Air Methods Corporation Business Information, Profile, and History

Company Perspectives:

Air Methods Corporation's mission is to provide safe, professional air medical transportation services, products, and systems with the highest level of quality and integrity. We are dedicated to providing excellent service to our customers, a fulfilling work environment to our staff, responsible membership in the medical aviation community, and a reasonable return on capital to ensure long-term economic viability and healthy growth.

History of Air Methods Corporation

Air Methods Corporation is one of the world's leading airborne healthcare companies, providing air medical emergency transport services and systems using both a hospital-based and community-based model throughout the United States. The company's Air Medical Services Division (hospital-based model), based in Denver, Colorado, provides emergency air medical transportation services to hospitals. This division provides hospital clients with helicopters and airplanes, which it operates and maintains in accordance with Federal Aviation regulations. Hospital clients are responsible for providing medical personnel and all medical care. The company's community-based model, operated by its wholly-owned subsidiary Mercy Air Service, Inc., based in Los Angeles, California, provides air medical transportation services in California, Nevada, Missouri, and Illinois. These services include operation and maintenance of helicopters and fixed-wing aircraft, medical care, 24-hour communications and dispatch, and medical billing and collections. This division's aircraft are typically based at fire stations or airports. Air Method's Products Division designs, produces, installs, and maintains aircraft medical interiors and other aerospace products for domestic and international customers. The company's medical interiors range from basic life support systems to intensive care units, while its engineering and production capabilities have enabled the division to design and integrate aerospace products that include aircraft navigation systems, environmental control systems, and structural and electrical systems.

Company Beginnings

Air Methods Corporation was founded in Colorado in 1982 as a research and development company then doing business as Cell Technology. On November 12, 1991, Cell Technology completed the acquisition of Air Methods Corporation, a Colorado corporation incorporated in 1980, which was involved in providing life-saving emergency air medical services. The company issued approximately 600,000 restricted shares of common stock for all of Air Method's outstanding common stock. Upon the merger, the company changed its name to Air Methods Corporation. From its inception until the completion of this transaction, the company was primarily involved in the development of biological response modifiers (BRMs), naturally occurring substances designed to alter the body's immune system and its reaction to cancer and other diseases. In late 1990, the Food and Drug Administration (FDA) notified the company of the need to construct a full-scale commercial production plant prior to initiating Phase III clinical trials. Up to this point, the company had completed various multi-center Phase II clinical trials of its BRMs for the treatment primary adult brain cancer. As a result of the FDA's notification, the company terminated the internal development of its BRMs, subsequently out-licensing these development responsibilities to other pharmaceutical and biotechnology companies.

Company Alters Its Business

With the acquisition of Air Methods Corporation, the company transformed itself into a provider of aeromedical emergency services and systems to hospitals throughout the United States. The company also designed, manufactured, and installed proprietary aircraft medical interiors and equipment for third parties, which allowed each aircraft to operate as an airborne intensive care unit. As a result, the company began to play a significant role in pioneering the integrated use of helicopters and airplanes equipped with patient life support systems to transport patients requiring intensive medical care from the scene of an accident or general care hospitals to highly specialized trauma centers, tertiary care centers, or university research and teaching hospitals. In an attempt to expand operations and raise profits, on September 14, 1993, the company acquired Golden Eagle Aviation, Inc., an airplane charter business.

Restructuring and the Pursuit of Strategic Acquisitions

By 1994, the company was losing money, leading to the appointment of a new CEO, George Belsey, an outside director and former hospital administrator. In leading the turnaround, on September 21, 1994 Belsey sold the money-losing Golden Eagle as part of a company-wide restructuring plan stemming from more than $7 million in losses for the fiscal year ended June 30, 1994. He also cut staff by 30 percent, reduced officers' salaries, sold off under-utilized aircraft, and guided the company back to its core business. To ensure future growth, Belsey began pursuing strategic acquisitions, joint business ventures, and branching out beyond simple transportation. In 1995, the company formed it first international franchise with Unimed Air de Sao Paulo of Brazil, a member of Brazil's largest healthcare cooperative, with the aim of creating an integrated air medical transportation and delivery system for the entire continent of South America. Under the franchise agreement, the Brazilian company purchased the right to use the trademarks and expertise of Air Methods in providing air medical services in Brazil for an acquisition price of $2,250,000, payable over ten years, plus annual royalties based on gross revenues. The franchise began air medical operations in January 1996.

In 1996, Air Methods believed that demand for comprehensive medical transportation would continue to grow with the closing and consolidation of rural hospitals. In response to increasing cost pressures and other changes within the healthcare industry, the company also began pursuing innovative approaches to aeromedical transportation, such as the turn key or independent provider (IP) model. Under the IP model, the operator provided the medical care, communications center, and medical billing resources as well as flight and maintenance capabilities. The company also planned to market its three aircraft interior product lines to domestic and international customers. In 1996, Air Methods secured a contract to provide medical interior systems for two U.S. army UH-60Q medical evacuation helicopters. The company considered the government aeromedical industry an important area for future growth. As of December 31, 1996, Air Methods employed 109 pilots, 122 aviation machinists, engineers, and other manufacturing and maintenance positions, and 38 business and administrative personnel. Net income totaled $308,000 compared to $959,000 in the previous year. The decrease in net income stemmed from investment in the development of a new modular medical interior and in the design of a medical interior system for the HU-60Q helicopter for the U.S. Army.

