UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 

 
FORM 10-Q
 
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2014
 
OR
 
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from   to  
 
Commission file number 0-16079

  AIR METHODS CORPORATION  
  (Exact name of Registrant as Specified in Its Charter)
 
 
Delaware
   
84-0915893
 
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification Number)
 
 
7301 South Peoria, Englewood, Colorado
   
80112
 
(Address of Principal Executive Offices)
(Zip Code)
 
Registrant’s Telephone Number, Including Area Code (303) 792-7400

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x  No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated Filer x Accelerated Filer o
Non-accelerated Filer o  (Do not check if a smaller reporting company) Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)
Yes o  No  x

The number of shares of Common Stock, par value $.06, outstanding as of October 31, 2014, was 39,205,446.
 


 
 

 

 
TABLE OF CONTENTS
         
   
         
     
         
     
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PART I: FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

Air Methods Corporation and Subsidiaries

(Amounts in thousands, except share and per share amounts)
(unaudited)

   
September 30,
   
December 31,
 
   
2014
   
2013
 
Assets
           
             
Current assets:
           
Cash and cash equivalents
  $ 16,832       9,862  
Receivables:
               
Trade, net (note 4)
    296,301       237,856  
Refundable income taxes
    --       11,863  
Other
    3,136       953  
Total receivables
    299,437       250,672  
                 
Inventories
    45,108       47,804  
Work-in-process on medical interiors and products contracts
    4,640       5,313  
Assets held for sale
    7,945       5,103  
Costs and estimated earnings in excess of billings on uncompleted contracts
    1,509       2,888  
Refundable deposits
    8,560       8,459  
Prepaid expenses and other (note 6)
    10,804       10,449  
 
               
Total current assets
    394,835       340,550  
                 
Property and equipment:
               
Land
    251       251  
Flight and ground support equipment
    653,049       584,059  
Aircraft under capital leases
    212,461       246,752  
Aircraft rotable spare parts
    41,895       41,391  
Buildings and office equipment
    59,075       51,601  
      966,731       924,054  
Less accumulated depreciation and amortization
    (270,440 )     (259,212 )
                 
Net property and equipment
    696,291       664,842  
                 
Goodwill (note 2)
    128,737       128,121  
Intangible assets, net of accumulated amortization of $17,922 and $13,397 at September 30, 2014 and December 31, 2013, respectively
      85,096         88,215  
Other assets
    30,686       30,813  
                 
Total assets
  $ 1,335,645       1,252,541  

 (Continued)
 
1
 

 

 
Air Methods Corporation and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS, Continued
(Amounts in thousands, except share and per share amounts)
(unaudited)

   
September 30,
   
December 31,
 
   
2014
   
2013
 
Liabilities and Stockholders’ Equity
           
             
Current liabilities:
           
Notes payable
  $ 2,729       2,616  
Current installments of long-term debt
    44,640       39,415  
Current installments of obligations under capital leases
    25,717       29,116  
Accounts payable
    19,813       20,431  
Deferred revenue
    3,063       3,463  
Billings in excess of costs and estimated earnings on uncompleted contracts
    1,179       2,232  
Accrued wages and compensated absences
    24,266       24,346  
Due to third party payers
    7,196       7,789  
Deferred income taxes
    19,530       13,748  
Other accrued liabilities
    26,425       19,162  
                 
Total current liabilities
    174,558       162,318  
                 
Long-term debt, less current installments
    483,713       477,038  
Obligations under capital leases, less current installments
    107,213       131,249  
Deferred income taxes
    98,275       86,131  
Other liabilities
    16,263       19,733  
                 
Total liabilities
    880,022       876,469  
                 
Redeemable non-controlling interests
    6,747       8,113  
                 
Stockholders’ equity (note 3):
               
Preferred stock, $1 par value.  Authorized 15,000,000 shares, none issued
    --       --  
Common stock, $.06 par value. Authorized 70,500,000 shares; issued 39,423,253 and 39,301,407 shares at September 30, 2014 and December 31, 2013, respectively; outstanding 39,205,446 and 39,064,437 shares at September 30, 2014 and December 31, 2013, respectively
          2,348             2,343  
Additional paid-in capital
    118,720       112,890  
Retained earnings
    328,385       253,098  
Accumulated other comprehensive loss
    (577 )     (372 )
                 
Total stockholders’ equity
    448,876       367,959  
                 
Total liabilities and stockholders’ equity
  $ 1,335,645       1,252,541  
 
See accompanying notes to unaudited condensed consolidated financial statements.
 
2
 

 

 
Air Methods Corporation and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except share and per share amounts)
(unaudited)

   
Three Months Ended
September 30,
   
Nine Months Ended
 September 30,
 
   
2014
   
2013
   
2014
   
2013
 
Revenue:
                       
Patient transport revenue, net of provision for contractual discounts (note 4)
  $ 315,459       283,709       864,101       736,431  
Provision for uncompensated care (note 4)
    (125,089 )     (105,916 )     (358,429 )     (301,863 )
Patient transport revenue, net
    190,370       177,793       505,672       434,568  
Air medical services contract revenue
    44,278       49,750       134,829       158,743  
Tourism and charter revenue
    33,941       16,002       89,709       42,385  
Medical interiors and products revenue
    6,237       5,616       21,461       15,026  
Dispatch and billing service revenue
    2,992       3,224       7,754       7,097  
      277,818       252,385       759,425       657,819  
Operating expenses:
                               
Flight centers
    94,461       89,431       270,232       258,874  
Air medical aircraft operations
    35,456       35,565       101,195       113,518  
Tourism operating expenses
    22,989       9,242       58,465       29,243  
Cost of medical interiors and products sold
    5,960       5,289       19,177       14,245  
Cost of dispatch and billing services
    2,430       2,156       7,354       5,156  
Depreciation and amortization
    20,121       19,781       60,910       59,790  
Loss on disposition of assets, net
    77       118       1,290       326  
General and administrative
    35,913       28,292       103,702       82,582  
      217,407       189,874       622,325       563,734  
                                 
Operating income
    60,411       62,511       137,100       94,085  
                                 
Other income (expense):
                               
Interest expense
    (5,341 )     (5,190 )     (16,439 )     (15,169 )
Other, net
    322       349       588       964  
                                 
Income before income taxes
    55,392       57,670       121,249       79,880  
Income tax expense
    (21,552 )     (22,065 )     (47,433 )     (30,815 )
Net income
    33,840       35,605       73,816       49,065  
                                 
Less net income attributable to redeemable non-controlling interests
    123       --       420       --  
Net income attributable to Air Methods Corporation and subsidiaries
  $ 33,717       35,605       73,396       49,065  
                                 
Other comprehensive income (loss), net of income taxes:
                               
Foreign currency translation adjustments
    (251 )     --       (205 )     --  
Comprehensive income
  $ 33,466       35,605       73,191       49,065  
                                 
Basic income per common share (note 5)
  $ .91       .91       1.92       1.26  
                                 
Diluted income per common share (note 5)
  $ .90       .91       1.91       1.25  
                                 
Weighted average number of common shares outstanding – basic
    39,168,873       38,933,915       39,146,609       38,882,943  
                                 
Weighted average number of common shares outstanding – diluted
    39,343,405       39,194,532       39,329,121       39,228,113  

See accompanying notes to unaudited condensed consolidated financial statements.
 
3
 

 

 
Air Methods Corporation and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(unaudited)

   
Nine Months Ended September 30,
 
   
2014
   
2013
 
             
Cash flows from operating activities:
           
Net income
  $ 73,816       49,065  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization expense
    60,910       59,790  
Deferred income tax expense
    17,926       13,780  
Stock-based compensation
    2,866       2,789  
Tax benefit from exercise of stock options
    (1,779 )     (2,173 )
Loss on disposition of assets, net
    1,290       326  
Unrealized loss on derivative instrument
    70       143  
Loss from equity method investee
    738       --  
Changes in assets and liabilities, net of effects of acquisitions:
               
Increase in prepaid expenses and other current assets
    (526 )     (4,395 )
Decrease (increase) in receivables
    (48,791 )     2,298  
Decrease (increase) in inventories
    3,369       (7,991 )
Decrease (increase) in costs in excess of billings
    1,379       (1,883 )
Increase in accounts payable, other accrued liabilities, and other liabilities
    6,718       4,572  
Decrease in deferred revenue and billings in excess of costs
    (1,453 )     (2,506 )
Net cash provided by operating activities
    116,533       113,815  
                 
Cash flows from investing activities:
               
