10-K 1 h54500e10vk.htm FORM 10-K - ANNUAL REPORT e10vk
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
     
þ   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2007
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 0-9827
PHI, INC.
(Exact name of registrant as specified in its charter)
2001 SE Evangeline Thruway
Lafayette, Louisiana 70508
(337) 235-2452

(Address, including zip code and telephone number of principal executive office)
     
Louisiana
(State or other jurisdiction of incorporation or organization)
  72-0395707
(I.R.S. Employer Identification No.)
Securities registered pursuant to Section 12(b) of the Act:
     
Title of Each Class   Name of Each Exchange on Which Registered
Voting Common Stock   The NASDAQ Global Market
Non-Voting Common Stock   The NASDAQ Global Market
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes: o No: þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes: o No: þ
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: þ No: o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this form 10-K. þ
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 the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):
     Large accelerated filer: o               Accelerated filer: þ                        Non-accelerated filer: o                   Smaller reporting company: o
                                        (Do not check if a smaller reporting company)
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes: o No: þ
     The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant as of June 30, 2007 was $458,988,668 based upon the last sales prices of the voting and non-voting common stock on June 30, 2007, as reported on the NASDAQ Global Market.
     The number of shares outstanding of each of the registrant’s classes of common stock, as of February 29, 2008 was:
         
Voting Common Stock
  2,852,616  shares.
Non-Voting Common Stock
  12,438,992  shares.
Documents Incorporated by Reference
     Portions of the registrant’s definitive Information Statement for the 2008 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K.
 
 

 


 

PHI, INC.
INDEX – FORM 10-K
         
       
 
       
    1  
    4  
    11  
    11  
    13  
    13  
 
       
       
 
       
    13  
    15  
    15  
    25  
    26  
PHI, Inc. and Consolidated Subsidiaries:
       
    26  
    27  
    28  
    29  
    30  
    31  
    54  
    54  
       
    56  
 
       
       
 
       
    56  
    56  
    56  
    56  
    56  
 
       
       
 
       
    57  
Signatures
    60  
 Amended and Restated 401(k) Retirement Plan
 Subsidiaries
 Consent of Deloitte & Touche LLP
 Certification of CEO Pursuant to Section 302
 Certification of CFO Pursuant to Section 302
 Certification of CEO Pursuant to Section 906
 Certification of CFO Pursuant to Section 906

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PART I
Forward-Looking Statements
All statements other than statements of historical fact contained in this Form 10-K and other periodic reports filed by PHI, Inc. (the “Company” or “PHI”) under the Securities Exchange Act of 1934 and other written or oral statements made by it or on its behalf, are forward-looking statements. When used herein, the words “anticipates”, “expects”, “believes”, “goals”, “intends”, “plans”, “projects” and similar words and expressions are intended to identify forward-looking statements. Forward-looking statements are based on a number of assumptions about future events and are subject to significant risks, uncertainties, and other factors that may cause the Company’s actual results to differ materially from the expectations, beliefs, and estimates expressed or implied in such forward-looking statements. Although the Company believes that the assumptions underlying the forward-looking statements are reasonable, no assurance can be given that such assumptions will prove correct or even approximately correct. Factors that could cause the Company’s results to differ materially from the expectations expressed in such forward-looking statements include but are not limited to the following: unexpected variances in flight hours, the effect on demand for our services caused by volatility of oil and gas prices and the level of exploration and production activity in the Gulf of Mexico, the effect on our operating costs of volatile fuel prices, the availability of capital required to acquire aircraft, environmental risks, hurricanes and other adverse weather conditions, the activities of our competitors, changes in government regulation, unionization, operating hazards, risks related to operating in foreign countries, the ability to obtain adequate insurance at an acceptable cost and the ability of the Company to develop and implement successful business strategies. For a more detailed description of risks, see the “Risk Factors” section in Item 1A below. All forward-looking statements in this document are expressly qualified in their entirety by the cautionary statements in this paragraph and the Risk Factors section below. PHI undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.
ITEM 1. BUSINESS
General
Since our incorporation in 1949, our primary business has been the safe and reliable transportation of personnel and, to a lesser extent, parts and equipment, to, from, and among offshore platforms for customers engaged in the oil and gas exploration, development, and production industry, principally in the Gulf of Mexico. We are a leading provider of helicopter transportation services in the Gulf of Mexico. We also provide helicopter services to the oil and gas industry internationally, and to non-oil and gas customers such as health care providers and U.S. governmental agencies such as the National Science Foundation. We also provide helicopter maintenance and repair services to certain customers. At December 31, 2007, we owned or operated approximately 237 aircraft domestically and internationally.
Description of Operations
We operate in three business segments: Oil and Gas, Air Medical, and Technical Services. For financial information regarding our operating segments and the geographic areas in which they operate, see Note 10 of the Notes to Consolidated Financial Statements included elsewhere in this Form 10-K.
During the quarter ended March 31, 2007, we combined our oil and gas customers that were previously included in our International segment into our Domestic Oil and Gas segment, and eliminated the term “Domestic” from that segment. Additionally, the contract work previously included in the International segment for the National Science Foundation is now included in our Technical Services segment. We therefore now have three reportable segments: Oil and Gas, Air Medical, and Technical Services. All prior periods have been recast to conform to the 2007 presentation.
A segment’s operating income is its operating revenues less its direct expenses and selling, general and administrative expenses. Each segment has a portion of selling, general and administrative expenses that is charged directly to the segment and a portion that is allocated. Direct charges represent the vast majority of segment selling, general and administrative expenses. Allocated selling, general and administrative expenses is based primarily on total segment costs as a percentage of total operating costs.

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Air Medical operations are headquartered in Phoenix, AZ, where we maintain significant separate facilities and administrative staff dedicated to this segment. Those costs are charged directly to the Air Medical segment, resulting in a disproportionate share of selling, general and administrative expenses compared to the Company’s other reportable segments. Unallocated overhead consists primarily of corporate selling, general, and administrative expenses that we do not allocate to the reportable segments.
Oil and Gas. Our Oil and Gas segment provides helicopter services primarily for the major oil and gas production companies transporting personnel and/or equipment to offshore platforms in the Gulf of Mexico, Angola and the Democratic Republic of Congo. We currently operate 163 aircraft in this segment.
Oil and gas exploration and production companies and other offshore oil service companies use our services primarily for routine transportation of personnel and equipment, to transport personnel during medical and safety emergencies, and to evacuate personnel during the threat of hurricanes and other adverse weather conditions. Most of our customers have entered into contracts for transportation services for a term of one year or longer, although some hire us on an “ad hoc” or “spot” basis.
Most of our Oil and Gas aircraft are available for hire by any customer, but some are dedicated to individual customers. Our helicopters have flight ranges up to 495 miles with a 30-minute fuel reserve and thus are capable of servicing many of the deepwater oil and gas operations from 50 to 200 miles offshore. (See Item 2 – Properties, for specific information by aircraft model.)
Operating revenue from the Oil and Gas segment is derived mainly from long-term contracts that include a fixed monthly rate for a particular model of aircraft, plus a variable rate for flight time. Operating costs for the Oil and Gas operations are primarily aircraft operation costs, including costs for pilots and maintenance personnel.
Operating revenues from the Oil and Gas segment accounted for 64%, 66%, and 67% of consolidated operating revenues during the years ended December 31, 2007, 2006, and 2005, respectively.
Air Medical. We provide air medical transportation services for hospitals and emergency service agencies where we operate as an independent provider of medical services in 15 states using approximately 70 aircraft at 62 separate locations. The Air Medical segment’s operating revenues accounted for 34%, 32%, and 31% of consolidated operating revenues for the years ended December 31, 2007, 2006, and 2005, respectively.
As an independent provider, we bill for our services on the basis of a flat rate plus a variable charge per loaded mile, regardless of aircraft model. Revenues are recorded net of contractual allowances under agreements with the third party payors and estimated uncompensated care when the services are provided. Contractual allowances and uncompensated care are estimated based on historical collection experience by payor category. The main payor categories are Medicaid, Medicare, Insurance and Self-Pay. Payor mix and changes in reimbursement rates are the factors most subject to sensitivity and variability in calculating our allowances. We compute an 18 month historical payment analysis of accounts paid in full, by category. The allowance percentages calculated are applied to the payor categories, and the necessary adjustments are made to the revenue allowance. The allowance for contractual discounts was $31.9 million, $29.9 million, and $24.2 million as of December 31, 2007, 2006 and 2005, respectively. The allowance for uncompensated care was $19.1 million, $20.1 million, and $11.5 million as of December 31, 2007, 2006, and 2005, respectively.
Provisions for contractual discounts and estimated uncompensated care are as follows:
                                                 
