Air Methods Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(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 the 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 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 and December 13, 2015, the former owners of BHH can require the Company to redeem their 10% ownership interest for a price based on same formula. The purchase price was financed primarily through borrowings under our 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

Air Methods Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements, continued

(unaudited)

(2) Acquisition of Subsidiaries, continued

The Company is still evaluating the aircraft spare parts inventory and verifying open repair orders with aircraft parts vendors and other liabilities relating to pre-acquisition events. Therefore, the allocation of the purchase price is still subject to adjustment.

(3) Stockholders’ Equity

Changes in stockholders’ equity for the three months ended March 31, 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		41,343		479
Stock-based compensation		42,660		774
Tax benefit from exercise of stock options		--		975
Forfeiture of unvested restricted shares and related dividends		--		4
Adjustments to redeemable non-controlling interests		--		50
Other comprehensive loss		--		(65	)
Net income		--		10,889

Balances at March 31, 2014		39,148,440	$	381,065

(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 37.7% of receivables from non-governmental payers as of March 31, 2014, compared to 39.2% at December 31, 2013, and 42.4% at March 31, 2013. Receivables from private insurance providers accounted for 63% of receivables from non-governmental payers as of March 31, 2014, compared to 60% as of December 31, 2013, and 59% as of March 31, 2013. The remainder of receivables from non-governmental payers are attributable to self-pay patients.

Air Methods Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements, continued

(unaudited)

(4) Patient Transport Revenue Recognition, continued

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.

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 the quarters ended March 31:


	2014		2013

Third-party payers	$	178,933		142,840
Self-pay		71,663		50,984
Total	$	250,596		193,824

(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 outstanding and dilutive potential common shares during the period.

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 $50,000 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 for the quarters ended March 31:


	2014		2013
Weighted average number of common shares outstanding – basic		39,119,397		38,831,102
Dilutive effect of:
Common stock options		125,950		--
Unvested restricted stock		72,833		--
Weighted average number of common shares outstanding – diluted		39,318,180		38,831,102

Common stock options totaling 47,500 were not included in the diluted shares outstanding for the quarter ended March 31, 2014, because their effect would have been anti-dilutive.

Air Methods Corporation and Subsidiaries

Notes to 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 $17,000 at March 31, 2014 and $0 at 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 a non-cash mark to market derivative loss of $53,000 for the first quarter of 2014, compared to $117,000 for the first quarter of 2013. There were no cash settlements under the terms of the agreements in the first quarter of 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 March 31, 2014, is estimated to be $536,987,000, compared to carrying value of $541,663,000. 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.

Air Methods Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements, continued

(unaudited)

(7)	Business Segment Information

Summarized financial information for the Company’s operating segments is shown in the following table (amounts in thousands). Amounts in the “Corporate Activities” column represent corporate headquarters expenses, corporate income tax expense, and results of insignificant operations. The Company does not allocate assets between all 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.

For quarter ended March 31:	AMS			Tourism			UR			Corporate Activities			Intersegment Eliminations			Consolidated
2014
External revenue	$	190,978			24,338			7,820			--			--			223,136
Intersegment revenue		--			--			3,067			--			(3,067	)		--
Total revenue		190,978			24,338			10,887			--			(3,067	)		223,136

Operating expenses, excluding depreciation & amortization		(142,247	)		(20,011	)		(9,510	)		(9,511	)		2,576			(178,703	)
Depreciation & amortization		(17,912	)		(1,564	)		(538	)		(502	)		--			(20,516	)
Interest expense		(4,196	)		(622	)		--			(711	)		--			(5,529	)
Other income, net		387			--			--			(413	)		--			(26	)
Income tax expense		--			--			--			(7,310	)		--			(7,310	)
Segment net income (loss)		27,010			2,141			839			(18,447	)		(491	)		11,052
Less net income (loss) attributable to non-controlling interests		(48	)		211			--			--			--			163
Net income (loss) attributable to Air Methods Corporation and subsidiaries	$	27,058			1,930			839			(18,447	)		(491	)		10,889

2013
External revenue	$	164,406			10,391			4,421			11			--			179,229
Intersegment revenue		--			--			1,771			--			(1,771	)		--
Total revenue		164,406			10,391			6,192			11			(1,771	)		179,229