Acquisition of subsidiaries (note 2)
    (3,182 )     (1,435 )
Acquisition of property and equipment
    (87,965 )     (41,279 )
Buy-out of previously leased aircraft
    (17,296 )     (51,403 )
Proceeds from disposition and sale of equipment and assets held for sale
    12,637       17,266  
Increase in other assets
    (660 )     (5,206 )
Net cash used in investing activities
    (96,466 )     (82,057 )

 (Continued)
 
4
 

 

 
Air Methods Corporation and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
(Amounts in thousands)
(unaudited)

   
Nine Months Ended September 30,
 
   
2014
   
2013
 
             
Cash flows from financing activities:
           
Proceeds from issuance of common stock
  $ 1,190       1,397  
Tax benefit from exercise of stock options
    1,779       2,173  
Borrowings under line of credit
    30,000       54,370  
Payments under line of credit
    (42,000 )     (101,370 )
Proceeds from long-term debt
    54,503       120,480  
Payments for financing costs
    (81 )     (221 )
Payments of long-term debt and notes payable
    (30,603 )     (20,274 )
Payments of capital lease obligations
    (27,983 )     (72,972 )
Proceeds from non-controlling interests
    98       --  
Net cash used in financing activities
    (13,097 )     (16,417 )
                 
Increase in cash and cash equivalents
    6,970       15,341  
                 
Cash and cash equivalents at beginning of period
    9,862       3,818  
                 
Cash and cash equivalents at end of period
  $ 16,832       19,159  
                 
Interest paid in cash during the period
  $ 15,862       14,589  
 
Income taxes paid in cash during the period
  $ 12,244       2,544  
 
Non-cash investing and financing activities:

In the nine months ended September 30, 2014, the Company entered into notes payable of $2,729 to finance the purchase of aircraft which were held in property and equipment pending permanent financing as of September 30, 2014, and into capital leases of $548 to finance the purchase of equipment. The Company also settled notes payable of $2,616 in exchange for the aircraft securing the debt.

In the nine months ended September 30, 2013, the Company entered into capital leases of $2,707 to finance the purchase of aircraft. The Company also settled notes payable of $3,570 in exchange for the aircraft securing the debt.
 
See accompanying notes to unaudited condensed consolidated financial statements.
 
5
 

 

 
Air Methods Corporation and Subsidiaries
(unaudited)

(1)          Basis of Presentation

 
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and instructions to Form 10-Q and Regulation S-X. Accordingly, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the condensed consolidated financial statements for the respective periods. Interim results are not necessarily indicative of results for a full year. The condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto for the year ended December 31, 2013.

 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) 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, valuation of long-lived assets, and fair values of assets acquired and liabilities assumed in business combinations. Actual results could differ from those estimates.

(2)          Acquisition of Subsidiaries

On December 13, 2013, via a newly formed subsidiary, Blue Hawaiian Holdings, LLC, the Company acquired 100% of the membership interests of Helicopter Consultants of Maui, LLC (doing business as Blue Hawaiian Helicopters) and certain of its affiliates (collectively, BHH) for a cash purchase price of $66.8 million, subject to final determination of working capital, as defined in the merger agreement, as of the closing date. At December 31, 2013, the Company had recorded a liability of $2,282,000 for the estimated increase to the purchase price for the change in working capital. The liability was revised to $3,182,000 during the first quarter of 2014 and paid during the second quarter. No further amounts are due to the sellers. The former owners of BHH hold a 10% ownership interest in Blue Hawaiian Holdings, LLC, which the Company can redeem at any time for a price based on BHH’s current operating results. Between June 13, 2015, and December 13, 2015, the former owners of BHH can require the Company to redeem their 10% ownership interest for a price based on the same formula. The purchase price was financed primarily through borrowings under the Company’s Amended and Restated Revolving Credit, Term Loan and Security Agreement with a commercial bank group.

The allocation of the purchase price was as follows (amounts in thousands):
                   
   
Allocation at
December 31, 2013
   
Adjustments
   
Revised
Allocation
 
                   
Aircraft
  $ 33,440       --       33,440  
Amortizable intangible assets
    24,525       --       24,525  
Goodwill
    5,985       590       6,575  
Other equipment and leasehold improvements
    5,183       --       5,183  
Working capital accounts, net
    5,964       310       6,274  
Total net assets
  $ 75,097       900       75,997  
Redeemable non-controlling interest
    (6,065 )     --       (6,065 )
Purchase price
  $ 69,032       900       69,932  

The Company does not expect further adjustments to the purchase price allocation.
 
6
 

 

 
Air Methods Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements, continued
(unaudited)

(3)          Stockholders’ Equity

 
Changes in stockholders’ equity for the nine months ended September 30, 2014, consisted of the following (amounts in thousands except share amounts):
             
   
Shares
       
   
Outstanding
   
Amount
 
             
Balances at January 1, 2014
    39,064,437     $ 367,959  
                 
Issuance of common shares for options exercised
    90,347       1,190  
Stock-based compensation
    50,662       2,866  
Tax benefit from exercise of stock options
    --       1,779  
Forfeiture of unvested restricted shares and related dividends
    --       8  
Adjustments to redeemable non-controlling interests
    --       1,883  
Other comprehensive income
    --       (205 )
Net income attributable to Air Methods Corporation and subsidiaries
    --       73,396  
                 
Balances at September 30, 2014
    39,205,446     $ 448,876  

 (4)         Patient Transport Revenue Recognition

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 estimated payer mix, payer 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. The allowance for contractual discounts is related primarily to Medicare and Medicaid patients. The allowance for uncompensated care is related primarily to receivables recorded for self-pay patients.

The Company has not changed its discount policies related to self-pay patients or deductible and copayment balances for insured patients during either 2014 or 2013. The allowance for uncompensated care was 39.7% of receivables from all payers, excluding Medicare and Medicaid, as of September 30, 2014, compared to 39.2% at December 31, 2013, and 44.2% at September 30, 2013. Receivables from private insurance providers accounted for 65% of receivables from all payers, excluding Medicare and Medicaid, as of September 30, 2014, compared to 60% as of December 31, 2013, and 61% as of September 30, 2013. The remainder of receivables from all payers, excluding Medicare and Medicaid, are attributable to self-pay patients.

The Company recognizes patient transport revenue at its standard rates for services provided, regardless of expected payer. In the period that services are provided and based upon historical experience, the Company records a significant provision for uncompensated care related to uninsured patients who will be unable or unwilling to pay for the services provided and a provision for contractual discounts related to Medicare and Medicaid transports. Air medical services contract revenue consists of monthly fees and hourly flight fees billed to hospitals or other institutions under exclusive operating agreements. These fees are earned regardless of when, or if, the institution is reimbursed for these services by its patients, their insurers, or the federal government. As a result, the Company does not maintain an allowance or provision for uncompensated care for air medical services contract revenue and related receivables.
 
7
 

 


Air Methods Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements, continued
(unaudited)

(4)          Patient Transport Revenue Recognition, continued

Patient transport revenue, net of provision for contractual discounts but before provision for uncompensated care, by major payer class, was as follows (amounts in thousands):
             
   
For quarter ended
September 30,
   
For nine months ended
September 30,
 
   
2014
   
2013
   
2014
   
2013
 
                         
Third-party payers
  $ 243,022       213,500       655,741       552,502  
Self-pay
    72,437       70,209       208,360       183,929  
Total
  $ 315,459       283,709       864,101       736,431  

 (5)         Income per Share

 
Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income by all common shares outstanding during the period and dilutive potential common shares.

 
In accordance with FASB ASC 480-10-S99, Distinguishing Liabilities from Equity, and solely for the purpose of calculating earnings per share, net income was increased by $1,871,000 and $1,883,000 for the quarter and nine months ended September 30, 2014, respectively, for an adjustment to the value of redeemable non-controlling interests.

 
The reconciliation of basic to diluted weighted average common shares outstanding is as follows:
             
   
2014
   
2013
 
For quarter ended September 30:
           
Weighted average number of common shares outstanding – basic
    39,168,873       38,933,915  
Dilutive effect of:
               
Common stock options
    83,064       201,661  
Unvested restricted stock
    83,520       58,956  
Unvested performance share units
    7,948       --  
Weighted average number of common shares outstanding – diluted
    39,343,405       39,194,532  
                 
For nine months ended September 30:
               
Weighted average number of common shares outstanding – basic
    39,146,609       38,882,943  
Dilutive effect of:
               
Common stock options
    108,952       285,534  
Unvested restricted stock
    73,560       59,636  
Unvested performance share units
    --       --  
Weighted average number of common shares outstanding – diluted
    39,329,121       39,228,113  

 
Common stock options totaling 47,500 and performance share units totaling 105,512 were not included in the diluted shares outstanding for the nine months ended September 30, 2014, because their effect would have been anti-dilutive. Common stock options totaling 45,000 were not included in the diluted shares outstanding for the quarter and nine months ended September 30, 2013, because their effect would have been anti-dilutive.
 
