not included in the diluted income per share calculation for the years
ended December 31, 2006, 2005, and 2004, respectively, because their
effect would have been anti-dilutive.
F-20
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- -------------------------------------------------------------------------------
(8) STOCK-BASED COMPENSATION
In August 2006, the Company's shareholders approved the 2006 Equity
Compensation Plan (2006 Plan) which provides for the granting of incentive
stock options, non-statutory stock options (NSO's), shares of restricted
stock, stock appreciation rights and supplemental bonuses consisting of
shares of common stock, cash or a combination thereof to employees,
directors, and consultants. The maximum aggregate number of shares of
common stock that may be made subject to awards under the 2006 Plan is
600,000. The 2006 Plan is administered by a committee of the Company's
board of directors which has discretion to set the exercise price and term
of any option granted, provided that the term may not exceed ten years. In
the year ended December 31, 2006, one grant for 15,000 shares was awarded
under the 2006 Plan.
The Company also has a 1995 Stock Option Plan (1995 Plan) which
provides for the granting of incentive stock options and nonqualified stock
options, 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 1995 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 Nonemployee Director Stock Option Plan 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.
In February 1993, the Board of Directors adopted the Air Methods
Corporation Equity Compensation Plan for Nonemployee Directors which was
subsequently approved by the Company's stockholders on March 12, 1993.
Under this compensation plan, 150,000 shares of common stock are reserved
for issuance to non-employee directors. As of December 31, 2006, no shares
have been issued under this plan.
Effective January 1, 2006, the Company implemented FASB Statement No.
123R (Statement 123R), Share-Based Payment, an amendment of FASB Statement
No. 123, adopting the modified prospective method of implementation.
Statement 123R requires recognition in the income statement of the
grant-date fair value of stock options and other equity-based compensation
issued to employees. 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 2006, the Company recognized $442,000 in
compensation expense related to outstanding stock options. Total
unrecognized compensation cost related to unvested stock-based awards as of
December 31, 2006, was $994,000 and is expected to be recognized over the
remaining weighted average vesting term of 2 years.
F-21
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- -------------------------------------------------------------------------------
(8) STOCK-BASED COMPENSATION, CONTINUED
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 (amounts
in thousands, except per share amounts):
As Reported Pro Forma
------------ ---------
Year ended December 31, 2005:
Net income $ 11,832 11,370
Basic income per share 1.07 1.03
Diluted income per share 1.02 .98
Year ended December 31, 2004:
Net income before cumulative effect of change in
accounting principle $ 3,243 2,750
Net income 11,838 11,346
Basic income per share before cumulative effect of
change in accounting principle .30 .25
Basic income per share 1.09 1.04
Diluted income per share before cumulative effect of
change in accounting principle .29 .24
Diluted income per share 1.05 1.01
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model. The Company uses historical
option exercise data for similar employee groups, as well as the vesting
period and contractual term, to estimate the expected term of options
granted; the expected term represents the period of time that options
granted are expected to be outstanding. Expected volatility is based on
historical volatility of the Company's stock. The risk-free rate for
periods within the contractual life of the option is based on the U.S.