Operating expenses, excluding depreciation & amortization		(141,061	)		(9,487	)		(6,298	)		(8,702	)		1,583			(163,965	)
Depreciation & amortization		(18,709	)		(589	)		(425	)		(399	)		--			(20,122	)
Interest expense		(4,006	)		(220	)		--			(576	)		--			(4,802	)
Other income, net		254			--			--			33			--			287
Income tax benefit (expense)		--			--			--			3,684			--			3,684
Segment net income (loss)	$	884			95			(531	)		(5,949	)		(188	)		(5,689	)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of the results of operations and financial condition should be read in conjunction with our 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,” and similar expressions are intended to identify such statements. Forward-looking statements include statements concerning the integration of Blue Hawaiian Helicopters (BHH); our possible or assumed future results; flight volume and collection rates 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 first quarter of 2014 the AMS Division generated 86% of our total revenue, compared to 92% in the first quarter of 2013.

●

Tourism Division – provides helicopter tours and charter flights, primarily focusing on Grand Canyon and Hawaiian Island tours. The division was started with the acquisition of Sundance Helicopters, Inc., (Sundance) in December 2012. In the first quarter of 2014, the Tourism Division generated 11% of our total revenue, compared to 6% in the first quarter of 2013.

●

United Rotorcraft (UR) Division - designs, manufactures, and installs aircraft medical interiors and other aerospace and medical transport products for domestic and international customers. In the first quarter of 2014 the UR Division generated 3% of our total revenue, compared to 2% in the first quarter of 2013.

See Note 7 to the condensed 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:

●

Patient transport volume. Almost all of patient transport revenue is derived from flight fees, as compared to approximately 20% of AMS contract revenue. By contrast, 85% of AMS operating costs incurred during the quarter ended March 31, 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 has historically been weather conditions. Adverse weather conditions—such as fog, high winds, or heavy precipitation—hamper our ability to operate our aircraft safely and, therefore, result in reduced patient transport volume. Total patient transports for community-based locations were approximately 12,900 for the first quarter of 2014 compared to approximately 11,800 for the first quarter of 2013. Patient transports for community-based locations open longer than one year (Same-Base Transports) were approximately 11,900 in the first quarter of 2014, compared to 11,100 in the first quarter of 2013. Cancellations due to unfavorable weather conditions for community-based locations open longer than one year were 443 lower in the first quarter of 2014, compared to the first quarter of 2013. Requests for community-based services increased 4.1% for bases open greater than one year.

●

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. Due to the uncertainty surrounding PPACA’s implementation, the impact on our reimbursement rates is, as yet, still not fully known. Net reimbursement per transport increased 20.1% in the quarter ended March 31, 2014, compared to the quarter ended March 31, 2013, attributed primarily to recent price increases. Provisions for contractual discounts and estimated uncompensated care related to patient transport revenue are as follows:

	For quarters ended March 31,
	2014			2013
Gross billings		100	%		100	%
Provision for contractual discounts		52	%		49	%
Provision for uncompensated care		21	%		23	%

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 we have not yet experienced significant increased limitations in the amount reimbursed by insurance companies, continued price increases may cause insurance companies to limit coverage for air medical transport to amounts less than our standard rates. Payer mix for the quarters ended March 31 was as follows:

	2014			2013
Private insurance carriers		32.0	%		32.7	%
Medicare		33.7	%		33.1	%
Medicaid		20.1	%		20.7	%
Self-pay patients		14.2	%		13.5	%

●

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 within our fleet, representing 12% of the rotor wing fleet, are no longer in production and are, therefore, susceptible to price increases which outpace general inflationary trends. In addition, on-condition components are more likely to require replacement with age. Since January 1, 2013, we have taken delivery of fourteen new aircraft and have commitments to take delivery of 54 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 decreased 16.2% from the first quarter of 2013 to the first quarter of 2014, while total flight hours for AMS operations decreased 4.5% over the same period. 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 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. Our AMS pilots are represented by a collective bargaining unit and were covered under a CBA which expired in December 2013. Negotiations on a new CBA have begun but no agreement has yet been reached. Other employee groups may also elect to be represented by unions in the future.