8
 

 

 
Air Methods Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements, continued
(unaudited)

 (6)
Fair Value of Financial Instruments

ASC Topic 820, “Fair Value Measurements and Disclosures,” requires disclosures about how fair value is determined for assets and liabilities and establishes a hierarchy by which these assets and liabilities must be grouped based on the type of inputs used in measuring fair value as follows:
     
 
 Level 1:
quoted prices in active markets for identical assets or liabilities;
 
 Level 2:
quoted prices in active markets for similar assets and liabilities and inputs that are observable for the asset or liability; or
 
 Level 3:
unobservable inputs, such as discounted cash flow models or valuations.
 
 
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 receivable, notes payable, accounts payable, and accrued liabilities:

 
The carrying amounts approximate fair value because of the short maturity of these instruments.

 
Derivative instruments:

The Company endeavors to acquire jet fuel at the lowest possible cost and to reduce volatility in operating expenses through the use of short-term purchased call options. Financial derivative instruments covering fuel purchases are included in prepaid expenses and other current assets at fair value. Fair value is determined based on quoted prices in active markets for similar instruments and is classified as Level 2 in the fair value hierarchy. The fair value of all fuel derivative instruments included in prepaid expenses and other current assets was $0 at September 30, 2014, and December 31, 2013. The Company’s financial derivatives do not qualify for hedge accounting, and, therefore, realized and non-cash mark to market adjustments are included in aircraft operations expense in the Company’s statement of income. Aircraft operations expense included non-cash mark to market derivative losses of $6,000 and $70,000 for the quarter and nine months ended September 30, 2014, respectively, compared to $3,000 and $143,000 for the quarter and nine months ended September 30, 2013, respectively. There were no cash settlements under the terms of the agreements in 2014 or  2013.

 
Long-term debt:

 
The fair value of long-term debt is classified as Level 3 in the fair value hierarchy because it is determined based on the present value of future contractual cash flows discounted at an interest rate that reflects the risks inherent in those cash flows. Based on the borrowing rates currently available to the Company for loans with similar terms and average maturities and on recent transactions, the fair value of long-term debt as of September 30, 2014, is estimated to be $526,353,000, compared to a carrying value of $528,353,000. The fair value of long-term debt as of December 31, 2013, was estimated to be $513,436,000, compared to a carrying value of $516,453,000.
 
(7)
New Accounting Pronouncements

 
In June 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. The ASU requires that performance targets in these situations be accounted for as performance conditions and should not be reflected in the calculation of the grant-date fair value of the award. The ASU also specifies requirements for recognition of associated compensation cost. The ASU is effective for periods beginning after December 15, 2014, with earlier adoption permitted. The Company expects to adopt ASU 2014-12 prospectively and does not expect the implementation to have a material effect on its financial position or results of operations.
 
9
 

 

 
Air Methods Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements, continued
(unaudited)

(7)
New Accounting Pronouncements, continued
 
 
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The ASU is effective for the Company for periods beginning after December 15, 2016, and early adoption is not permitted. The ASU permits the use of either the retrospective or cumulative effect transition method. The Company has not yet selected a transition method and is currently evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures.

(8)
Business Segment Information

 
Summarized financial information for the Company’s operating segments is shown in the following table (amounts in thousands). Amounts in the “Corporate Activities” column represent corporate headquarters expenses, corporate income tax expense, and results of insignificant operations. The Company does not allocate assets between operating segments for internal reporting and performance evaluation purposes. Operating segments and their principal products or services are as follows:

 
Air Medical Services (AMS) - provides air medical transportation services to the general population as an independent service and to hospitals or other institutions under exclusive operating agreements. Services include aircraft operation and maintenance, medical care, dispatch and communications, and medical billing and collection.
 
Tourism – provides helicopter tours and charter flights, primarily focusing on Grand Canyon and Hawaiian Island tours.
 
United Rotorcraft (UR) Division - designs, manufactures, and installs aircraft medical interiors and other aerospace and medical transport products for domestic and international customers.
 
10
 

 

 
Air Methods Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements, continued
(unaudited)

(8)           Business Segment Information, continued

 
For quarter ended September 30:
 
AMS
   
Tourism
   
UR
   
Corporate
Activities
   
Intersegment
Eliminations
   
Consolidated
 
2014
                                   
External revenue
  $ 237,640       33,941       6,151       86       --       277,818  
Intersegment revenue
    --       --       2,305       --       (2,305 )     --  
Total revenue
    237,640       33,941       8,456       86       (2,305 )     277,818  
Operating expenses, excluding depreciation & amortization
    (153,415 )     (27,963 )     (8,193 )     (9,672 )     1,957       (197,286 )
Depreciation & amortization
    (17,257 )     (1,746 )     (598 )     (520 )     --       (20,121 )
Interest expense
    (3,964 )     (742 )     --       (635 )     --       (5,341 )
Other income (expense), net
    435       1       --       (114 )     --       322  
Income tax expense
    --       --       --       (21,552 )     --       (21,552 )
Segment net income (loss)
    63,439       3,491       (335 )     (32,407 )     (348 )     33,840  
Less net income (loss) attributable to non-controlling interests
    (44 )     167       --       --       --       123  
Net income (loss) attributable to Air Methods Corporation and subsidiaries
  $ 63,483       3,324       (335 )     (32,407 )     (348 )     33,717  
                                                 
2013
                                               
External revenue
  $ 230,767       16,002       5,597       19       --       252,385  
Intersegment revenue
    --       --       2,120       --       (2,120 )     --  
Total revenue
    230,767       16,002       7,717       19       (2,120 )     252,385  
Operating expenses, excluding depreciation & amortization
    (145,068 )     (11,212 )     (7,324 )     (8,558 )     2,069       (170,093 )
Depreciation & amortization
    (18,184 )     (681 )     (455 )     (461 )     --       (19,781 )
Interest expense
    (4,222 )     (280 )     --       (688 )     --       (5,190 )
Other income (expense), net
    311       --       (2 )     40       --       349  
Income tax expense
    --       --       --       (22,065 )     --       (22,065 )
Segment net income (loss)
  $ 63,604       3,829       (64 )     (31,713 )     (51 )     35,605  

For nine months ended September 30:
                                   
2014
                                   
External revenue
  $ 648,229       89,709       21,401       86       --       759,425  
Intersegment revenue
    --       --       9,363       --       (9,363 )     --  
Total revenue
    648,229       89,709       30,764       86       (9,363 )     759,425  
Operating expenses, excluding depreciation & amortization
    (440,078 )     (72,158 )     (28,160 )     (29,178 )     8,159       (561,415 )
Depreciation & amortization
    (52,671 )     (4,966 )     (1,733 )     (1,540 )     --       (60,910 )
Interest expense
    (12,221 )     (2,095 )     --       (2,123 )     --       (16,439 )
Other income (expense), net
    1,248       4       --       (664 )     --       588  
Income tax expense
    --       --       --       (47,433 )     --       (47,433 )
Segment net income (loss)
    144,507       10,494       871       (80,852 )     (1,204 )     73,816  
Less net income (loss) attributable to non-controlling interests
    (130 )     550       --       --       --       420  
Net income (loss) attributable to Air Methods Corporation and subsidiaries
  $ 144,637       9,944       871       (80,852 )     (1,204 )     73,396  
                                                 
2013
                                               
External revenue
  $ 600,414       42,385       14,928       92       --       657,819  
Intersegment revenue
    --       --       6,421       --       (6,421 )     --  
Total revenue
    600,414       42,385       21,349       92       (6,421 )     657,819  
Operating expenses, excluding depreciation & amortization
    (429,742 )     (34,631 )     (20,534 )     (25,138 )     6,101       (503,944 )
Depreciation & amortization
    (55,218 )     (1,999 )     (1,313 )     (1,260 )     --       (59,790 )
Interest expense
    (12,426 )     (773 )     --       (1,970 )     --       (15,169 )
Other income (expense), net
    854       --       (2 )     112       --       964  
Income tax expense   
    --       --       --       (30,815 )     --       (30,815 )
Segment net income (loss)
  $ 103,882       4,982       (500 )     (58,979 )     (320 )     49,065  

11
 

 

 

The following discussion of the results of operations and financial condition should be read in conjunction with our condensed consolidated financial statements and notes thereto included in Item 1 of this report. This report, including the information incorporated by reference, contains forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. The use of any of the words “believe,” “expect,” “anticipate,” “plan,” “estimate,” “may,” and similar expressions are intended to identify such statements. Forward-looking statements include statements concerning our possible or assumed future results; flight volume, collection rates, and days’ sales outstanding for patient transports; size, structure and growth of our air medical services, aerial tourism, and products markets; continuation and/or renewal of hospital contracts; acquisition of new and profitable UR Division contracts; impact of the Patient Protection and Affordable Care Act (PPACA) and other changes in laws and regulations; and other matters. The actual results that we achieve may differ materially from those discussed in such forward-looking statements due to the risks and uncertainties described in the Risk Factors section of this report, in Management’s Discussion and Analysis of Financial Condition and Results of Operations, and in other sections of this report, as well as in our annual report on Form 10-K. We undertake no obligation to update any forward-looking statements.