Treasury yield curve in effect at the time of the grant. During the year
ended December 31, 2006, options to purchase 70,000 shares of stock, with
exercise prices ranging from $22.62 to $28.70, were granted at a weighted
average fair value of $9.14. The weighted average fair value of options
granted during the years ended December 31, 2005 and 2004, was $2.15, and
$2.91, respectively. The following weighted average assumptions were used
in valuing the grants for the years ended December 31:
2006 2005 2004
-------------------
Expected term (in years) 3.5 3.0 5.0
Expected volatility 37% 36% 33%
Risk-free interest rate 4.8% 4.0% 3.2%
Expected dividend yield 0% 0% 0%
F-22
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- -------------------------------------------------------------------------------
(8) STOCK-BASED COMPENSATION, CONTINUED
The following is a summary of option activity under all stock option
plans during the year ended December 31, 2006:
Weighted-Average Aggregate
Weighted Remaining Intrinsic Value
Average Contractual (amounts in
Shares Exercise Price Life (Years) thousands)
----------------------------------------------------------------
Outstanding at January 1, 2006 961,522 $ 8.48
Granted 70,000 27.40
Canceled (75,000) 8.98
Exercised (244,023) 7.64
---------
Outstanding at December 31, 2006 712,499 10.58 2.9 $ 12,400
=========
Exercisable at December 31, 2006 253,500 8.39 2.3 4,951
=========
The aggregate intrinsic value of options exercised during the years
ended December 31, 2006, 2005, and 2004, was $4,400,000, $1,220,000, and
$717,000, respectively.
(9) REVENUE
The Company has operating agreements with various hospitals and
hospital systems to provide services and aircraft for initial terms ranging
from 1 to 10 years. The agreements provide for revenue from monthly fixed
fees and flight fees based upon the utilization of aircraft in providing
emergency medical services. The fixed-fee portions of the agreements
provide for the following revenue for years ending December 31 (amounts in
thousands):
2007 $ 52,225
2008 31,393
2009 22,171
2010 10,988
2011 1,129
Thereafter --
--------
$117,906
========
F-23
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- -------------------------------------------------------------------------------
(10) INCOME TAXES
Income tax benefit (expense), excluding amounts recorded as the
cumulative effect of a change in accounting principle, consists of the
following for the years ended December 31 (amounts in thousands):
2006 2005 2004
---------------------------
Current income tax benefit (expense):
Federal $ (9,622) (816) --
State (1,745) (1,184) 9
---------------------------
(11,367) (2,000) 9
Deferred income tax expense:
Federal (1,555) (5,399) (1,857)
State (222) (794) (273)
---------------------------
(1,777) (6,193) (2,130)
---------------------------
Total income tax expense $(13,144) (8,193) (2,121)
===========================
For years prior to 2006, the Company's deferred income taxes were
determined using a federal statutory rate of 34% because the Company
believed that the deferred tax assets and liabilities would be recovered or
settled at that rate. Due to an increase in projected taxable income for
the year ended December 31, 2006, and for future years, the Company revised
its estimated tax rate to 35% in 2006. Deferred income tax expense of
$525,000 was recognized for the year ended December 31, 2006, as a result
of applying the new rate to deferred tax assets and liabilities.
Reconciliation of income taxes on income before income taxes computed at
the federal statutory rate of 35% for the year ended December 31, 2006, and
34% for the years ended December 31, 2005, and 2004, to income taxes as
recorded is as follows (amounts in thousands):
2006 2005 2004
---------------------------
Tax at the federal statutory rate $(10,620) (6,809) (1,824)
State income taxes, net of federal benefit,
including adjustments based on filed
state income tax returns (1,559) (1,007) (268)
Nondeductible expenses (292) -- --
True up's to filed returns (104) (368) --
Change in estimated tax rate (525) -- --
Other (44) (9) (29)
---------------------------
Net income tax expense $(13,144) (8,193) (2,121)
===========================
For state income tax purposes, at December 31, 2006, the Company has
net operating loss carryforwards of approximately $7 million, expiring at
various dates through 2024. In 2005 the Company changed its year-end for
income tax filing from June 30 to December 31 to coincide with its fiscal
year-end and filed a short-period return for the six months ended December
31, 2004. The true-up of deferred tax assets and liabilities resulted in an
increase of $368,000 to deferred tax liabilities and income tax expense in
2005.