    Revenue   Accounts Receivable
    Year Ended December 31,   Year Ended December 31,
    2007   2006   2005   2007   2006   2005
Gross billings
    100 %     100 %     100 %     100 %     100 %     100 %
Provision for contractual discounts
    46 %     43 %     42 %     33 %     32 %     34 %
Provision for uncompensated care
    10 %     10 %     9 %     20 %     22 %     16 %

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Amounts attributable to Medicaid, Medicare, Insurance and Self Pay as a percentage of net Air Medical revenues are as follows:
                         
    Year Ended December 31,
    2007   2006   2005
Medicaid
    10 %     12 %     14 %
Medicare
    16 %     14 %     10 %
Insurance
    66 %     62 %     60 %
Self Pay
    8 %     12 %     16 %
We also have a limited number of contracts with hospitals under which we receive a fixed monthly rate for aircraft availability and an hourly rate for flight time. Those contracts generate approximately 8% of the segment’s revenues.
Technical Services. The Technical Services segment provides helicopter repair and overhaul services for flight operations customers that own their aircraft. Costs associated with these services are primarily labor, and customers are generally billed at a percentage above cost. We also operate four aircraft for the National Science Foundation in Antarctica under this segment.
Operating revenues from the Technical Services segment accounted for 2% of consolidated operating revenues for the years ended December 31, 2007, 2006, and 2005.
Seasonal Aspects
Seasonality affects our operations in three principal ways: weather conditions are generally poorer in December, January, and February; tropical storms and hurricanes are prevalent in the Gulf of Mexico in late summer and early fall; and reduced daylight hours restrict our operations in winter, which result in reduced flight hours. When a tropical storm or hurricane is about to enter or begins developing in the Gulf of Mexico, flight activity may temporarily increase because of evacuations of offshore workers, but during the storms, we are unable to operate in the area of the storm and can incur significant expense in moving our aircraft to safer locations. For a more detailed discussion of these events, see the “Adverse Weather Conditions” paragraph in the “Risk Factors” section of Item 1A. Our operating results vary from quarter to quarter, depending on seasonal factors and other factors outside of our control. As a result, full year results are not likely to be a direct multiple of any particular quarter or combination of quarters.
Inventories
We carry a significant inventory of aircraft parts to support the maintenance and repair of our helicopters. Many of these inventory items are parts that have been removed from aircraft, refurbished according to manufacturers and FAA specifications, and returned to inventory. The cost to refurbish these parts is expensed as incurred. We use systematic procedures to estimate the value of these used parts, which include consideration of their condition and continuing utility. The carrying values of inventory reported in our financial statements are affected by these estimates and may change from time to time if our estimated values change.
Customers
Our principal customers are major integrated energy companies and independent exploration and production companies. We also serve oil and gas service companies, hospitals and medical programs under the independent provider model, government agencies, and other aircraft owners and operators. Our largest customer is in our Oil and Gas segment and accounted for 15%, 17%, and 14% of operating revenues for the years ended December 31, 2007, 2006, and 2005, respectively. We have entered into contracts with most of our customers for terms of at least one year, although most contracts include provisions permitting earlier termination.
Competition
Our business is highly competitive in each of our markets, and many of our contracts are awarded after competitive bidding. Factors that impact competition include safety, reliability, price, availability of appropriate aircraft and quality of service. Some of our competitors recently have undertaken expansion and/or upgrades of their fleets.

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We are a leading operator of helicopters in the Gulf of Mexico. There are two major and several small competitors operating in the Gulf of Mexico market. Although most oil companies traditionally contract for most specialty services associated with offshore operations, including helicopter services, certain of our customers and potential customers in the oil industry operate their own helicopter fleets, or have the capability to do so if they so elect.
In the air medical market, we compete against national and regional firms, and there is usually more than one competitor in each local market. In addition, we compete against hospitals that operate their own helicopters and, in some cases, against ground ambulances as well.
Employees
As of December 31, 2007, we employed approximately 2,254 full-time employees and 45 part-time employees, including approximately 643 pilots and 1,656 aircraft maintenance and support personnel.
As previously reported, the Company is involved in Federal Court litigation in the Western District of Louisiana with the OPEIU (the Office and Professional Employees International Union), the union representing domestic pilots, over claims of bad faith bargaining and issues relating to the return to work of striking pilots. Pilots continue to work under the terms and conditions of employment set forth in the final implementation proposals made by the Company at the end of collective bargaining negotiations in August 2006.
A trial on strike-related matters is currently set to start on November 3, 2008. It is not possible to assess the outcome of that litigation, as these matters are still in the discovery stage. However, management is of the opinion that the Company’s claims and defenses have substantial merit.
The Company has continued to hire and train pilots to meet staffing needs for new and existing aircraft. As of February 14, 2008, the pilot work force was 646.
Environmental Matters
We are subject to federal, state and local environmental laws and regulations that impose limitations on the discharge of pollutants into the environment and establish standards for the treatment, storage, recycling, and disposal of toxic and hazardous wastes. Operating and maintaining helicopters requires that we use, store, and dispose of materials that are subject to federal and state environmental regulation. We periodically conduct environmental site surveys at our facilities, and determine whether there is a need for environmental remediation based on these surveys.
Availability of SEC filings and other information
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to any of these reports are available free of charge through our web site: www.phihelico.com. These reports are available as soon as reasonably practicable after we file them with the Securities and Exchange Commission (“SEC”). You may also read and copy any of the materials that we file with the SEC at the SEC’s Public Reference Room at 100 F. Street, N.E., Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a web site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The SEC’s website address is www.sec.gov.
ITEM 1A. Risk Factors
All phases of our operations are subject to significant uncertainties, risks, and other influences. Important factors that could cause our actual results to differ materially from anticipated results or other expectations include the following:

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RISKS INHERENT IN OUR BUSINESS
Our operations are affected by adverse weather conditions and seasonal factors.
We are subject to three types of weather-related or seasonal factors:
Ø   the tropical storm and hurricane season in the Gulf of Mexico;
Ø   poor weather conditions that often prevail during winter and can develop in any season; and
Ø   reduced daylight hours during the winter months.
Poor visibility, high winds and heavy precipitation can affect the operation of helicopters and significantly reduce our flight hours. A significant portion of our operating revenue is dependent on actual flight hours and a substantial portion of our direct costs is fixed. Thus, prolonged periods of adverse weather can materially and adversely affect our operating revenues and net earnings.
In the Gulf of Mexico, the months of December, January and February have more days of adverse weather conditions than the other months of the year. Also, June through November is tropical storm and hurricane season in the Gulf of Mexico, with August and September typically being the most active months. During tropical storms, we are unable to operate in the area of the storm and can incur significant expense in moving our aircraft to safer locations. In addition, as most of our facilities are located along the Gulf of Mexico coast, tropical storms and hurricanes may cause substantial damage to our property, including helicopters that we are unable to relocate.
Because the fall and winter months have fewer hours of daylight, our flight hours are generally lower at those times, which typically results in a reduction in operating revenues during those months. Currently, only 50 of the 163 helicopters used in our oil and gas operations are equipped to fly under instrument flight rules, or IFR, which enables these aircraft, when manned by IFR-rated pilots and co-pilots, to operate when poor visibility or darkness prevents flight by aircraft that can fly only under visual flight rules, or VFR. Not all of our pilots are IFR rated.
We may not be able to obtain acceptable customer contracts covering some of our new helicopters, and there will be a delay between the time that a helicopter is delivered to us and the time that it can begin generating revenues.
We are substantially expanding and upgrading our medium and heavy helicopter fleet. Many of our new oil and gas helicopters may not be covered by customer contracts when they are placed into service, and we cannot assure you as to when we will be able to utilize these new helicopters or on what terms. In addition, with respect to those helicopters that will be covered by customer contracts when they are placed into service, our contract terms generally are too short to recover our cost of purchasing the helicopter at current rates. Thus, we are subject to the risk that we will be unable to recoup our investment in the helicopters.
Once a new helicopter is delivered to us, we generally spend between two and five months installing mission-specific and/or customer-specific equipment before we place it into service. As a result, there can be a significant delay between the delivery date for a new helicopter and the time that it is able to generate revenues for us.
There is also a possibility that our customers may request new helicopters in lieu of our existing helicopters, which could adversely affect the utilization of our existing fleet.
Our contracts generally can be terminated or downsized by our customers without penalty.
Most of our fixed-term contracts contain provisions permitting early termination by the customer, sometimes with as little as 30 days’ notice for any reason and generally without penalty. In addition, many of our contracts permit our customers to decrease the number of aircraft under contract with a corresponding decrease in the fixed monthly payments without penalty. As a result, you should not place undue reliance on our customer contracts or the terms of those contracts.
Increased governmental regulations could increase our costs or reduce our ability to operate successfully.
Our operations are regulated by a number of federal and state agencies. All of our flight operations are regulated by the Federal Aviation Administration, or FAA. Aircraft accidents are subject to the jurisdiction of the National Transportation Safety Board. Standards relating to the workplace health and safety are monitored by the federal

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Occupational Safety and Health Administration, or OSHA. We are also subject to various federal and state environmental statutes.
The FAA has jurisdiction over many aspects of our business, including personnel, aircraft and ground facilities. We are required to have an Air Taxi Certificate, granted by the FAA, to transport personnel and property in our helicopters. This certificate contains operating specifications that allow us to conduct our present operations, but it is potentially subject to amendment, suspension or revocation in accordance with procedures set forth in the Federal Aviation Act. The FAA conducts regular inspections regarding the safety, training and general regulatory compliance of our U.S. aviation operations. Additionally, the FAA requires us to file reports confirming our continued compliance.
FAA regulations require that at least 75% of our voting securities be owned or controlled by citizens of the U.S. or one of its possessions, and that our president and at least two-thirds of our directors be U.S. citizens. Our Chief Executive Officer and all of our directors are U.S. citizens, and our organizational documents provide for the automatic reduction in voting power of each share of voting common stock owned or controlled by a non-U.S. citizen if necessary to comply with these regulations.
We are subject to significant regulatory oversight by OSHA and similar state agencies. We are also subject to the Communications Act of 1934 because of our ownership and operation of a radio communications flight-following network throughout the Gulf of Mexico.
Numerous other federal statutes and rules regulate our offshore operations and those of our customers, pursuant to which the federal government has the ability to suspend, curtail or modify certain or all offshore operations. A suspension or substantial curtailment of offshore oil and gas operations for any prolonged period would have an immediate and materially adverse effect on us. A substantial modification of current offshore operations could adversely affect the economics of such operations and result in reduced demand for our services.
The helicopter services business is highly competitive.
All segments of our business are highly competitive. Many of our contracts are awarded after competitive bidding, and the competition for those contracts generally is intense. The principal aspects of competition are safety, price, reliability, availability and service.
We have two major competitors and several small competitors operating in the Gulf of Mexico, and most of our customers and potential customers could operate their own helicopter fleets if they chose to do so. At least one of our primary competitors is in the process of significantly expanding its fleet.
Our Air Medical segment competes for business primarily under the independent provider model and, to a lesser extent, under the hospital-based model. Under the independent provider model, we have no contracts and no fixed revenue stream, but must compete for transport referrals on a daily basis with other independent operators in the area. Under the hospital-based model, we contract directly with the hospital to provide their transportation services, with the contracts typically awarded on a competitive bid basis. Under both models, we compete against national and regional companies, and there is usually more than one competitor in each local market. In addition, we compete against hospitals that operate their own helicopters and, in some cases, against ground ambulances as well.
The failure to maintain our safety record would seriously harm our ability to attract new customers and maintain our existing customers.
A favorable safety record is one of the primary factors a customer reviews in selecting an aviation provider. If we fail to maintain our safety and reliability record, our ability to attract new customers and maintain our current customers will be materially adversely affected.
Helicopter operations involve risks that may not be covered by our insurance or may increase the cost of our insurance.
The operation of helicopters inherently involves a high degree of risk. Hazards such as aircraft accidents, collisions, fire and adverse weather are hazards that must be managed by providers of helicopter services and may result in loss of life, serious injury to employees and third parties, and losses of equipment and revenues.