Overview

We provide air medical transportation services throughout the United States and design, manufacture, and install medical aircraft interiors and other aerospace products for domestic and international customers. We also provide tourism operations in and around the Grand Canyon and Hawaiian Islands. Our divisions, or business segments, are organized according to the type of service or product provided and consist of the following:
Air Medical Services (AMS) - provides air medical transportation services to the general population as an independent service (also called community-based services) and to hospitals or other institutions under exclusive operating agreements (also called hospital-based services). Patient transport 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. Air medical services contract revenue consists of fixed monthly fees (approximately 80% of total contract revenue) and hourly flight fees (approximately 20% of total contract revenue) billed to hospitals or other institutions. In the nine months ended September 30, 2014, the AMS Division generated 85% of our total revenue, compared to 91%  in 2013.
Tourism Division – provides helicopter tours and charter flights, primarily focusing on Grand Canyon and Hawaiian Island tours. In the nine months ended September 30, 2014, the Tourism Division generated 12% of our total revenue, compared to 6% in 2013.
United Rotorcraft (UR) Division - designs, manufactures, and installs aircraft medical interiors and other aerospace and medical transport products for domestic and international customers. The UR Division generated 3% of our total revenue in the nine months ended September 30, 2014, compared to 2% in 2013.

See Note 8 to the consolidated financial statements included in Item 1 of this report for operating results by segment.

We believe that the following factors have the greatest impact on our results of operations and financial condition:

Flight volume. Almost all patient transport and tourism revenue and approximately 20% of AMS contract revenue are derived from flight fees. By contrast, 84% of AMS operating costs incurred during the nine months ended September 30, 2014, 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 in quarterly comparatives has historically been weather conditions. Adverse weather conditions—such as fog, high winds, high heat, or heavy precipitation—hamper our ability to operate our aircraft safely and, therefore, result in reduced flight volume. Total patient transports for community-based locations were approximately 15,800 and 43,700 for the quarter and nine months ended September 30, 2014, respectively, compared to approximately 14,800 and 40,800 for the quarter and nine months ended September 30, 2013, respectively. Patient transports for community-based locations open longer than one year (Same-Base Transports) were approximately 13,900 and 39,300 in the quarter and nine months ended September 30, 2014, respectively, compared to approximately 14,200 and 38,700 in the quarter and nine months ended September 30, 2013, respectively. Cancellations due to unfavorable weather conditions for community-based locations open longer than one year were 60 higher and 717 lower in the quarter and nine months ended September 30, 2014, respectively, compared to 2013. Requests for community-based services increased by 0.5% and 2.4% for the quarter and nine months ended September 30, 2014, respectively, for bases open longer than one year.
 
12
 

 

 
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 for services provided to insured and uninsured patients. Medicare and Medicaid also receive contractual discounts from our standard charges for flight services. Patient transport 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 payer mix. The provisions are adjusted as required based on actual collections in subsequent periods. Net reimbursement per patient transport is primarily a function of price, payer 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. PPACA is intended to decrease the number of uninsured Americans and reduce health care costs. We believe that the movement from self-pay patients to Medicaid in our payer mix for 2014 compared to 2013 is attributable to the expansion of Medicaid eligibility under PPACA. To date, PPACA has not resulted in an increase in the percentage of transports covered by private insurance.

 
Net reimbursement per transport decreased 0.1% and increased 7.6% in the quarter and nine months ended September 30, 2014, compared to 2013, attributable to recent price increases net of a deterioration in payer mix, as shown below:

   
For quarters ended
September 30,
   
For nine months ended
September 30,
 
   
2014
   
2013
   
2014
   
2013
 
Private insurance carriers
    32.6 %     34.2 %     31.5 %     32.8 %
Medicare
    32.4 %     31.7 %     33.6 %     33.1 %
Medicaid
    23.6 %     20.1 %     22.9 %     20.6 %
Self-pay patients
    11.4 %     14.0 %     12.0 %     13.5 %

Collections as a percentage of gross charges from private insurers decreased from 74.6% in the third quarter of 2013 to 73.5% in the third quarter of 2014, and from 74.8% for the nine months ended September 30, 2013, to 74.2% for the nine months ended September 30, 2014. The majority of the decrease in private insurance collection rates is due to an increase in the percentage of transports covered by a government-sponsored insurance plan which reimburses at significantly lower rates than other private insurance plans and typically does not increase reimbursement when we increase prices.

Provisions for contractual discounts and estimated uncompensated care related to patient transport revenue are as follows:

   
For quarters ended
September 30,
   
For nine months ended
 September 30,
 
   
2014
   
2013
   
2014
   
2013
 
Gross billings
    100 %     100 %     100 %     100 %
Provision for contractual discounts
    51 %     47 %     51 %     47 %
Provision for uncompensated care
    20 %     20 %     20 %     22 %

Although price increases generally increase the net reimbursement per transport from insurance payers, the amount per transport collectible from private patient payers, 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 certain insurance companies have not increased their reimbursement rates proportionately with recent price increases to the same extent they have with previous price increases, we have not yet experienced significant increased limitations in the amount reimbursed by private insurers taken as a whole. Continued price increases may cause insurance companies to limit coverage for air medical transport to amounts less than our historical collection rates.
 
13
 

 

 
Aircraft maintenance. AMS and Tourism operations are directly affected by fluctuations in aircraft maintenance costs. Proper operation of the aircraft by flight crews and standardized maintenance practices can help to contain maintenance costs. Increases in spare parts prices from original equipment manufacturers tend to be higher for aircraft which are no longer in production. Two models of aircraft, representing 10% of our 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, 2013, we have taken delivery of 21 new aircraft and have commitments to take delivery of fifty additional aircraft through the end of 2017. We have replaced discontinued models and other older aircraft with the new aircraft, as well as provided capacity for base expansion. Replacement models of aircraft typically have higher ownership costs than the models targeted for replacement but lower maintenance costs. Total AMS aircraft maintenance expense increased 1.5% and decreased 11.0% for the quarter and nine months ended September 30, 2014, respectively, compared to 2013. Total flight volume for all AMS operations decreased 3.2% and 4.6% for the quarter and nine months ended September 30, 2014, respectively, compared to 2013. The change in maintenance expense reflects normal fluctuations in the timing of overhaul and replacement cycles for aircraft parts.

Competitive pressures from low-cost providers. We are recognized within the industry for our higher 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.

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. Our AMS pilots are represented by a collective bargaining unit and are covered under a collective bargaining agreement which is effective through December 31, 2016. Other employee groups may also elect to be represented by unions in the future.
 
Results of Operations

We reported net income of $33,717,000 and $73,396,000 for the quarter and nine months ended September 30, 2014, respectively, compared to $35,605,000 and $49,065,000 for the quarter and nine months ended September 30, 2013, respectively. The results for 2014 include the impact of the BHH acquisition which closed in December 2013. Same-Base Transports were 2.6% lower and 1.6% higher in the quarter and nine months ended September 30, 2014, respectively, compared to 2013, while net reimbursement per patient transport decreased 0.1% and increased 7.6% in the quarter and nine months ended September 30, 2014, respectively, compared to 2013, primarily as a result of recent price increases net of changes in payer mix.

Air Medical Services

Patient transport revenue is recorded net of provisions for contractual discounts and uncompensated care and increased $12,577,000, or 7.1%, and $71,104,000, or 16.4%, for the quarter and nine months ended September 30, 2014, respectively, compared to 2013, for the following reasons:
Decrease of 0.1% and increase of 7.6% in net reimbursement per transport for the quarter and nine months ended September 30, 2014, respectively, compared to 2013, due to the benefit of recent price increases net of the deterioration in payer mix and collection rate described above.
Decrease of 370, or 2.6%, and increase of 604, or 1.6%, in Same-Base Transports for the quarter and nine months ended September 30, 2014, respectively, compared to 2013. Cancellations due to unfavorable weather conditions for locations open longer than one year were 60 higher and 717 lower in the quarter and nine months ended September 30, 2014, respectively, compared to 2013. Requests for community-based services increased 0.5% and 2.4% for the quarter and nine months ended September 30, 2014, respectively, for bases open longer than one year.
 