F-24
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- -------------------------------------------------------------------------------
(10) INCOME TAXES, CONTINUED
For the years ended December 31, 2006 and 2005, the Company recognized
certain tax benefits related to stock option plans in the amount of
$1,425,000 and $356,000, respectively. Such benefits were recorded as a
reduction of income taxes payable and an increase in additional paid-in
capital.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31 are as
follows (amounts in thousands):
2006 2005
--------- --------
Deferred tax assets:
Net operating loss carryforwards $ 373 698
Minimum tax credit carryforward -- 334
Employee compensation and benefit accruals
and other 5,069 4,642
--------- --------
Total deferred tax assets 5,442 5,674
--------- --------
Deferred tax liabilities:
Equipment and leasehold improvements,
principally due to differences in bases and
depreciation methods (22,754) (22,422)
Allowance for uncollectible accounts (2,568) (1,446)
Goodwill (674) (458)
Other (87) (212)
--------- --------
Total deferred tax liabilities (26,083) (24,538)
--------- --------
Net deferred tax liability $(20,641) (18,864)
========= ========
Based on management's assessment, realization of net deferred tax
assets through future taxable earnings is considered more likely than not.
(11) EMPLOYEE BENEFIT PLANS
The Company has two defined contribution retirement plans whereby
employees may contribute any percentage of their gross pay up to the IRS
maximum ($15,000 for 2006). Under one plan, through March 31, 2006, the
Company contributed 2% of gross pay for all employees and matched 60% of
the employees' contributions up to 6% of their gross pay. The Company also
continued the RMH defined contribution retirement plan which was in place
at the acquisition date. Under the RMH plan, through March 31, 2006, the
Company matched 30% of the employees' contributions up to 6% of their gross
pay. Effective April 1, 2006, the Company merged the two plans and changed
its contributions to match 70% of the employees' contributions up to 8% of
their gross pay. Company contributions to all plans totaled approximately
$3,572,000, $2,354,000, and $2,284,000 for the years ended December 31,
2006, 2005, and 2004, respectively.
F-25
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- -------------------------------------------------------------------------------
(12) COMMITMENTS, CONTINGENCIES, AND CONCENTRATIONS
The Company has entered into various aircraft operating leases under
which it provides residual value guarantees to the lessor. As of December
31, 2006, the undiscounted maximum amount of potential future payments
under the guarantees is $3,311,000. No amounts have been accrued for any
estimated losses with respect to the guarantees, since it is not probable
that the residual value of the aircraft will be less than the amounts
stipulated in the guarantee. The assessment of whether it is probable that
the Company will be required to make payments under the terms of the
guarantee is based on current market data and the Company's actual and
expected loss experience.
In July 2004, the Company entered into a commitment agreement to
purchase fifteen Bell 429 helicopters for approximately $55.5 million,
beginning in 2007, with a minimum of three deliveries per year. The
agreement provides for special incentives, including a trade-in option for
up to fifteen Bell 222 helicopters, with minimum guaranteed trade-in
values. Due to delays in the manufacturer's processes, delivery of the
first Bell 429 helicopter is currently expected in late 2008, with the
remaining units to be delivered over approximately the following two and a
half years.
In August 2005, the Company entered into a commitment agreement to
purchase six Eurocopter EC135 helicopters for approximately $23.0 million,
with deliveries scheduled in 2006. In October 2005, the Company also
entered into a purchase commitment for four Eurocopter AS350 helicopters
for approximately $6.1 million. As of December 31, 2006, the Company had
taken delivery of all aircraft under the agreements.
During 2006, the Company entered into additional purchase commitments
for various models of Bell and Eurocopter helicopters. As of December 31,
2006, commitments for 23 aircraft for approximately $69.0 million are still
open. Deliveries under these commitments are expected in 2007 and 2008.
As of December 31, 2006, the Company's aircraft purchase commitments
were as follows (amounts in thousands):
Year ending December 31:
2007 $ 52,338
2008 20,332
2009 22,200
2010 22,200
2011 7,400
Thereafter --
--------
$124,470
========
The Company intends to use the new aircraft for base expansion
opportunities as well as to replace older models of aircraft in our fleet.