Results of Operations

We reported net income of $10,889,000 for the three months ended March 31, 2014, compared to a net loss of $5,689,000 for the three months ended March 31, 2013. The results for 2014 include the impact of the BHH acquisition which closed in December 2013. Same-Base Transports were 7.0% higher in the first quarter of 2014 compared to the first quarter of 2013, while net reimbursement per patient transport increased 20.1%, primarily as a result of recent price increases.

Air Medical Services

Patient transport revenue is recorded net of provisions for contractual discounts and uncompensated care and increased $36,097,000, or 33.5%, for the three months ended March 31, 2014, compared to 2013, for the following reasons:

●	Increase of 20.1% in net reimbursement per transport for the first quarter of 2014, compared to 2013, due primarily to recent price increases.

●

Increase in Same-Base Transports of 780, or 7.0%, in the first quarter of 2014 compared to 2013. Cancellations due to unfavorable weather conditions for bases open longer than one year were 443 lower in the first quarter of 2014, compared to the first quarter of 2013. Requests for community-based services increased by 4.1% for bases open greater than one year.

●	Incremental net revenue of $12,980,000 generated from the addition of 22 new bases during or subsequent to the first quarter of 2013.

●	Closure of fourteen bases due to insufficient flight volume subsequent to the first quarter of 2013, resulting in a decrease in net revenue of approximately $4,051,000.

Air medical services contract revenue decreased $9,697,000, or 17.8%, for the quarter ended March 31, 2014, compared to 2013, for the following reasons:

●	Cessation of service under eleven contracts and the conversion of four contracts to community-based operations during or subsequent to the first quarter of 2013, resulting in a decrease in revenue of approximately $11,770,000.

●	Incremental revenue of $452,000 generated from the expansion to additional bases of operation under two contracts during the fourth quarter of 2013 and first quarter of 2014.

●	Consistent flight volume for all contracts, excluding contract expansions and closed contracts described above, in the first quarter of 2014 compared to 2013.

●	Annual price increases in the majority of contracts based on stipulated contractual increases, changes in the Consumer Price Index or spare parts prices from aircraft manufacturers, and the renewal of contracts at higher rates.

Flight center costs (consisting primarily of pilot, mechanic, and medical staff salaries and benefits) increased $3,254,000, or 3.8%, for the quarter ended March 31, 2014, compared to 2013, for the following reasons:

●	Increase of approximately $6,305,000 for the addition of personnel to staff new base locations described above.

●	Decrease of $8,650,000 due to the closure of base locations described above.

●	Increases in salaries for merit pay raises and in the cost of employee medical insurance.

Aircraft operating expenses decreased $4,439,000, or 11.8%, for the quarter ended March 31, 2014, in comparison to the quarter ended March 31, 2013. Aircraft operating expenses consist primarily of fuel, insurance, and maintenance costs and generally are a function of the size of the fleet, type of aircraft flown, and number of hours flown. The increase in costs is due to the following:

●

Decrease of $4,376,000, or 16.2%, in AMS aircraft maintenance expense to $22,710,000. Total flight volume for AMS operations decreased 4.5% for the first quarter of 2014 compared to 2013. The change in maintenance expense reflects normal fluctuations in the timing of overhaul and replacement cycles for aircraft parts.

●	Decrease of approximately 6.2% in the cost of aircraft fuel per hour flown for AMS operations. Total fuel cost decreased by $11,000 to a total expense of $5,841,000 for 2014.

Tourism

Tourism and charter revenue increased $13,947,000, or 134.2%, for the first quarter of 2014 compared to the first quarter of 2013. During the first quarter of 2014, we transported approximately 87,300 passengers on tourism flights, compared to 39,800 in the first quarter of 2013. BHH generated revenue of $13,444,000 transporting approximately 47,100 passengers in the first quarter of 2014.

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 $8,159,000, or 104.1%, for the first quarter of 2014 compared to 2013, primarily related to the acquisition of BHH. BHH operating expenses totaled $8,103,000 for the first quarter of 2014.