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Incremental net revenue of $23,377,000 and $53,433,000 for the quarter and nine months ended September 30, 2014, respectively, generated from the addition of 36 new bases, including fourteen bases resulting from the conversion of hospital contracts, during either 2014 or 2013.
Closure of eighteen bases during either 2014 or 2013, resulting in decreases in net revenue of approximately $4,586,000 and $14,306,000 during the quarter and nine months ended September 30, 2014, respectively.

Air medical services contract revenue decreased $5,472,000, or 11.0%, and $23,914,000, or 15.1%, for the quarter and nine months ended September 30, 2014, for the following reasons:
Cessation of service under eleven contracts and the conversion of eight contracts to community-based operations, during either 2014 or 2013, resulting in decreases in revenue of approximately $7,269,000 and $30,770,000 for the quarter and nine months ended September 30, 2014, respectively.
Incremental net revenue of $1,071,000 and $2,579,000 for the quarter and nine months ended September 30, 2014, generated from the addition of one new AMS contract and expansion under two other contracts to additional bases of operation during either 2014 or 2013.
Decrease of 0.1% and increase of 1.2% in flight volume for the quarter and nine months ended September 30, 2014, respectively, for all contracts excluding new contracts, contract expansions, and closed contracts described above.
Annual price increases in the majority of contracts based on stipulated contractual increases or changes in the Consumer Price Index or spare parts prices from aircraft manufacturers.

Flight center costs (consisting primarily of pilot, mechanic, and medical staff salaries and benefits) increased $5,030,000, or 5.6%, and $11,358,000, or 4.4%, for the quarter and nine months ended September 30, 2014, respectively, compared to 2013, for the following reasons:
Increases of approximately $8,935,000 and $22,497,000 for the quarter and nine months ended September 30, 2014, respectively, for the addition of personnel to staff new base locations described above.
Decreases of approximately $7,456,000 and $25,466,000 for the quarter and nine months ended September 30, 2014, respectively, due to the closure of base locations described above.
Increases in salaries for merit pay raises.

Air medical aircraft operating expenses decreased $109,000, or 0.3%, and $12,323,000, or 10.9%, for the quarter and nine months ended September 30, 2014, respectively, compared to 2013. 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 change in costs is due to the following:
Increase of $381,000, or 1.5%, to $24,965,000 and decrease of $8,712,000, or 11.0%, to $70,823,000 in AMS aircraft maintenance expense for the quarter and nine months ended September 30, 2014, respectively, compared to 2013. Total flight volume for AMS operations decreased 3.2% and 4.6% for the quarter and nine months ended September 30, 2014, respectively, compared to prior year. The change in maintenance expense reflects normal fluctuations in the timing of overhaul and replacement cycles for aircraft parts.
Decreases of 1.9% and 4.4% in the cost of aircraft fuel per hour flown for AMS for the quarter and nine months ended September 30, 2014, respectively. Total AMS fuel costs increased $362,000, or 5.6%, to $6,788,000 and $372,000, or 2.0%, to $19,288,000 for the quarter and nine months ended September 30, 2014, respectively, compared to 2013.
Credit of $1,066,000 for the nine months ended September 30, 2014, earned based on the amount of hull insurance claims for the policy period ended June 30, 2014, and recorded during the second quarter of 2014. The nine months ended September 30, 2013, included expense of $2,000,000 related to hull and liability insurance retention triggered by hull claims incurred during the second quarter of 2013.

Tourism

Tourism and charter revenue increased $17,939,000, or 112.1%, and $47,324,000, or 111.7%, for the quarter and nine months ended September, 2014, respectively, compared to 2013. During the quarter and nine months ended September 30, 2014, respectively, we transported approximately 125,500 and 326,100 passengers on tourism flights, compared to 64,400 and 166,600 in the quarter and nine months ended September 30, 2013, respectively. BHH generated revenue of $15,044,000 and $42,506,000 transporting approximately 54,500 and 151,300 passengers in the quarter and nine months ended September 30, 2014, respectively.
 
15
 

 

 
 
Tourism operating expenses consist primarily of pilot and mechanic salaries and benefits; aircraft maintenance, fuel, and insurance; landing fees; commissions; and cost of tour amenities and typically vary with passenger count, flight volume, and number and type of aircraft. Expenses increased $13,747,000, or 148.7%, and $29,222,000, or 99.9%, for the quarter and nine months ended September 30, 2014, respectively, primarily related to the acquisition of BHH. BHH operating expenses totaled $9,817,000 and $26,766,000 for the quarter and nine months ended September 30, 2014, respectively. Excluding the effect of BHH, tourism aircraft maintenance expense increased $1,821,000, or 89.0%, and decreased $917,000, or  9.7%, for the quarter and nine months ended September 30, 2014, respectively. We incurred costs for seven and sixteen engine overhauls for these aircraft in the quarter and nine months ended September 30, 2014, compared to two and nine engine overhauls in the quarter and nine months ended September 30, 2013, primarily due to normal fluctuations in the timing of overhaul cycles.
 
United Rotorcraft Division
 
Medical interiors and products revenue increased $621,000, or 11.1%, and $6,435,000, or 42.8%, for the quarter and nine months ended September 30, 2014, respectively, compared to 2013. Significant projects in process during 2014 included work on 24 multi-mission interiors for the U.S. Army’s HH-60M helicopter, 35 interiors for an older generation of the U.S. Army’s Black Hawk helicopter, and fifteen aircraft interiors for commercial customers. Revenue by product line for the quarter and nine months ended September 30, 2014, was as follows:
$3,982,000 and $13,891,000 – governmental entities
$2,255,000 and $7,570,000 – commercial customers
 
Significant projects in process during 2013 included work under two contracts to produce a total of 53 multi-mission interiors for the U.S. Army’s HH-60M helicopter and eight aircraft medical interiors for commercial customers. Revenue by product line for the quarter and nine months ended September 30, 2013, was as follows:
$2,752,000 and $8,744,000 – governmental entities
$2,864,000 and $6,282,000 – commercial customers
 
Cost of medical interiors and products increased $671,000, or 12.7%, and $4,932,000, or 34.6%, for the quarter and nine months ended September 30, 2014, respectively, as compared to the prior year, due primarily to the change in sales volume. 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 $340,000, or 1.7%, and $1,120,000, or 1.9%, for the quarter and nine months ended September 30, 2014, compared to 2013. From the fourth quarter of 2013 through the third quarter of 2014, we placed 21 aircraft with a total depreciable basis of $59 million into service. Depreciation and amortization related to BHH’s assets also totaled $869,000 and $2,553,000 for the quarter and nine months ended September 30, 2014, respectively. These increases were offset in part by the buy-out of previously leased aircraft. Since March 31, 2013, we have bought out 38 aircraft which were previously leased under capital lease obligations and which had total depreciable basis of $72 million. Aircraft under capital leases are amortized over the terms of the underlying leases with no assigned salvage value. Aircraft which are owned directly are depreciated over a 25-year life, based on the year of manufacture, with a 25% salvage value. As a result, the buy-out of aircraft from capital lease obligations resulted in a decrease in depreciation in 2014.
 
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General and administrative (G&A) expenses increased $7,621,000, or 26.9%, and $21,120,000, or 25.6%, for the quarter and nine months ended September 30, 2014, respectively, compared to 2013. G&A expenses include executive management, accounting and finance, billing and collections, information services, human resources, aviation management, pilot training, dispatch and communications, AMS program administration, and Tourism customer service and reservations. Total G&A expenses related to BHH operations were $2,325,000 and $6,638,000 for the quarter and nine months ended September 30, 2014. Excluding the impact of BHH, G&A expenses increased 18.7%  and 17.5% in the quarter and nine months ended September 30, 2014, compared to 2013, reflecting branding and marketing initiatives for both air medical services and tourism, as well as the addition of senior management positions to enhance the company’s ability to implement its growth strategy. Since March 31, 2013, we have converted eight AMS contracts to community-based operations, resulting in fourteen additional bases and contributing to an increase in billing and collections, dispatch, and AMS program administration requirements. In addition, equity compensation and incentive compensation accruals related to our financial performance increased $1,457,000 and $5,688,000 during the quarter and nine months ended September 30, 2014, respectively, compared to 2013.
 