The Company plans to either sell the aircraft which are replaced or
redeploy them into the backup fleet. Typically the Company has financed
aircraft acquired under these or similar commitments through operating
lease or debt agreements.
In January 2005, the Company entered into a $1,400,000 letter of
credit with an insurance underwriter in lieu of increasing cash deposits on
its workers compensation insurance policy. The letter of credit may be
renewed annually and reduces the available borrowing capacity under the
Company's revolving credit facility.
F-26
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- -------------------------------------------------------------------------------
(12) COMMITMENTS, CONTINGENCIES, AND CONCENTRATIONS, CONTINUED
The Company's pilots, comprising 31% of the total workforce, are
represented by a collective bargaining unit. The current collective
bargaining agreement expires April 30, 2009.
(13) BUSINESS SEGMENT INFORMATION
The Company identifies operating segments based on management
responsibility and the type of services or products offered. Operating
segments and their principal services or products are as follows:
- Community-Based Model (CBM) - provides air medical transportation
services to the general population as an independent service in
eighteen 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 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.
The accounting policies of the operating segments are as described in
Note 1. The Company evaluates the performance of its segments based on
pretax income. Intersegment sales are reflected at cost-related prices.
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 and
results of insignificant operations. The Company does not allocate assets
between HBM, Products, and Corporate Activities for internal reporting and
performance evaluation purposes.
Community- Hospital-
Based Based Products Corporate Intersegment
Model Model Division Activities Eliminations Consolidated
------------------------------------------------------------------------------
2006
External revenue $ 206,827 107,414 5,263 -- -- 319,504
Intersegment revenue -- 832 16,813 -- (17,645) --
------------------------------------------------------------------------------
Total revenue 206,827 108,246 22,076 -- (17,645) 319,504
Operating expenses (162,125) (99,608) (16,344) (9,470) 14,103 (273,444)
Depreciation & amortization (6,795) (5,354) (439) (322) -- (12,910)
Litigation settlement 1,417 -- -- -- -- 1,417
Interest expense (3,059) (2,630) -- (132) -- (5,821)
Other, net 1,482 -- -- 116 -- 1,598
Income tax expense -- -- -- (13,144) -- (13,144)
------------------------------------------------------------------------------
Net income (loss) $ 37,747 654 5,293 (22,952) (3,542) 17,200
==============================================================================
Total assets $ 121,363 N/A N/A 130,957 (2,163) 250,157
==============================================================================
F-27
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- -------------------------------------------------------------------------------
(13) BUSINESS SEGMENT INFORMATION, CONTINUED
Community- Hospital-
Based Based Products Corporate Intersegment
Model Model Division Activities Eliminations Consolidated
2005
External revenue $ 169,472 98,869 7,837 -- -- 276,178
Intersegment revenue -- -- 9,452 -- (9,452) --
------------------------------------------------------------------------------
Total revenue 169,472 98,869 17,289 -- (9,452) 276,178
Operating expenses (138,120) (82,552) (13,289) (9,285) 7,224 (236,022)
Depreciation & amortization (6,133) (5,201) (412) (275) -- (12,021)
Interest expense (3,123) (2,719) -- (114) -- (5,956)
Loss on early extinguishment
of debt -- -- -- (3,104) -- (3,104)
Other, net 1,011 -- -- (61) -- 950
Income tax expense -- -- -- (8,193) -- (8,193)
------------------------------------------------------------------------------
Net income (loss) $ 23,107 8,397 3,588 (21,032) (2,228) 11,832
==============================================================================
Total assets $ 89,805 N/A N/A 133,890 (2,163) 221,532
==============================================================================
2004
External revenue $ 134,463 88,448 7,300 -- -- 230,211
Intersegment revenue -- -- 8,753 -- (8,753) --