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We maintain hull and liability insurance on our aircraft, which insures us against physical loss of, or damage to, our aircraft and against certain legal liabilities to others. In addition, we carry war risk, expropriation, confiscation and nationalization insurance for our aircraft involved in international operations. In some instances, we are covered by indemnity agreements from our customers in lieu of, or in addition to, our insurance. Our aircraft are not insured for loss of use.
While we believe that our insurance and indemnification arrangements provide reasonable protection for most foreseeable losses, they do not cover all potential losses and are subject to deductibles, retentions, coverage limits and coverage exceptions such that severe casualty losses, or the expropriation or confiscation of significant assets could materially and adversely affect our financial condition or results of operations. The occurrence of an event that is not fully covered by insurance could have a material adverse impact on our financial condition, results of operations, and cash flows.
Our air medical operations expose us to numerous special risks, including collection risks, high start-up costs and potential medical malpractice claims.
We expanded our Air Medical operations significantly from 2004 to 2006. These operations are highly competitive and expose us to a number of risks that we do not encounter in our oil and gas operations. For instance, the fees for our air medical services generally are paid by individual patients, insurance companies, or government agencies such as Medicare and Medicaid. As a result, our profitability in this business depends not only on our ability to generate an acceptable volume of patient transports, but also on our ability to collect our transport fees. We are not permitted to refuse service to patients based on their inability to pay.
As a result of our recent expansion, even if we are able to generate an acceptable volume of patient transports, we cannot assure you that our new markets will be profitable for us. We generally incurred significant startup costs and lower utilization rates when we entered new air medical markets, which impacted our profitability. Finally, we employ paramedics, nurses, and other medical professionals for these operations, which can give rise to medical malpractice claims against us, which, if not fully covered by our medical malpractice insurance, could materially adversely affect our financial condition and results of operations.
Our international operations are subject to political, economic and regulatory uncertainty.
Our international operations, which represented approximately 5% of our total operating revenues for the year ended December 31, 2007, are subject to a number of risks inherent in operating in lesser developed countries, including:
Ø   political, social and economic instability;
Ø   terrorism, kidnapping and extortion;
Ø   potential seizure or nationalization of assets;
Ø   import-export quotas; and
Ø   currency fluctuations or devaluation.
Additionally, our competitiveness in international markets may be adversely affected by government regulation, including regulations requiring:
Ø   the awarding of contracts to local contractors;
Ø   the employment of local citizens; and
Ø   the establishment of foreign subsidiaries with significant ownership positions reserved by the foreign government for local ownership.
Our failure to attract and retain qualified personnel could adversely affect us.
Our ability to attract and retain qualified pilots, mechanics, nurses, paramedics and other highly trained personnel will be an important factor in determining our future success. Many of our customers require pilots of aircraft that service them to have inordinately high levels of flight experience. The market for these experienced and highly trained personnel is extremely competitive. Accordingly, we cannot assure you that we will be successful in our

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efforts to attract and retain such persons. Some of our pilots and mechanics, and those of our competitors, are members of the U.S. military reserves and could be called to active duty. If significant numbers of such persons are called to active duty, it would reduce the supply of such workers, possibly curtailing our operations and likely increasing our labor costs.
RISKS SPECIFIC TO OUR COMPANY
We are highly dependent on the offshore oil and gas industry.
Approximately 60% of our 2007 operating revenue was attributable to helicopter support for domestic offshore oil and gas exploration and production companies. Our business is highly dependent on the level of activity by oil and gas companies, particularly in the Gulf of Mexico. The level of activity by our customers operating in the Gulf of Mexico depends on factors that we cannot control, such as:
Ø   the supply of, and demand for, oil and natural gas and market expectations regarding supply and demand;
Ø   weather-related or other natural causes;
Ø   actions of OPEC, and Middle Eastern and other oil producing countries, to control prices or change production levels;
Ø   general economic conditions in the United States and worldwide;
Ø   war, civil unrest or terrorist activities;
Ø   governmental regulation; and
Ø   the price and availability of alternative fuels.
Any substantial or extended decline in the prices of oil and natural gas could depress the level of helicopter activity in support of exploration and production activity, and thus have a material adverse effect on our business, results of operations and financial condition.
Additionally, the Gulf of Mexico is generally considered to be a mature area for oil and gas exploration, which may result in a continuing decrease in activity over time. This could materially adversely affect our business, results of operations and financial condition. In addition, the concentrated nature of our operations subjects us to the risk that a regional event could cause a significant interruption in our operations or otherwise have a material affect on our profitability.
Moreover, companies in the oil and gas exploration and production industry continually seek to implement cost-savings measures. As part of these measures, oil and gas companies have attempted to improve operating efficiencies with respect to helicopter support services. For example, certain oil and gas companies have pooled helicopter services among operators, reduced staffing levels by using technology to permit unmanned production installations and decreased the frequency of transportation of employees offshore by increasing the lengths of shifts offshore. The continued implementation of such measures could reduce demand for helicopter services and have a material adverse effect on our business, results of operations and our financial condition.
Our pilot workforce is represented by the Office and Professional Employees International Union, with which the Company is engaged in strike-related litigation.
As previously reported, the Company is involved in Federal Court litigation in the Western District of Louisiana with the OPEIU (the Office and Professional Employees International Union), the union representing domestic pilots, over claims of bad faith bargaining and issues relating to the return to work of striking pilots. Pilots continue to work under the terms and conditions of employment set forth in the final implementation proposals made by the Company at the end of collective bargaining negotiations in August 2006.
A trial on strike-related matters is currently set to start on November 6, 2008. It is not possible to assess the outcome of that litigation.

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We depend on a small number of large oil and gas industry customers for a significant portion of our revenues, and our credit exposure within this industry is significant.
We derive a significant amount of our revenue from a small number of major and independent oil and gas companies. For the year ended December 31, 2007, 15% of our revenues were attributable to our largest customer. The loss of one of our significant customers, if not offset by revenues from new or other existing customers, would have a material adverse effect on our business and operations. In addition, this concentration of customers may impact our overall credit risk in that these entities may be similarly affected by changes in economic and other conditions.
Our Chairman of the Board and Chief Executive Officer is also our principal stockholder and has voting control of the Company.
Al A. Gonsoulin, our Chairman of the Board and Chief Executive Officer, beneficially owns stock representing approximately 52% of our total voting power. As a result, he exercises control over the election of all of our directors and the outcome of most matters requiring a stockholder vote. This ownership also may delay or prevent a change in our management or a change in control of us, even if such changes would benefit our other stockholders and were supported by a majority of our stockholders.
Our substantial indebtedness could adversely affect our financial condition and impair our ability to operate our business.
We are a highly leveraged company and, as a result, have significant debt service obligations. As of December 31, 2007, our total long-term indebtedness was $200.0 million, consisting of $200 million of our 7.125% Senior Notes due 2013. On April 12, 2006, we completed the sale of 4,287,920 non-voting common shares, and then on May 1, 2006 we completed the sale of the over-allotment of shares of 578,680 non-voting common shares. These transactions resulted in an increase in shareholder equity of $160.7 million, net of expenses. We also issued $200 million of 7.125% Senior Notes due April 15, 2013. Proceeds of the Notes were used to retire our existing $200 million 9 3/8% Senior Notes due May 1, 2009. These transactions are discussed in more detail under “Management’s Discussion And Analysis of Financial Condition and Results of Operations – Overview” below. As a result of these transactions, our debt to equity ratio at December 31, 2007 was 0.47 to 1.00, as compared to 0.51 to 1.00 at December 31, 2006.
At December 31, 2007, we had no borrowings and $4.6 million in letters of credit outstanding under our revolving line of credit. As of December 31, 2007, availability for borrowings under our revolving credit facility was $30.4 million.
Our substantial indebtedness could have significant negative consequences to us that you should consider. For example, it could:
Ø   require us to dedicate a substantial portion of our cash flow from operations to pay principal of, and interest on, our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures or other general corporate purposes, or to carry out other aspects of our business plan;
Ø   increase our vulnerability to general adverse economic and industry conditions and limit our ability to withstand competitive pressures;
Ø   limit our flexibility in planning for, or reacting to, changes in our business and future business opportunities;
Ø   place us at a competitive disadvantage compared to our competitors that have less debt; and
Ø   limit our ability to obtain additional financing for working capital, capital expenditures and other aspects of our business plan.
Our ability to meet our debt obligations and other expenses will depend on our future performance, which will be affected by financial, business, economic, regulatory and other factors, many of which we are unable to control. When our 7.125% Senior Notes come due in 2013, we will likely need to enter into new financing arrangements at that time to repay those notes. We may be unable to obtain that financing on favorable terms, which could adversely