Interest expense increased $151,000, or 2.9%, and $1,270,000, or 8.4%, for the quarter and nine months ended September 30, 2014, compared to 2013, primarily due to an additional $60 million term loan under our senior credit facility originated in December 2013 to finance the purchase of BHH and new term loans totaling $137.0 million with a weighted average interest rate of 4.1% originated subsequent to March 31, 2013, to fund the retirement of capital leases and the purchase of aircraft. The resulting increase in interest expense was offset in part by decreased borrowings against our line of credit, the retirement of $17.7 million in capital lease obligations with a weighted average effective interest rate of 4.7% subsequent to March 31, 2013, and to regularly scheduled payments of long-term debt and capital lease obligations.
 
Income tax expense was $21,552,000 and $47,433,000, at effective tax rates of 38.9%, and 39.1%, for the quarter and nine months ended September 30, 2014, respectively, compared to $22,065,000 and $30,815,000, at effective tax rates of 38.3%, and 38.6%, for the quarter and nine months ended September 30, 2013, respectively. Changes in our effective tax rate are affected by the apportionment of revenue and income before taxes for the various jurisdictions in which we operate and by changing tax laws and regulations in those jurisdictions.
 
Liquidity and Capital Resources
 
Our working capital position as of September 30, 2014, was $220,277,000, compared to $178,232,000 at December 31, 2013. Cash generated by operations was $116,533,000 in 2014, compared to $113,815,000 in 2013. Receivables increased during 2014 by $48.8 million, reflecting the increase in net patient transport revenue described above. In addition, days’ sales outstanding (DSO’s) related to patient transports, measured by comparing net patient transport revenue for the annualized previous six-month period to outstanding open net accounts receivable, were 116 at September 30, 2014, compared to 104 at December 31, 2013, and 100 at September 30, 2013.
 
The increase in DSO’s at September 30, 2014, is primarily attributed to additional time taken by private insurers, especially one private insurance company and one government-sponsored insurance plan, to review claims and related documentation prior to processing. Excluding the impact of these two payers, DSO’s at September 30, 2014, would have been 112. The increases in processing times for these two payers are expected to be temporary and are not expected to decrease the ultimate collection rate from either of these two payers.
 
Cash used by investing activities totaled $96,466,000 in 2014 compared to $82,057,000 in 2013. Equipment acquisitions in 2014 included the buy-out of thirteen previously leased aircraft for approximately $17.3 million, the purchase of twenty aircraft for approximately $65.1 million, and $7.5 million for aircraft interiors. We also sold twenty aircraft for $12.5 million. In 2013 we bought out 43 previously leased aircraft for $51.4 million and disposed of ten aircraft for $16.1 million. Equipment acquisitions in 2013 also included the purchase of eleven aircraft for $28.1 million.
 
Financing activities used $13,097,000 in 2014 compared to $16,417,000 in 2013. The primary uses of cash in both 2014 and 2013 were regularly scheduled payments of long-term debt and capital lease obligations and capital lease buy-outs. During 2014, we originated seventeen notes primarily to finance the acquisition of aircraft. During 2013, we originated 44 notes secured by aircraft to finance lease buy-outs, retire variable rate debt, and finance the acquisition of three aircraft.
 
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We currently intend to exercise early lease buy-out options on up to five additional aircraft leases totaling approximately $10.2 million prior to the end of 2014. We expect to finance the buy-outs with aircraft financiers under long-term notes and with internally generated cash flow or availability under the line of credit.
 
Critical Accounting Policies
 
Our unaudited condensed 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 valuation of long-lived assets and goodwill. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of our consolidated financial statements.
 
Revenue Recognition
 
Revenue relating to tourism and charter flights is recognized upon completion of the services. Fixed contract revenue under our operating agreements with hospitals is recognized monthly over the terms of the agreements. 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 related services are performed based on historical collection experience and any known trends or changes in reimbursement rate schedules and payer 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 payers. In addition, third-party payers 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 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 payer 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 patient transport revenue for the nine months ended September 30, 2014, a change of 100 basis points in the percentage of estimated contractual discounts and uncompensated care would have resulted in a change of approximately $17,675,000 in patient transport 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.
 
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The ASU is effective for the Company for periods beginning after December 15, 2016, and early adoption is not permitted. The ASU permits the use of either the retrospective or cumulative effect transition method. The Company has not yet selected a transition method and is currently evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures.
 
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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 in the respective federal or state jurisdiction as appropriate and record a valuation allowance for those amounts we believe are not likely to be realized. 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. Establishing or increasing a valuation allowance in a period increases income tax expense. 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. We evaluate the recognition and measurement of uncertain tax positions based on the facts and circumstances surrounding the tax position and applicable tax law and other tax pronouncements. Changes in our estimates of uncertain tax positions would be recognized as an adjustment to income tax expense in the period of the change.
 
Long-lived Assets Valuation
 
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. Our cash flow estimates are based on historical results adjusted for estimated current industry trends, the economy, and operating conditions.
 
Goodwill Valuation
 
We evaluate goodwill annually in accordance with ASU No. 2011-08, Testing for Goodwill Impairment, which allows an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Factors considered include overall economic conditions within our markets, access to capital, changes in the cost of operations, our financial performance, and change in our stock price during the year. Based upon our qualitative assessment of factors impacting the value of goodwill as of December 31, 2013, we determined that it was not likely that the fair value of any reporting unit was less than its carrying amount and that a quantitative assessment of goodwill was not necessary. Changes in these factors or a sustained decline in general economic conditions could change our conclusion regarding an impairment of goodwill and potentially result in a non-cash impairment loss in a future period.
 
 
There have been no material changes in market risk at September 30, 2014, from that reported in our Annual Report on Form 10-K for the year ended December 31, 2013.
 
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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 (the Commission) under the Securities Exchange Act of 1934, as amended (the Exchange Act), 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 September 30, 2014, pursuant to Rule 13a-15(b) under the Exchange Act. Based on that evaluation, the Certifying Officers have concluded that, as of September 30, 2014, our disclosure controls and procedures were effective.
 
Changes in Internal Control over Financial Reporting
 
There were no significant changes in our internal control over financial reporting that occurred during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
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Not Applicable
 
 
There have been no material changes in our risk factors from those disclosed in our annual report on Form 10-K for the year ended December 31, 2013.
 
 
Not Applicable
 
 
Not Applicable
 
 
Not Applicable
 
 
Not Applicable
 
 
10.1 Form of Performance Based Share Unit Award Agreement
   
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
   
101.INS
XBRL Instance Document
   
101.SCH
XBRL Taxonomy Extension Schema Document
   
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
   
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
   
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
 
21
 

 

 
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
AIR METHODS CORPORATION
 
       
Date:  November 7, 2014
By /s/ Aaron D. Todd  
    Aaron D. Todd  
   
Chief Executive Officer
 
       
Date:  November 7, 2014 By /s/ Trent J. Carman  
   
Trent J. Carman
 
   
Chief Financial Officer
 
       
Date:  November 7, 2014 By /s/ Sharon J. Keck  
   
Sharon J. Keck
 
   
Chief Accounting Officer
 
 
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Exhibit 10.1
 
AIR METHODS CORPORATION
PERFORMANCE PAY PLAN

PERFORMANCE-BASED SHARE UNIT AWARD AGREEMENT

This Performance-Based Share Unit Award Agreement (the “Award Agreement”) is made as of this [____] day of [___________], 20[__] (the “Grant Date”), between Air Methods Corporation, a Delaware corporation (the “Company”), and [________________________] (the “Participant”).
 
WHEREAS, the Company’s Board of Directors (the “Board”) has adopted, and the stockholders have approved, the Performance Pay Plan (the “Plan”) in order to advance the interests of the Company through the initiative, resourcefulness, teamwork, motivation and efficiency of certain members of the Company’s senior management team;
 
WHEREAS, the Committee has determined that the Participant is a person eligible to receive an incentive award under the Plan and has determined that it would be in the best interest of the Company to grant the incentive award provided for herein.
 
NOW, THEREFORE, in consideration of the mutual covenants hereinafter set forth and for other good and valuable consideration, the parties agree as follows:
 
1.            Definitions. Capitalized terms used herein shall have the same meanings ascribed to them in the Plan. Whenever the following terms are used in this Award Agreement, they shall have the meanings set forth below.
 