------------------------------------------------------------------------------
Total revenue 134,463 88,448 16,053 -- (8,753) 230,211
Operating expenses (116,537) (78,295) (10,451) (9,230) 7,347 (207,166)
Depreciation & amortization (5,417) (5,081) (272) (213) -- (10,983)
Interest expense (3,950) (3,736) -- (170) -- (7,856)
Other, net 1,050 -- -- 108 -- 1,158
Income tax expense -- -- -- (2,121) -- (2,121)
------------------------------------------------------------------------------
Income (loss) before
cumulative effect of change
in accounting principle 9,609 1,336 5,330 (11,626) (1,406) 3,243
Cumulative effect of change
in accounting principle, net -- -- -- 8,595 -- 8,595
------------------------------------------------------------------------------
Net income (loss) $ 9,609 1,336 5,330 (3,031) (1,406) 11,838
==============================================================================
Total assets $ 67,156 N/A N/A 139,730 (2,163) 204,723
==============================================================================
F-28
AIR METHODS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- -------------------------------------------------------------------------------
(14) UNAUDITED QUARTERLY FINANCIAL DATA
Summarized unaudited quarterly financial data for 2006 and 2005 is as
follows (amounts in thousands except per share data):
Quarter
First Second Third Fourth
---------------------------------
2006
Revenue $73,029 78,477 90,520 77,478
Operating income 5,478 7,400 17,122 4,567
Income before income taxes 4,468 6,324 16,052 3,500
Net income 2,580 3,813 9,606 1,201
Basic income per common share .22 .32 .82 .10
Diluted income per common share .21 .31 .78 .10
2005
Revenue $58,397 71,449 72,699 73,633
Operating income 785 10,146 9,895 7,309
Income (loss) before income taxes (735) 5,477 9,028 6,255
Net income (loss) (468) 3,324 5,498 3,478
Basic income (loss) per common share (.04) .30 .50 .31
Diluted income (loss) per common share (.04) .29 .47 .29
Income per common share is computed independently for each of the
quarters presented. Therefore, the sum of the quarterly income per share
does not necessarily equal the total computed for the year. Revenue for all
previously reported quarters in 2006 and 2005 has been adjusted to reflect
the presentation of revenue exclusive of uncompensated care, as discussed
more thoroughly in Note 2.
The Company incurred a pre-tax loss of $3,104,000 during the second
quarter of 2005 associated with the early extinguishment of debt.
F-29
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
Air Methods Corporation:
Under date of March 9, 2007, we reported on the consolidated balance sheets of
Air Methods Corporation and subsidiaries (the Company) as of December 31, 2006
and 2005, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 2006, which are included in the Company's December 31, 2006 Annual
Report on Form 10-K. In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related consolidated
financial statement Schedule II - Valuation and Qualifying Accounts. This
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on this financial statement schedule
based on our audits.
As discussed in Note 2 to the accompanying consolidated financial statements,
the Company changed its method of accounting for revenue and estimated
uncompensated care in 2006.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
KPMG LLP
Denver, Colorado
March 9, 2007
F-30
AIR METHODS CORPORATION
AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
Balance at
Beginning Transfers and Balance at
Description of Period Additions (a) Other Deductions (b) End of Period
- -------------------------------------------------------------------------------------------------------------
Allowance for contractual discounts
Year ended December 31, 2006 $ 24,700 120,585 -- (112,215) 33,070
Year ended December 31, 2005 21,740 83,948 -- (80,988) 24,700
Year ended December 31, 2004 16,785 82,150 -- (77,195) 21,740
Allowance for uncompensated care
Year ended December 31, 2006 $ 45,540 83,917 -- (77,913) 51,544
Year ended December 31, 2005 26,040 60,792 -- (41,292) 45,540
Year ended December 31, 2004 30,301 42,892 -- (47,153) 26,040
- --------------
Notes:
(a) Amounts excluded from revenue.
(b) Actual write-offs and charges to allowances.
See accompanying Report of Independent Registered Public Accounting Firm.
F-31