In July 1997, the growing financial success of the company's flight operations enabled it to acquire all of the common stock of Mercy Air Service, Inc., and the net assets of Helicopter Services, Inc., both California corporations. These acquisitions fit with Belsey's strategy of saving money by buying competitors, tying them together into regional services, and serving entire communities of hospitals with air transport staffed with paramedics and nurses. The company acquired Mercy, a California-based independent provider of air medical services, for around $6 million. The transaction also included a separate maintenance facility in Rialto, California, which provided all maintenance services to Mercy and engaged in third party sales of helicopter spare parts. Mercy's operations for the five months following the acquisition produced $7 million in revenue and $892,000 in net income, generating a 24 percent increase in revenue and a 290 percent increase in net income for the year. As an independent provider since 1988, Mercy's operations included medical care, aircraft operations and maintenance, FAA training and support, 24-hour communications and dispatch, and medical billing and collections. The company saw the addition of these core capabilities as not only providing a new model for the delivery of air medical transportation services but also a new model for delivering emergency air medical care, thus expanding Air Method's market from $330 million to almost $1 billion. At the time of the acquisition, Mercy operated eight helicopters in southern California and Las Vegas and served as a leading provider of aeromedical transport services in Orange, Riverside, San Diego, Kern, San Bernadino, and Los Angeles counties. All of the aircraft were based either at fire stations or airports and served community hospitals. Revenue from Mercy's flight operations derived primarily from flight fees billed directly to patients, their insurers, and governmental agencies. Mercy's community-based model stemmed largely from the managed care environment of southern California in 1989. With the emphasis by hospitals on cutting costs and under growing pressure to justify or terminate noncore functions, many hospital-based programs in the region were eliminated. Mercy utilized its neutral locations at fire stations and airports and its computer-aided dispatch system to provide independent service to community healthcare institutions. Mercy's experience with medical billing also enabled it to establish preferred provider status with managed care groups.

In 1997, the company's product division delivered four multi-mission medical evacuation systems for the U.S. Army UH-60Q helicopter. The multi-mission system, which can be quickly converted from medical evacuation to personnel or cargo transport, was considered critical for modernizing the Army's helicopter fleet. Following Operation Desert Storm, the Army set the modernization of medical evacuation forces as a top priority for the medical corps. The need to provide medical care en route from the battle field led to the development of the UH-60Q medical evacuation helicopter. Because the Army planned on producing 447 UH-60Q units over the next 20 years, contingent on Congressional funding, the company hoped to profit from securing continuing contracts with the U.S. armed forces.

By the end of 1997, the company's flight division was also providing air medical transport services in 16 states under 21 long-term operating agreements using a fleet of 35 helicopters and 3 airplanes. In addition, the flight division delivered five Bell 407's to its various hospital programs. Known for its speed, performance, and patient care facilities, the Bell 407 proved increasingly popular with the company's air medical transport customers.

In 1998, Air Methods continued to expand operations within a multi-billion dollar market for specialized medical transportation services and technology. Revenue increased 25 percent to a record $48.7 million compared to $38.9 million in 1997. The company's rapid expansion, however, came at a cost as Air Methods invested in hiring and training new personnel and in acquiring additional aircraft to service new locations. As a result, net income declined to $257,000 from $1.7 million in 1997. Increased revenues stemmed primarily from expansion of the company's flight services division and Mercy Air Service, Inc. into new geographic markets as well as expansion of sales from its products division.

The flight services division secured new contracts for its operations in Flagstaff and Bullhead City, Arizona, and Columbia, South Carolina. In 1998, Mercy expanded its operations in Las Vegas, Nevada, and introduced a second helicopter in San Diego. In addition, Mercy formed a joint venture with Aspen Helicopters, Inc. to expand its air emergency helicopter ambulance unit into Ventura, Santa Barbara, and San Luis Obispo Counties in California. The 50/50 venture--operating as Mercy Air, Tri-County, LLC--began operations on August 30, 1998. Under the agreement, Mercy would provide medical staffing, dispatch, marketing and public relations and administrative support services. Aspen Helicopters, a local helicopter service provider headquartered in Ventura County, would provide a medically equipped Bell 222 UT/SP helicopter as well as pilot staffing and aircraft maintenance. The company considered the joint venture a significant addition to its service, adding seven tertiary care centers to the already 20 that were being served in southern California.