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affect our business, financial condition and results of operations. For more information on our indebtedness, please see the financial statements included elsewhere herein.
The United States Department of Justice (“DOJ”) investigation could result in criminal proceedings and the imposition of fines and penalties.
On June 15, 2005, we received a subpoena from the DOJ relating to a grand jury investigation of potential antitrust violations among providers of helicopter transportation services in the Gulf of Mexico. We are cooperating fully with the investigation and believe we have provided all documents and other information required by the subpoena. We will respond to any DOJ request for further information, and will continue to cooperate with the investigation.
We cannot predict the ultimate outcome of the DOJ investigation. The outcome of the DOJ investigation and any related legal proceedings could include civil injunctive or criminal proceedings, the imposition of fines and other penalties, remedies and/or sanctions, referral to other governmental agencies and/or the payment of damages in civil litigation, any of which could have a material adverse effect on our business, financial condition and results of operations. Additionally, the cost of defending such an action or actions against us could be significant.
Our stock has a low trading volume.
Our common stock is listed for trading on The NASDAQ Global Market under the symbol ‘‘PHIIK’’ for our non-voting common stock and ‘‘PHII’’ for our voting common stock. Both classes of common stock have low trading volume. As a result, a stockholder may not be able to sell shares of our common stock at the time, in the amounts, or at the price desired.
We do not pay dividends.
We have not paid any dividends on our common stock since 1999 and do not anticipate that we will pay dividends on our common stock in the foreseeable future. In addition, our ability to pay dividends is restricted by the indenture governing our 7.125% Senior Notes due 2013 and our bank credit facility. There are limitations and restrictions on the payment of dividends, more fully described in Form 10-K, Item 15 Exhibits and Financial Statement Schedules, Exhibit 4.7.
Provisions in our articles of incorporation and by-laws and Louisiana law make it more difficult to effect a change in control of us, which could discourage a takeover of our company and adversely affect the price of our common stock.
Although an attempted takeover of our company is unlikely by virtue of the ownership by our Chief Executive Officer of more than 50% of the total voting power of our capital stock, there are also provisions in our articles of incorporation and by-laws that may make it more difficult for a third party to acquire control of us, even if a change in control would result in the purchase of your shares at a premium to the market price or would otherwise be beneficial to you. For example, our articles of incorporation authorize our board of directors to issue preferred stock without stockholder approval. If our board of directors elects to issue preferred stock, it could be more difficult for, or discourage, a third party to acquire us.
In addition, provisions of our by-laws, such as giving the board the exclusive right to fill all board vacancies, could make it more difficult for a third party to acquire control of us. In addition to the provisions contained in our articles of incorporation and by-laws, the Louisiana Business Corporation Law (‘‘LBCL”), includes certain provisions applicable to Louisiana corporations, such as us, which may be deemed to have an anti-takeover effect. Such provisions give stockholders the right to receive the fair value of their shares of stock following a control transaction from a controlling person or group and set forth requirements relating to certain business combinations. Our descriptions of these provisions are only abbreviated summaries of detailed and complex statutes. For a complete understanding of the statutes, you should read them in their entirety.
The LBCL’s control share acquisition statute provides that any person who acquires ‘‘control shares’’ will be able to vote such shares only if the right to vote is approved by the affirmative vote of at least a majority of both (i) all the votes entitled to be cast by stockholders and (ii) all the votes entitled to be cast by stockholders excluding ‘‘interested shares.’’ The control share acquisition statute permits the articles of incorporation or by-laws of a company to exclude from the statute’s application acquisitions occurring after the adoption of the exclusion. Our by-laws do contain such an exclusion; however, our board of directors or stockholders, by an amendment to our by-laws, could reverse this exclusion.

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Future sales of our shares could depress the market price of our non-voting common stock.
The market price of our non-voting common stock could decline as a result of issuances and sales by us of additional shares of non-voting or voting common stock pursuant to our existing shelf registration statement or otherwise. The market price of our non-voting common stock could also decline as the result of the perception that these sales could occur. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Aircraft
Information regarding our owned and leased aircraft fleet and twelve customer-owned aircraft as of December 31, 2007 is set forth in the following table:
                                         
                            Cruise   Appr.
        Number               Speed   Range
Manufacturer   Type   in Fleet   Engine   Passengers   (mph)   (miles)(2)
Light Aircraft
                                       
Bell
  206 / 407     95     Turbine     4 – 6       130 – 150       300 – 420  
Eurocopter
  BK-117 / BO-105     11     Twin Turbine     4 – 6       135       255 – 270  
Eurocopter
  EC-135 (1)     30     Twin Turbine     7       143       382  
Aerospatiale
  AS350 B2 / B3     24     Turbine     5       140       337 – 385  
 
                                       
Medium Aircraft
                                       
Bell
  212 (1) / 222 (1)                                    
 
  230 (1) / 412 (1) / 430 (1)     17     Twin Turbine     8 – 13       115 – 160       300 – 370  
Sikorsky
  S-76 (1) A++, C+, C++     41     Twin Turbine     12       150       400  
 
                                       
Transport Aircraft
                                       
Sikorsky
  S-92A(1)     10     Twin Turbine     19       160       495  
 
                                       
 
                                       
 
  Total Helicopters     228                              
 
                                       
Fixed Wing
                                       
Rockwell(3)
  Aero Commander     2     Turboprop     6       300-340       1,200-1,600  
Lear Jet(4)
  31A(1)     1     Turbojet     8       527       1,437  
Cessna(4)
  Conquest 441 (1)     3     Turboprop     6       330       1,200  
Beech(4)
  King Air(1)     3     Turboprop     8       300       1,380  
 
                                       
 
                                       
 
  Total Fixed Wing     9                              
 
                                       
 
                                       
 
  Total Aircraft     237                              
 
                                       
 
(1)   Equipped to fly under instrument flight rules (“IFR”). All other types listed can only fly under visual flight rules (“VFR”). See Item 1A. “Business – Risk Factors, Risks Inherent In Our Business – Our operations are affected by adverse weather conditions and seasonal factors.”
 
(2)   Based on maintaining a 30-minute fuel reserve.
 
(3)   Aircraft used for corporate purposes.
 
(4)   Aircraft used in the Air Medical segment.