Medical Interiors and Products

Medical interiors and products revenue increased $3,386,000, or 76.4%, for the first quarter of 2014 compared to the first quarter of 2013. Significant projects in process during the first quarter of 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 seven aircraft interiors for commercial customers. Revenue by product line was as follows:

●	$5,236,000 – governmental entities

●	$2,584,000 – commercial customers

Significant projects in process during the first quarter of 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 two aircraft interiors for commercial customers. Revenue by product line was as follows:

●	$2,809,000 – governmental entities

●	$1,625,000 – commercial customers

Cost of medical interiors and products increased $2,134,000, or 47.0%, for the first quarter of 2014, as compared to the previous year, due primarily to the increase in related revenue. 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

Depreciation and amortization expense increased $394,000, or 2.0% for the first quarter of 2014, compared to 2013. During the fourth quarter of 2013 and the first quarter of 2014, we placed twelve aircraft with a total depreciable basis of $35 million into service. Depreciation and amortization related to BHH’s assets also totaled $829,000 for the first quarter of 2014. These increases were offset in part by the buyout of previously leased aircraft. Since March 31, 2013, we have bought out 29 aircraft which were previously leased under capital lease obligations and which had total depreciable basis of $66 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 buyout of aircraft from capital lease obligations resulted in a decrease in depreciation for the first quarter of 2014.

General and administrative (G&A) expenses increased $4,435,000, or 16.3%, for the first quarter of 2014, compared to the first quarter of 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 $2,070,000 for the first quarter of 2014. Excluding the impact of BHH, G&A expenses increased 8.7% in the first quarter of 2014, compared to 2013, reflecting branding and marketing initiatives, as well as the addition of senior management positions to enhance the company’s ability to implement its growth strategy.

Interest expense increased $727,000, or 15.1%, for the first quarter of 2014, compared to the first quarter of 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 $102.4 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 $12.7 million in capital lease obligations with a weighted average effective interest rate of 4.5% subsequent to March 31, 2013, and to regularly scheduled payments of long-term debt and capital lease obligations. The average balance outstanding against our line of credit was $22.3 million during the first quarter of 2014, compared to $69.8 million in the first quarter of 2013.

Income tax expense was $7,310,000 in the first quarter of 2014, compared to a benefit of $3,684,000 in the first quarter of 2013, at effective tax rates of approximately 39.8% and 39.3%, respectively. The effective rate for 2014 increased primarily because of an increase in certain permanent book-tax differences. 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 March 31, 2014, was $192,373,000, compared to $178,232,000 at December 31, 2013. Cash generated by operations was $15,097,000 in the first quarter of 2014, compared to $14,722,000 in the first quarter of 2013, reflecting the results of operations described above. Receivables increased during the first quarter of 2014 by $19.9 million, reflecting the increase in net revenue described above.

Days’ sales outstanding (DSO’s) related to patient transports, measured by comparing net patient transport revenue for the annualized previous three-month and six-month periods to outstanding open net accounts receivable, were as follows:

	As of March 31, 2014		As of December 31, 2013		As of March 31, 2013
Three-month measurement		120		106		128
Six-month measurement		116		97		106

DSO’s calculated using a three-month measurement period are more significantly impacted by seasonality in revenue than DSO’s using the six-month measurement period. The increase in DSO’s from December 31, 2013, to March 31, 2014, is largely attributed to increases in claims processing times by a private insurance company and a governmental insurance provider. The increases in processing times are not expected to decrease the ultimate collection rate from either payer.

Cash used by investing activities totaled $34,888,000 in 2014 compared to $24,892,000 in 2013. Equipment acquisitions in the first quarter of 2014 included the buy-out of four previously leased aircraft for approximately $5.6 million and the purchase of nine aircraft for approximately $26.0 million. We also sold seven aircraft for $5.4 million. In the first quarter of 2013 we bought out 21 previously leased aircraft for $22.7 million, purchased three aircraft for $10.1 million, and sold three aircraft for $7.4 million.

Financing activities provided $18,032,000 in 2014 compared to $17,731,000 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 buyouts. During the first quarter of 2014, we originated seven notes primarily to finance the acquisition of aircraft. During the first quarter of 2013, we originated sixteen notes secured by aircraft to finance lease buyouts, retire variable rate debt, and finance the acquisition of aircraft.