In 1998, the company formed another joint venture servicing Catholic Health Services of Long Island (CHS), a large consortium of hospitals, nursing homes, diagnostic and treatment centers, and home health agencies in Nassau and Suffolk counties, New York. With more than 1,600 beds, CHS constituted the second largest healthcare consortium on Long Island. Air Methods formed the joint venture with EMX LLC of New York City, creating EMX Emergency Medical Services, LLC. The joint venture operated under a 5-year administrative service contract with CHS to operate CHS Ambulance Services, Inc. Air Methods was a 50/50 partner in the venture and owned 5 percent of privately held EMX, which developed information services and products for improving the delivery and efficiency of healthcare services. The venture enabled Air Methods to enter the ground services business, which began operations in late June with six ambulances servicing various hospitals.

On September 15, 1998, Air Methods also announced that the U.S. Airforce's Health Systems Center had selected the company as a prime contractor to develop and manufacture a new generation Spinal Cord Injury Transport System (SCITS). The new system signified the product division's first entry into the healthcare medical device market. One of Air Method's business strategies had been to diversify into new, complementary markets by utilizing its core competencies in emergency air medical systems for commercial and government applications.

Growth in 2000 and Beyond

In 2000, Air Methods' business strategy of growth through strategic acquisitions continued unabated. On April 25, Air Method's wholly-owned subsidiary, Mercy Air Service, acquired through a newly formed company all of the assets of Area Rescue Consortium of Hospitals (ARCH), a Missouri non-profit organization, for $11 million plus two fixed wing aircraft and related equipment and inventory from Skylife Aviation, LLC for around $1.7 million. Because the acquisition was funded with proceeds from debt and lease financing and from existing treasuries, the company avoided issuing any additional shares of common stock outstanding, thus eliminating dilution to shareholders. The newly formed company, ARCH Air Medical Service, Inc., operated as a Missouri corporation and a wholly-owned subsidiary of Mercy Air. Following this transaction, Air Methods moved to acquire ownership of Rocky Mountain Holdings, LLC (RMH), one of the largest private companies providing air medical transport services in the country. RMH had pioneered more than 30 years earlier the first hospital-based air medical service program. Like Air Methods, RMH provided air medical services under both the community-based and hospital-based models, utilizing a fleet of 80 helicopters and fixed-wing aircraft. Headquartered in Provo, Utah, RMH also ran maintenance and overhaul operations in Provo and Greenville, South Carolina. In addition, it maintained a national dispatch and communications center in Omaha, Nebraska. Air Methods purchased RMH for $28 million. This transaction made Air Methods the largest provider of air medical services in the United States with operations in 31 states and a fleet of 136 helicopters and 19 fixed-wing aircraft.

Despite the economic downturn in 2001 and 2002, Air Methods continued to demonstrate substantial growth. Revenues had increased an average of 25 percent annually over the previous three years to $98.4 million, and profits grew by an average of 169 percent to $7.7 million. This rate of growth attracted the attention of the financial media. In 2002, the company was named number 30 on the "100 America's Fastest Growing Small Companies" list in the July-August issue of Fortune Small Business Magazine. The company was also profiled in Business Week as one of the magazine's "Hot Growth Companies," listing as number 57.

Financial analysts anticipated the company would see future growth from its products division in light of the September 11, 2001 terrorist attacks in New York and Washington, D.C. After securing the contract with the U.S. Army in 1996, Air Methods developed a system that could transform a cargo helicopter into an airborne ambulance in two minutes. The helicopters were outfitted with lights, oxygen, medical supplies, and stretchers, comprising a small intensive care unit. The Army contract may conceivably generate $200 million over the next 20 years. Nonetheless, the inherent risks and unpredictability of the company's airborne missions, sometimes plagued by unscheduled delays and inclement weather affecting the bottom line, had kept investors at a distance until June 2002, when Wall Street took notice of the company's growth. In the midst of the worst bear market since the Great Depression, the company's stock increased from approximately $4 a share to more than $10 by June 2002. With this kind of performance, Air Methods appeared well positioned to take advantage of additional growth opportunities in the future.

Principal Subsidiaries: Mercy Air Service, Inc.; ARCH Air Medical Service, Inc.

Principal Divisions: Air Medical Services Division; Products Division.

Principal Operating Units: Air Medical Transportation Services; Aerospace and Air Medical Technologies; Air Management Services.

Principal Competitors: Corporate Jets, Inc.; OmniFlight, Inc.; Petroleum Helicopters, Inc.; Rocky Mountain Helicopters, Inc.

Chronology

• Key Dates:
• 1980: The company is incorporated in Delaware as Cell Technology, Inc.
• 1991: Air Methods Corporation is acquired.
• 1993: Golden Eagle Aviation, Inc. is acquired.
• 1994: The company sells all outstanding common shares of Golden Eagle Charters, Inc.
• 1995: An international franchise with Unimed Air de Sao Paulo of Brazil is established.
• 1997: The company acquires Mercy Air Services, Inc. and all of the net assets of Helicopter Services, Inc.
• 2000: Subsidiary Mercy Air acquires the business assets of Area Rescue Consortium of Hospitals.