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Of the 237 aircraft listed, we own 205 and lease 20. Additionally, we operate 12 aircraft owned by customers also included in the table above.
We sell aircraft whenever they (i) become obsolete or (ii) do not fit into future fleet plans.
Facilities
Our principal facilities are located on property leased from the Lafayette Airport Commission at Lafayette Regional Airport in Lafayette, Louisiana. The lease covers approximately 28 acres and two buildings, with an aggregate of approximately 256,000 square feet, housing our main operational, executive, and administrative offices and the main repair and maintenance facility. The lease for this facility commenced in 2001, expires in 2021 and contains three five-year renewal options following the expiration date.
We own our Boothville, Louisiana operating facility. The property has a 23,000 square foot building, a 7,000 square foot hangar, and landing pads for 35 helicopters. This facility was extensively damaged by Hurricane Katrina, but was repaired and returned to service in 2006.
We also lease property for an Executive and Marketing office in Houston, Texas and 12 additional bases to service the oil and gas industry throughout the Gulf of Mexico. Those bases that represent a significant investment in leasehold improvements and are particularly important to our operations are:
                 
Facility   Lease Expiration   Area   Facilities   Comments
Morgan City
(Louisiana)
  June 30, 2008   53 acres   Operational and maintenance facilities, landing pads for 46 helicopters   Options to extend to June 30, 2018
Intracoastal City
(Louisiana)
  December 31, 2008   18 acres   Operational and maintenance facilities, landing pads for 45 helicopters   Options to extend to December 31, 2010
Houma-Terrebonne
Airport (Louisiana)
  July 31, 2017   91 acres   Operational and maintenance facilities, landing pads for 30 helicopters   Facility under four separate leases, of which two contain options to extend thru 2027
Galveston (Texas)
  May 31, 2021   4 acres   Operational and maintenance facilities, landing pads for 30 helicopters   Lease period to May 31, 2021 with certain cancellation provisions
Fourchon
(Louisiana)
  February 28, 2013   8 acres   Operational and maintenance facilities, landing pads for 10 helicopters   Facility under three separate leases, of which two contain options to extend thru 2026 and 2028.
Our other operations-related facilities in the United States are located at New Orleans and Lake Charles, Louisiana; at Port O’Connor and Sabine Pass, Texas; and at Theodore, Alabama.
We also operate from offshore platforms that are provided without charge by the owners of the platforms, although in certain instances we are required to indemnify the owners against loss in connection with our use of their facilities.

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We also lease office and hangar space for our Air Medical operations in Phoenix, Arizona. The two buildings are held under separate leases and collectively provide 5,000 square feet of hangar space and 26,000 square feet of office space. The leases expire in 2009, subject to options to extend for up to ten additional years. Other Air Medical bases are located in California, Indiana, Kentucky, Maryland, New Jersey, New Mexico, Texas and Virginia. Other bases for our International and other Air Medical operations are generally furnished by customers.
ITEM 3. LEGAL PROCEEDINGS
We have been named as a defendant in various legal actions that have arisen in the ordinary course of our business and have not been finally adjudicated. In the opinion of management, the amount of the ultimate liability with respect to these actions will not have a material adverse effect on our consolidated financial condition, results of operations or cash flows.
As previously reported, the Company is involved in Federal Court litigation in the Western District of Louisiana with the OPEIU (the Office and Professional Employees International Union), the union representing domestic pilots, over claims of bad faith bargaining and issues relating to the return to work of striking pilots. Pilots continue to work under the terms and conditions of employment set forth in the final implementation proposals made by the Company at the end of collective bargaining negotiations in August 2006. A trial on strike-related matters is currently set to start on November 3, 2008. It is not possible to assess the outcome of that litigation, as these matters are still in the discovery stage. However, management is of the opinion that the Company’s claims and defenses have substantial merit.
As previously reported, on June 15, 2005, we received a subpoena from the United States Department of Justice relating to a grand jury investigation of potential antitrust violations among providers of helicopter transportation services in the Gulf of Mexico. We are cooperating fully with the investigation and believe we have provided all documents and other information required by the subpoena. We have not received any further communications from the Department of Justice since shortly after providing the requested information. At this stage, it is not possible to predict the outcome of this investigation, although based on the information available to us to date, management does not expect the outcome of the investigation to have a material adverse effect on our financial condition, results of operations, or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our voting and non-voting common stock trades on The NASDAQ Global Market, under the symbols PHII and PHIIK, respectively. The following table sets forth the range of high and low sales prices per share, as reported by NASDAQ, for our voting and non-voting common stock for the fiscal quarters indicated.
                                 
    Voting   Non-Voting
Period   High   Low   High   Low
January 1, 2007 to March 31, 2007
  $ 34.10     $ 23.45     $ 33.30     $ 25.03  
April 1, 2007 to June 30, 2007
    32.16       26.04       30.72       25.02  
July 1, 2007 to September 30, 2007
    34.00       19.94       34.69       27.02  
October 1, 2007 to December 31, 2007
    34.49       28.85       35.38       28.39  
 
                               
January 1, 2006 to March 31, 2006
  $ 41.00     $ 29.00     $ 39.48     $ 30.00  
April 1, 2006 to June 30, 2006
    38.00       29.99       38.54       29.00  
July 1, 2006 to September 30, 2006
    34.24       29.01       34.39       26.69  
October 1, 2006 to December 31, 2006
    34.10       27.29       33.06       27.56  

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We have not paid dividends on either class of our common stock since 1999 and do not expect to pay dividends in the foreseeable future.
In addition, the indenture governing our 7.125% Series B Senior Notes due 2013 and our revolving credit facility with a commercial bank restrict the payment of dividends. See Note 4 to the Consolidated Financial Statements.
Stock Performance Graph
The information included under the caption “Stock Performance Graph” in this Item 5 of this Annual Report on Form 10-K is not deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C under the Securities Exchange Act of 1934 or to the liabilities of Section 18 of the Securities Act of 1934, and will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent we specially incorporate it by reference into such a filing.
The following performance graph compares PHI’s cumulative total stockholder return on its voting common stock for the last five years with the cumulative total return on the Russell 2000 Index, the Oil Service Index, and a peer group, assuming the investment of $100 on January 1, 2003, at closing prices on December 31, 2002, and reinvestment of dividends. The Russell 2000 Index consists of a broad range of publicly-traded companies with small market capitalizations of $0.5 billion to $1.07 billion, and is published daily in the Wall Street Journal. The Oil Service Sector Index is a price-weighted index composed of the common stocks of 15 companies that provide oil drilling and production services, oil field equipment, support services, and geophysical/reservoir services. The peer group companies are Bristow Group, Inc.; Tidewater, Inc.; Gulfmark Offshore, Inc.; CHC Helicopter Corp.; Seacor Holdings, Inc.; and Air Methods Corp.
(PERFORMANCE GRAPH)
                                                       
 
  Index     2003     2004     2005     2006     2007  
 
PHI
      122.50         128.90         155.00         165.00         155.10    
 
Peer Group
      106.41         143.28         155.95         198.35         239.61    
 
OSX
      108.36         142.95         210.08         230.57         347.88    
 
Russell 2000
      115.60         135.25         139.75         163.50         159.01    
 
As of February 29, 2008, there were approximately 936 holders of record of our voting common stock and 66 holders of record of our non-voting common stock.
Information regarding our stock based compensation plan is included in Note 6 to the Consolidated Financial Statements.