We currently intend to exercise early lease buyout options on up to fourteen aircraft totaling approximately $28.3 million prior to the end of 2014. We expect to finance the buyouts with aircraft financiers under long-term notes and with internally generated cash flow or availability under the line of credit.

Critical Accounting Policies

Our 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 quarter ended March 31, 2014, a change of 100 basis points in the percentage of estimated contractual discounts or uncompensated care would have resulted in a change of approximately $5,181,000 in flight revenue.

Revenue related to fixed fee medical interior and products contracts is recorded as costs are incurred using the percentage of completion method of accounting. We estimate the percentage of completion based on costs incurred to date as a percentage of an estimate of the total costs to complete the project. Losses on contracts in process are recognized when determined. If total costs to complete a project are greater or less than estimated, the gross margin on the project may be greater or less than originally recorded under the percentage of completion method.

Deferred Income Taxes

In preparation of the consolidated financial statements, we are required to estimate income taxes in each of the jurisdictions in which we operate. This process involves estimating actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as depreciable assets, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in the consolidated balance sheets. We then assess the likelihood that deferred tax assets will be recoverable from future taxable income 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

The Company’s goodwill relates to nine acquisitions and has been allocated to our reporting units. 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, the financial performance of the Company, 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.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes in market risk at March 31, 2014, from that reported in our Annual Report on Form 10-K for the year ended December 31, 2013.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted to the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified by the Commission’s rules and forms, and that information is accumulated and communicated to management, including the principal executive and financial officers (referred to in this report as the Certifying Officers), as appropriate to allow timely decisions regarding required disclosure. Management, under the supervision and with the participation of the Certifying Officers, evaluated the effectiveness of disclosure controls and procedures as of March 31, 2014, pursuant to Rule 13a-15(b) under the Exchange Act. Based on that evaluation, the Certifying Officers have concluded that, as of March 31, 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.

PART II: OTHER INFORMATION

Item 1. Legal Proceedings

There have been no material changes in legal proceedings from those disclosed in our annual report on Form 10-K for the year ended December 31, 2013.

Item 1A. Risk Factors

There have been no material changes in our risk factors from those disclosed in our annual report on Form 10-K for the year ended December 31, 2013.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not Applicable.

Item 3. Defaults Upon Senior Securities

Not Applicable.

Item 4. Reserved

Item 5. Other Information

Not Applicable.

Item 6. Exhibits

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

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	AIR METHODS CORPORATION

Date: May 9, 2014	By	\s\ Aaron D. Todd
		Aaron D. Todd
		Chief Executive Officer
		(Principal Executive Officer)

Date: May 9, 2014	By	\s\ Trent J. Carman
		Trent J. Carman
		Chief Financial Officer
		(Principal Financial Officer)

Date: May 9, 2014	By	\s\ Sharon J. Keck
		Sharon J. Keck
		Chief Accounting Officer
		(Principal Accounting Officer)


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)

Large accelerated Filer x	Accelerated Filer o
Non-accelerated Filer o (Do not check if a smaller reporting company)	Smaller reporting company o

	March 31,			December 31,
	2014			2013
Assets

Current assets:
Cash and cash equivalents	$	8,103			9,862
Receivables:
Trade, net (note 4)		252,880			237,856
Refundable income taxes		11,508			11,863
Other		6,933			953
		271,321			250,672

Inventories		47,781			47,804
Work-in-process on medical interiors and products contracts		5,385			5,313
Assets held for sale		4,532			5,103
Costs and estimated earnings in excess of billings on uncompleted contracts		2,646			2,888
Refundable deposits		8,363			8,459
Prepaid expenses and other (note 6)		10,869			10,449

Total current assets		359,000			340,550

Property and equipment:
Land		251			251
Flight and ground support equipment		615,352			584,059
Aircraft under capital leases		235,105			246,752
Aircraft rotable spare parts		43,019			41,391
Buildings and other equipment		55,422			51,601
		949,149			924,054
Less accumulated depreciation and amortization		(264,653	)		(259,212	)