1.1           “Corporate Transaction” means:
 
(a)           The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) (a “Person”) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of more than 50% or more of the then-outstanding voting securities of the Company entitled to vote generally in the election of directors;
 
(b)           In the event the Board is a classified board, a majority of the individuals who serve in the same class of directors that constitute the Board as of the Grant Date (the “Incumbent Board”) cease for any reason to constitute at least a majority of that class of directors, or in the event the Board is not a classified board, members of the Incumbent Board cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the Grant Date whose election, or nomination for election by the Company’s stockholders, was approved by a vote of at least two-thirds of the directors then comprising the Incumbent Board (including for these purposes, the new members whose election or nomination was so approved, without counting the member and her predecessor twice) shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board;
 
 
 

 

 
(c)           Consummation of a reorganization, merger, statutory share exchange or consolidation or similar corporate transaction involving the Company or any of its subsidiaries, a sale or other disposition of all or substantially all of the assets of the Company, or the acquisition of assets or stock of another entity by the Company or any of its subsidiaries (each, a “Business Combination”), in each case unless, following such Business Combination, (A) all or substantially all of the individuals and entities that were the beneficial owners of the Company’s outstanding voting securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of the then-outstanding voting securities of the entity resulting from such Business Combination (including, without limitation, an entity that, as a result of such transaction, owns the Company or all or substantially all of the Company’s assets directly or through one or more subsidiaries (a “Parent”)), and (B) at least a majority of the members of the board of directors or trustees of the entity resulting from such Business Combination or a Parent were members of the Incumbent Board at the time of the execution of the initial agreement or of the action of the Board providing for such Business Combination; or
 
(d)           Approval by the stockholders of the Company of a complete liquidation or dissolution of the Company.
 
1.2           “Peer Group” means the companies listed on Appendix A; provided that a company (other than the Company) shall be removed from the Peer Group for a Performance Period if during such period, (i) the common stock of such company ceases to be publicly traded on an established securities market, (ii) such company ceases to maintain publicly available statements of operations prepared in accordance with United States generally accepted accounting principles, consistently applied, (iii) such company is not the surviving entity in any merger, consolidation, or other reorganization (or survives only as a subsidiary of an entity other than a previously wholly owned subsidiary of such company), (iv) such company sells, leases, or exchanges all or substantially all of its assets to any other person or entity (other than a previously wholly owned subsidiary of such company), or (v) such company is dissolved and liquidated.
 
1.3           “Performance Period” means the period commencing July 1, 2014 and ending on June 30, 2017.
 
1.4           “Permanent Disability” shall mean the Participant’s inability, due to illness, accident, injury, physical or mental incapacity or other disability, to carry out effectively the duties and obligations to the Company performed by such person immediately prior to such disability for a period of at least six (6) months, as determined in the good faith judgment of the Committee.
 
1.5           “Retirement” shall mean a Participant’s retirement from the Company (A) on or after attaining age 55 and completing at least ten (10) years of service; or (B) on or after attaining age 65.
 
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1.6           “Severance Date” shall mean the last day that Participant is employed by or provides services to the Company.
 
1.7           “TSR” means a company’s total shareholder return, calculated based on the stock price appreciation during a specified measurement period plus the value of dividends paid on such stock during the measurement period (which shall be deemed to have been reinvested in the underlying company’s stock on the ex-dividend date); provided that the Committee may make appropriate adjustments to reflect any changes in the capital stock of any Peer Group company (e.g. stock splits, subdivision or consolidation of shares) that occurs during the Performance Period.
 
1.8           “TSR Percentile” means the percentile rank of the Company’s TSR during the Performance Period relative to the TSR of other companies in the Peer Group during the Performance Period as determined by the Committee; provided that for purposes of measuring the TSR Percentile, the beginning and ending TSR values shall be calculated based on the average of the closing prices of the applicable company’s stock for the 20 trading days prior to and including the beginning or ending date, as applicable, of the Performance Period.
 
2.             Performance Share Units.
 
2.1          The Company hereby grants to the Participant [________] Performance Share Units, subject to such conditions as are provided for in the Plan and this Award Agreement. Each “Performance Share Unit” is a phantom stock right that entitles the Grantee to receive one share of the Company’s common stock, $0.06 par value per share (the “Common Stock”) for each Earned Performance Share Unit.
 
2.2          Subject to Section 4 below, upon expiration of the Performance Period, a number of Performance Share Units shall vest equal to the product of the aggregate number of Performance Share Units set forth in Section 2.1 multiplied by the percentage corresponding to the Company’s TSR Percentile during the Performance Period in accordance with the following table (such Performance Share Units, the “Earned Performance Share Units”):
 
Company’s TSR Percentile
 
% of Performance Share Units
Below the 25th Percentile:
 
0%
25th TSR Percentile:
 
33 1/3%
50th TSR Percentile:
 
66 2/3%
75th TSR Percentile and Above:
 
100%
 
If the Company’s TSR Percentile during the Performance Period is between two of the TSR Percentiles in the above table, the corresponding percentage of Performance Share Units shall be calculated using linear interpolation (e.g., 65th TSR Percentile would result in a percentage of Performance Share Units of 86 2/3%). Except as set forth in Section 4 below, any Performance Share Units that do not become Earned Performance Share Units shall be forfeited and cancelled upon expiration of the Performance Period. The Committee will certify in writing and provide Participant with written notice of the number of Earned Performance Share Units promptly following the end of the Performance Period.
 
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2.3           Notwithstanding the foregoing and subject to Section 4 below, the Performance Share Units shall vest only if the Participant’s services with the Company, whether as an employee or consultant, is not interrupted or terminated (“Continuous Service”) from the Grant Date through the last day of the Performance Period. The Participant’s Continuous Service shall not be deemed to have terminated merely because of a change in the capacity in which the Participant renders service to the Company. The Committee, in its sole discretion, may determine whether Continuous Service shall be considered interrupted in the case of any leave of absence, including sick leave, military leave or any other personal leave. Upon the termination of the Participant’s Continuous Service prior to the end of the Performance Period, other than as provided in Section 4 below, all Performance Share Units shall be forfeited and cancelled, and neither the Participant nor his or her heirs, executors, administrators or successors shall have any right or interest in the Performance Share Units.
 
2.4           Participant acknowledges receipt of a copy of the Plan, and agrees that this Award Agreement shall be subject to all of the terms and conditions set forth in the Plan, including future amendments thereto, if any, pursuant to the terms thereof, which Plan is incorporated herein by reference as a part of this Award Agreement.
 
3.            No Rights of a Stockholder. The Participant shall have no voting, rights to receive dividends or other rights as a stockholder of the Company with respect to this award until such time, if any, that the Earned Performance Shared Units vest and shares of Common Stock are issued pursuant to Section 5. The Participant’s right to receive Common Stock earned under this Agreement shall be no greater than the right of any unsecured general creditor of the Company.
 
4.            Accelerated Vesting of Performance Share Units.
 
4.1           Notwithstanding Section 2.3 above, if a Corporate Transaction is consummated prior to the last day of the Performance Period, then at the date of consummation of the Corporate Transaction, Participant shall vest in a number of Earned Performance Share Units calculated in the manner set forth in Section 2.2 above except that (i) the Company’s TSR shall be calculated based on the price per share of Common Stock paid to the Company’s holders of Common Stock in the Corporate Transaction and (ii) for purposes of calculating the TSR Percentile, the Performance Period shall be deemed to have ended on the date of consummation of the Corporate Transaction.
 
4.2           Notwithstanding Section 2.3 above, if Participant’s employment with or provision of services to the Company is terminated prior to the last day of the Performance Period as a result of Participant’s death or Permanent Disability, then at the Severance Date, Participant shall vest in a number of Earned Performance Share Units calculated in the manner set forth in Section 2.2 above except that (i) the number of Performance Share Units will be pro-rated based on the number of days that Participant was employed or provided services to the Company between the Grant Date and the Severance Date as a percentage of the number of days in the Performance Period, and (ii) for purposes of calculating the TSR Percentile, the Performance Period shall be deemed to have ended on the Severance Date.
 
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4.3           Notwithstanding Section 2.3 above, if Participant’s employment with or provision of services to the Company is terminated prior to the last day of the Performance Period as a result of Participant’s Retirement, then the Performance Share Units shall not be forfeited and Participant shall continue to hold the Performance Share Units through the end of the Performance Period. At the expiration of the Performance Period, Participant shall vest in a number of Earned Performance Share Units calculated in the manner set forth in Section 2.2 above except that the number of Earned Performance Share Units will be pro-rated based on the number of days that Participant was employed or provided services to the Company between the Grant Date and the Severance Date as a percentage of the number of days in the Performance Period.
 