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ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below for each of the past five fiscal periods should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and Notes to Consolidated Financial Statements included elsewhere in this Annual Report.
                                         
    Year Ended
    December 31,
    2007   2006   2005   2004   2003
    (Thousands)
Income Statement Data
                                       
Operating revenues
  $ 446,406     $ 413,118     $ 363,610     $ 291,308     $ 269,392  
Net earnings (loss)
    28,218       (667 )     14,154       3,972       1,139  
Net earnings (loss) per share
                                       
Basic
    1.85       (0.05 )     1.76       0.74       0.21  
Diluted
    1.85       (0.05 )     1.76       0.72       0.21  
Weighted average shares outstanding
                                       
Basic
    15,277       13,911       8,040       5,383       5,383  
Diluted
    15,286       13,911       8,063       5,486       5,486  
 
                                       
Cash Flow Data
                                       
Net cash provided by operating activities
  $ 25,226     $ 30,324     $ 28,020     $ 10,905     $ 29,415  
Net cash used in investing activities
    (19,464 )     (178,928 )     (137,464 )     (18,594 )     (30,943 )
Net cash (used in) provided by financing activities
    (5,157 )     146,388       108,947       8,275       2,026  
 
                                       
Balance Sheet Data (1)
                                       
Current assets
  $ 230,029     $ 307,689     $ 224,265     $ 128,405     $ 110,135  
Working capital
    176,633       254,099       162,527       88,716       70,300  
Property and equipment, net
    484,119       369,465       311,678       253,241       258,526  
Total assets
    741,296       700,970       549,209       394,173       377,454  
Total debt
    200,000       205,500       204,300       210,275       202,000  
Shareholders’ equity
    428,669       400,125       239,051       109,975       105,993  
 
(1)   As of the end of the period.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with our Consolidated Financial Statements and the related Notes included elsewhere in this report.
Overview
Operating revenues for 2007 were $446.4 million compared to $413.1 million for 2006, an increase of $33.3 million. Oil and Gas operating revenues increased $15.4 million for 2007 due to an increase in medium and heavy aircraft flight hours and contractual rate increases. Operating revenues in the Air Medical segment increased $16.2 million due to rate increases and increased patient transports. Technical Services operating revenues increased $1.7 million due to increased activity in the segment.
Flight hours for 2007 were 140,369 compared to 150,980 for 2006. The decrease was due to a reduction in flight hours in our foreign operations, and continuing effects of the strike on our domestic operations related to pilot staffing levels. Although we have increased our pilot workforce since the termination of the pilots’ strike, we still have requirements for additional pilots, particularly in the Oil and Gas segment.
Oil and Gas segment’s operating income was $34.5 million for the year ended December 31, 2007, compared to $40.8 million for the year ended December 31, 2006. The decrease of $6.3 million was primarily due to an increase

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in operating expenses of $21.3 million related to increased employee, aircraft leasing and aircraft warranty costs. Our Air Medical segment’s operating income was $4.0 million for the year ended December 31, 2007, compared to an operating loss of $4.4 million for the year ended December 31, 2006 primarily as a result of recovery from the effects of the pilots’ strike, along with rate increases initiated in 2007 and increased patient transports related to the expansion of new locations in the segment during the past three years. Technical Services operating income increased $2.1 million.
Net earnings for 2007 were $28.2 million, or $1.85 per diluted share, compared to a loss of $0.7 million for 2006, or $0.05 per diluted share. Pre-tax earnings were $45.7 million for 2007 compared to a loss of $1.1 million in 2006. Pre-tax gain on disposition of assets, net was $35.0 million in 2007 compared to $1.9 million in 2006. Earnings in 2006 were impacted by a pre-tax loss on debt restructuring of $12.8 million.
Effective July 1, 2007, we changed the estimated residual value of certain aircraft from 40% to 54%. We believe the revised amounts reflect our historical experience and more appropriately match costs over the estimated useful lives and salvage values of these assets. The change in residual values of certain aircraft was based on our experience in sales of such aircraft and industry data which indicated that these aircraft were retaining on average a salvage value of at least 54% by model type. The effect of this change for 2007 was a reduction in depreciation expense of $1.6 million ($1.0 million after tax or $0.07 per diluted share).
In 2007, we sold or disposed of 28 aircraft, primarily consisting of older aircraft that were not in our long term growth plan. We have also taken delivery of 29 aircraft, consisting of two heavy, 10 medium, 16 light, and one fixed wing aircraft.
At December 31, 2007, we had an order for six additional transport category aircraft at an approximate cost of $127.4 million with delivery dates throughout 2008 and 2009. We also had orders for 30 medium and light aircraft for service primarily in the Oil and Gas segment, although certain of these may be assigned to the Air Medical segment as growth opportunities are identified. The total cost of these aircraft is $154.0 million and delivery dates are scheduled throughout 2008 and 2009. We intend to fund these aircraft from existing cash, short-term investments, and operating leases, as required.
As previously reported, the Company is involved in Federal Court litigation in the Western District of Louisiana with the OPEIU (the Office and Professional Employees International Union), the union representing domestic pilots, over claims of bad faith bargaining and issues relating to the return to work of striking pilots. Pilots continue to work under the terms and conditions of employment set forth in the final implementation proposals made by the Company at the end of collective bargaining negotiations in August 2006. A trial on strike-related matters is currently set to start on November 3, 2008. It is not possible to assess the outcome of that litigation, as these matters are still in the discovery stage. However, management is of the opinion that the Company’s claims and defenses have substantial merit.
As previously reported, on June 15, 2005, we received a subpoena from the United States Department of Justice relating to a grand jury investigation of potential antitrust violations among providers of helicopter transportation services in the Gulf of Mexico. We are cooperating fully with the investigation and believe we have provided all documents and other information required by the subpoena. We have not received any further communications from the Department of Justice since shortly after providing the requested information. At this stage, it is not possible to predict the outcome of this investigation, although based on the information available to us to date, management does not expect the outcome of the investigation to have a material adverse effect on our financial condition, results of operations, or cash flows.

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Results of Operations
The following table presents segment operating revenues, expense and operating profit before tax, along with certain non-financial operational statistics, for the years ended December 31, 2007, 2006 and 2005:
                         
    Year Ended  
    December 31,  
    2007     2006     2005  
    (Thousands of dollars)  
Segment operating revenues
                       
Oil and Gas
  $ 286,118     $ 270,707     $ 242,464  
Air Medical
    149,590       133,397       112,123  
Technical Services
    10,698       9,014       9,023  
 
                 
Total operating revenues
    446,406       413,118       363,610  
 
                 
 
                       
Segment direct expense
                       
Oil and Gas
    250,110       228,797       188,872  
Air Medical
    137,703       130,412       104,465  
Technical Services
    6,608       7,063       5,926  
 
                 
Total direct expense
    394,421       366,272       299,263  
 
                       
Segment selling, general and administrative expenses
                       
Oil and Gas
    1,531       1,150       1,181  
Air Medical
    7,883       7,384       6,503  
Technical Services
    59       38       43  
 
                 
Total selling, general and administrative expenses
    9,473       8,572       7,727  
 
                 
Total direct and selling, general and administrative expenses
    403,894       374,844       306,990  
 
                 
 
                       
Net segment profit (loss)
                       
Oil and Gas
    34,477       40,760       52,411  
Air Medical
    4,004       (4,399 )     1,155  
Technical Services
    4,031       1,913       3,054  
 
                 
Total
    42,512       38,274       56,620  
 
                       
Other, net (1)
    40,051       9,946       3,230  
Unallocated selling, general and administrative expenses
    (20,753 )     (19,267 )     (17,169 )
Interest expense
    (16,121 )     (17,243 )     (20,448 )
Loss on debt restructuring
          (12,790 )      
 
                 
Earnings (loss) before income taxes
  $ 45,689     $ (1,080 )   $ 22,233  
 
                 
 
                       
Flight hours
                       
Oil and Gas
    107,812       119,503       126,591  
Air Medical
    31,341       29,980       26,619  
Technical Services
    1,216       1,497       1,433  
 
                 
Total
    140,369       150,980       154,643  
 
                 
 
                       
Air Medical Transports
    21,710       20,808       17,200  
 
                 
 
                       
Aircraft operated at period end
                       
Oil and Gas
    163       164       167  
Air Medical
    70       68       64  
Technical Services
    4       4       4  
 
                 
Total (2)
    237       236       235  
 
                 
 
(1)   Including gains on disposition of property and equipment, and other income.
 