Net property and equipment		684,496			664,842

Goodwill (note 2)		128,737			128,121
Intangible assets, net of accumulated amortization of $14,652 and $13,397 at March 31, 2014 and December 31, 2013, respectively		86,875			88,215
Other assets		28,920			30,813

Total assets	$	1,288,028			1,252,541

	March 31,			December 31,
	2014			2013
Liabilities and Stockholders’ Equity

Current liabilities:
Notes payable	$	5,696			2,616
Current installments of long-term debt		43,129			39,415
Current installments of obligations under capital leases		27,966			29,116
Accounts payable		17,409			20,431
Deferred revenue		5,047			3,463
Billings in excess of costs and estimated earnings on uncompleted contracts		1,651			2,232
Accrued wages and compensated absences		19,430			24,346
Due to third party payers		8,565			7,789
Deferred income taxes		16,106			13,748
Other accrued liabilities		21,628			19,162

Total current liabilities		166,627			162,318

Long-term debt, less current installments		498,534			477,038
Obligations under capital leases, less current installments		124,286			131,249
Deferred income taxes		89,790			86,131
Other liabilities		19,402			19,733

Total liabilities		898,639			876,469

Redeemable non-controlling interests		8,324			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 39,367,250 and 39,301,407 shares at March 31, 2014 and December 31, 2013, respectively; outstanding 39,148,440 and 39,064,437 shares at March 31, 2014 and December 31, 2013, respectively		2,345			2,343
Additional paid-in capital		115,116			112,890
Retained earnings		264,041			253,098
Accumulated other comprehensive loss		(437	)		(372	)

Total stockholders’ equity		381,065			367,959

Total liabilities and stockholders’ equity	$	1,288,028			1,252,541

	Three Months Ended March 31,
	2014			2013
Revenue:
Patient transport revenue, net of provision for contractual discounts (note 4)	$	250,596			193,824
Provision for uncompensated care (note 4)		(106,667	)		(85,992	)
Patient transport revenue, net		143,929			107,832
Air medical services contract revenue		44,761			54,458
Tourism and charter revenue		24,338			10,391
Medical interiors and products revenue		7,820			4,434
Dispatch and billing service revenue		2,288			2,114
		223,136			179,229

Operating expenses:
Flight centers		88,406			85,152
Aircraft operations (note 6)		33,024			37,463
Tourism operating expenses		16,000			7,841
Cost of medical interiors and products sold		6,679			4,545
Cost of dispatch and billing services		2,529			1,300
Depreciation and amortization		20,516			20,122
Loss on disposition of assets, net		407			441
General and administrative		31,658			27,223
		199,219			184,087

Operating income (loss)		23,917			(4,858	)

Other income (expense):
Interest expense		(5,529	)		(4,802	)
Other, net		(26	)		287

Income (loss) before income taxes		18,362			(9,373	)
Income tax benefit (expense)		(7,310	)		3,684

Net income (loss)		11,052			(5,689	)
Less net income attributable to redeemable non-controlling interests		163			--
Net income (loss) attributable to Air Methods Corporation and subsidiaries	$	10,889			(5,689	)

Other comprehensive income (loss), net of income taxes:
Foreign currency translation adjustments		(65	)		--
Comprehensive income (loss)	$	10,824			(5,689	)

Basic income (loss) per common share (note 5)	$	.28			(.15	)
Diluted income (loss) per common share (note 5)	$	.28			(.15	)

Weighted average number of common shares outstanding – basic		39,119,397			38,831,102
Weighted average number of common shares outstanding – diluted		39,318,180			38,831,102


PART I.	FINANCIAL INFORMATION

	Item 1.	Condensed Consolidated Financial Statements (unaudited)

		Condensed Consolidated Balance Sheets - March 31, 2014 and December 31, 2013	1

		Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2014 and 2013	3

		Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2014 and 2013	4

		Notes to Condensed Consolidated Financial Statements	6

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	18

	Item 4.	Controls and Procedures	18

PART II.	OTHER INFORMATION

	Item 1.	Legal Proceedings	19

	Item 1A.	Risk Factors	19

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	19

	Item 3.	Defaults upon Senior Securities	19

	Item 4.	Reserved	19

	Item 5.	Other Information	19

	Item 6.	Exhibits	19

SIGNATURES			20