5.            Delivery of Shares. As soon as reasonably practicable after Performance Share Units become Earned Performance Share Units, a stock certificate (which may be in electronic form) for such number of shares of Common Stock equal to the number of Earned Performance Share Units in the name of the Participant shall be delivered to the Participant (or, in the case of Participant’s death or Permanent Disability, to the Participant’s estate or guardian), subject to the Company’s collection of applicable withholding taxes in accordance with Section 9 below. All shares of Common Stock issuable to the Participant shall be issued under the Second Amended and Restated Air Methods 2006 Equity Compensation Plan or such other stockholder-approved compensation plan that may be adopted by the Company (the “Equity Plan”), and the Company shall at all times ensure that there are sufficient shares reserved for issuance under the Equity Plan to satisfy its obligations hereunder.
 
6.            No Right to Continued Employment. Nothing in this Award Agreement or the Plan shall confer upon the Participant the right to maintain his or her relationship with the Company, whether as an employee or consultant, nor shall it interfere in any way with any right of the Company to terminate its relationship with the Participant at any time for any reason whatsoever, with or without cause.
 
7.             Prohibited Activities.
 
7.1           During the term of the Participant’s employment and for a period of six months after termination of employment (the “Restricted Period”), the Participant will not:
 
 (a)           be employed, including as an employee, consultant or otherwise, by any person or entity that is engaged in the business of air medical emergency transport services and systems;
 
 (b)           directly or indirectly hire or solicit an employee who is or, at any time during the three months prior to the Participant’s termination of employment, was an employee of the Company or any of its subsidiaries; or
 
 (c)           usurp any corporate opportunity of the Company or its subsidiaries or otherwise interfere with the relationship between the Company or its subsidiaries and any person or entity with whom the Company or its subsidiaries is conducting, proposes to conduct or has during the six months prior to the Participant’s termination of employment conducted any business activities.
 
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7.2           The Participant and the Company acknowledge that it would be extremely difficult and impracticable, if not impossible, to ascertain with any degree of certainty the amount of damages which would be suffered by the Company in the event the Participant breaches any of the provisions contained in Section 7.1 (each, a “Prohibited Activity”). The Participant and the Company hereby agree that the reasonable estimate of said damages shall be an amount equal to the amount recognized by the Participant as income (net of taxes withheld) with respect to any Performance Share Units that vested within six months prior to the date of termination of the Participant’s employment (the “Clawback Amount”). The right to receive the Clawback Amount shall be the Company’s sole remedy in the event of the occurrence of a Prohibited Activity. The Clawback Amount shall be paid by the Participant within 15 days after occurrence of the Prohibited Activity and may be payable in cash or an equivalent amount of Common Stock, at the option of the Participant.
 
7.3           In the event the Participant is subject to any other non-competition provisions, which are set forth in an agreement between the Participant and the Company, including without limitation, an employment agreement and/or a non-competition agreement, the terms of such non-competition provision shall govern and control.
 
8.            Adjustments Upon Recapitalization. In the event of any stock dividend, extraordinary cash dividend, recapitalization, reorganization, merger, consolidation, split-up, spin-off, combination, exchange of shares, grant of warrants or rights offering to purchase Common Stock at a price materially below fair market value or other similar corporate event affecting the Common Stock, the Committee shall adjust the award issued hereunder in order to preserve the benefits or potential benefits intended to be made available under this Award Agreement. All adjustments shall be made in the sole and exclusive discretion of the Committee, whose determination shall be final, binding and conclusive. Notice of any adjustment shall be given to the Participant.
 
9.            Withholding of Taxes. In order to comply with all applicable federal or state income tax laws or regulations, the Company may take such action as it deems appropriate to ensure that all applicable federal or state payroll, withholding, income or other taxes, which are the sole and absolute responsibility of the Participant, are withheld or collected from the Participant. In accordance with the terms of the Plan and/or the Equity Plan, and such rules as may be adopted by the Committee under the Plan and/or the Equity Plan, the Participant may elect to satisfy the Participant’s federal and state tax withholding obligations arising from the settlement of any Earned Performance Share Units, by (i) delivering cash, check (bank check, certified check or personal check) or money order payable to the Company equal to the minimum amount of such taxes, (ii) having the Company withhold a portion of the Common Stock otherwise to be delivered having a Fair Market Value equal to the minimum amount of such taxes, (iii) delivering to the Company shares of Common Stock already owned by Participant having a Fair Market Value equal to the minimum amount of such taxes, or (iv) allowing the Company to deduct from any amount otherwise payable in cash to the Participant an amount equal to the minimum amount of such taxes.
 
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10.          Tax Considerations. The Company has advised Participant to seek Participant’s own tax and financial advice with regard to the federal and state tax considerations resulting from Participant’s receipt of the Performance Share Units pursuant to this Award Agreement. Participant understands that the Company will report to appropriate taxing authorities the payment to Participant of compensation income upon the vesting of the Performance Share Units. Participant understands that he or she is solely responsible for the payment of all federal and state taxes resulting from this grant of Performance Share Units.
 
11.          Modification of Award Agreement. Except as set forth in the Plan and in this Award Agreement, this Award Agreement may be modified, amended, suspended or terminated, and any terms or conditions may be waived, but only by a written instrument executed by the parties hereto.
 
12.          Severability. Should any provision of this Award Agreement be held by a court of competent jurisdiction to be unenforceable or invalid for any reason, the remaining provisions of this Award Agreement shall not be affected by such holding and shall continue in full force and effect in accordance with their terms.
 
13.     Governing Law. This Award Agreement and all rights arising hereunder shall be governed by, and construed and interpreted in accordance with, the laws of the State of Colorado.
 
14.          Successors in Interest. This Award Agreement shall inure to the benefit of and be binding upon any successor to the Company and upon the Participant’s heirs, executors, administrators and successors. No right or interest of the Participant pursuant to this Award Agreement shall be assignable or transferable in whole or in part, either directly or by operation of law or otherwise, including, but not by way of limitation, execution, levy, garnishment, attachment, pledge, bankruptcy, or in any other manner, and no right or interest of the Participant pursuant to this Award Agreement shall be liable for, or subject to, any obligation or liability of the Participant. Any assignment, pledge, encumbrance, charge, transfer, or other act in violation of this Section 14 shall be void.
 
15.          Conflicts and Interpretation. In the event of any ambiguity in this Award Agreement, or any matters as to which this Award Agreement is silent, the Plan shall govern including, without limitation, the provisions thereof pursuant to which the Committee has the power, among others, to (i) interpret the Plan, (ii) prescribe, amend and rescind rules and regulations relating to the Plan and (iii) make all other determinations deemed necessary or advisable for the administration of the Plan.
 
16.          Compliance with Code Section 409A. The Performance Share Units granted under this Award Agreement are intended to fit within the “short-term deferral” exemption from section 409A of the Code, and this Award Agreement shall be interpreted and administered in accordance with such intent.
 
7
 

 

 
  AIR METHODS CORPORATION
     
     
 
By:
 
    Name:
    Title: 
     
     
  PARTICIPANT
   
     
    Name:
 
 
 

 

 
Appendix A

Peer Group

Air Methods Corporation
AmSurg Corp.
Atlas Air Worldwide Holdings, Inc.
Bio-Reference Laboratories, Inc.
Bristow Group Inc.
Hanger, Inc.
HealthSouth Corporation
Healthways, Inc.
HEICO Corporation
LHC Group, Inc.
LifePoint Hospitals, Inc.
Mednax Inc.
Air Transport Services Group, Inc.
Phi, Inc.
Select Medical Holdings Corporation
Team Health Holdings, Inc.
Viad Corp
Acadia Healthcare Company, Inc.
The Ensign Group, Inc.
ExamWorks Group, Inc.
IPC The Hospitalist Company, Inc.
AAR Corp.
Envision Healthcare Holdings, Inc.
CHC Group Ltd.
Era Group Inc.
 
 

 




EXHIBIT 31.1

CERTIFICATION
 
I, Aaron D. Todd, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Air Methods Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date: November 7, 2014
   
/s/ Aaron D. Todd  
Aaron D. Todd
Chief Executive Officer
 
 

 

 



EXHIBIT 31.2

CERTIFICATION
 
I, Trent J. Carman, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Air Methods Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date: November 7, 2014
   
/s/ Trent J. Carman  
Trent J. Carman
Chief Financial Officer
 
 

 




EXHIBIT 32

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Quarterly Report of Air Methods Corporation (the “Company”) on Form 10-Q for the period ended September 30, 2014, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
 
          (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
          (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
   
/s/ Aaron D. Todd  
Aaron D. Todd
 
Chief Executive Officer
 
November 7, 2014
 
   
/s/ Trent J. Carman  
Trent J. Carman
 
Chief Financial Officer
 
November 7, 2014
 
 
 

 

 
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