(2)   Includes 12 aircraft as of December 31, 2007, 2006 and 2005 that are customer owned or leased by customers but operated by us.

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Year Ended December 31, 2007 compared with Year Ended December 31, 2006
Combined Operations
Operating Revenues – Operating revenues for 2007 were $446.4 million compared to $413.1 million for 2006, an increase of $33.3 million, or 8%. Operating revenues increased in the Oil and Gas segment $15.4 million primarily due to an increase in medium and heavy aircraft flight hours and contractual rate increases in our domestic operations. Operating revenues in the Air Medical segment also increased $16.2 million in 2007 due to rate increases and increased patient transports. Revenues in the Technical Services segment increased $1.7 million due to an increase in activity. These items are discussed in more detail in the Segment Discussion below.
Other Income and Losses – Gain on equipment dispositions were $35.0 million for 2007 compared to $1.9 million for 2006. These amounts represent gains and losses on sales of aircraft and related parts inventory that no longer meet our strategic needs. We expect a substantial reduction in this amount prospectively. Other income, which primarily represents interest income on unspent proceeds from our April 2006 stock offering, was $5.1 million for 2007, compared to $8.0 million for 2006. This decrease resulted from a decrease in short-term investments as a substantial portion of these proceeds have now been spent acquiring new aircraft.
Direct Expenses – Direct expense was $394.4 million for 2007 compared to $366.3 million for 2006, an increase of $28.1 million, or 8%. Direct expense in the Oil and Gas segment increased $21.3 million, primarily due to increased employee costs ($7.9 million), aircraft lease expense ($6.2 million), and aircraft warranty costs ($7.2 million). Air Medical direct expense increased $7.3 million due to increased employee costs ($4.4 million), aircraft warranty costs ($1.4 million), and outside services expenses ($2.2 million). Technical Services direct expense decreased $0.5 million. These items are discussed in more detail in the Segment Discussion below.
Selling, General and Administrative Expenses – Selling, general and administrative expenses were $30.2 million for 2007 compared to $27.8 million for 2006, an increase of $2.4 million, or 9%. This increase resulted from increased employee costs ($1.0 million), franchise taxes ($0.4 million), outside services ($0.2 million) primarily related to the Air Medical segment, legal fees ($0.3 million), and other items, net ($0.5 million).
Interest Expense – Interest expense was $16.1 million for 2007, compared to $17.2 million for 2006 due to a decrease in borrowings under our line of credit.
Income Taxes – Income tax expense for 2007 was $17.5 million, compared to income tax benefit of $0.4 million for 2006. The effective tax rate was 38% for 2007 and 2006.
Earnings – Our net earnings for 2007 was $28.2 million, compared to a net loss of $0.7 million for 2006. Earnings before tax for 2007 were $45.7 million compared to losses before tax of $1.1 million in 2006. Earnings per diluted share were $1.85 for 2007 as compared to losses per diluted share of $0.05 for 2006. Included in earnings before tax for 2007 are gains on disposition of assets of $35.0 million, compared to $1.9 million for 2006. The loss for 2006 included a loss on debt restructuring charge of $12.8 million related to the early call premium and associated costs for redemption of our 9 3/8% Senior Notes.
Segment Discussion
Oil and Gas – Oil and Gas segment revenues for 2007 were $286.1 million compared to $270.7 million for 2006, an increase of $15.4 million or 6%. The increase was due to an increase in medium and heavy aircraft flight hours and contractual rate increases. These increases were partially offset by a decrease in light aircraft flight hours due to competitive pricing pressures. Segment revenues were also adversely affected by less than optimal pilot staffing levels due to the residual effects of the strike and competition for pilots from the military and other companies. Segment flight hours were 107,812 for 2007 compared to 119,503 for 2006, a decrease of 11,691 hours. The number of aircraft in the segment at December 31, 2007 was 163 compared to 164 aircraft at December 31, 2006. In 2007, we sold or disposed of 22 aircraft in the Oil and Gas segment, consisting of nine light, nine medium and four heavy aircraft. We also transferred three light aircraft to the Air Medical segment. We have added 24 new aircraft to the Oil and Gas segment during 2007, consisting of 12 light, 10 medium, and two heavy aircraft. We have a total of 32 aircraft on order for delivery in 2008 and 2009 for the Oil and Gas segment, although certain of the light

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aircraft on order may be assigned to the Air Medical segment as growth opportunities materialize. For further information on our aircraft, see Item 2 – Properties contained in this Form 10-K
Direct expense in the Oil and Gas segment increased by $21.3 million due to increased employee costs ($7.9 million) due primarily to compensation increases including pilot overtime costs and other contract labor costs related to the strike, and incentive and safety compensation accruals. We also experienced increased aircraft lease expense ($6.2 million) and aircraft warranty costs ($7.2 million) due to additional aircraft added to the fleet. All new aircraft come with a manufacturer’s warranty that covers defective parts. The increase in our warranty cost is related to an additional warranty that we purchase from the manufacturer on certain aircraft to cover replacement or refurbishment of aircraft parts in accordance with manufacturer specifications. We pay a monthly fee to the manufacturer based on flight hours for the aircraft that are covered under this warranty. In return, the manufacturer provides replacement parts required for maintaining the aircraft. Depreciation expense decreased $0.2 million due to the change in residual value of certain aircraft effective July 1, 2007, as discussed in the Overview.
Selling, general and administrative expenses were $1.5 million for the year ended December 31, 2007, compared to $1.2 million for the prior year.
Our Oil and Gas segment’s operating income was $34.5 million for the year ended December 31, 2007, compared to $40.8 million for the year ended December 31, 2006. The decrease of $6.3 million was due to the increase in operating expenses of $21.3 million, offset by the increase in operating revenues of $15.4 million, for the reasons described above. Operating margins were 12% for the year ended December 31, 2007, compared to 15% for the year ended December 31, 2006, primarily due to pilot staffing levels resulting in reduced flight hours and lower revenues and increases in certain direct expenses, such as pilot overtime costs and other contract labor costs.
Air Medical – Air Medical segment revenues were $149.6 million for 2007 compared to $133.4 million for 2006, an increase of $16.2 million. The increase was primarily related to rate increases and an increase in patient transports, which totaled 21,710 for 2007 compared to 20,808 transports for 2006. Flight hours were 31,341 for the year ended December 31, 2007, compared to 29,980 for the year ended December 31, 2006. The number of aircraft in the segment was 70 at December 31, 2007, compared to 68 at December 31, 2006. In 2007, we transferred three light aircraft to the Air Medical segment from the Oil and Gas segment, and added five new aircraft, consisting of four light and one fixed wing aircraft. We sold four medium and two light aircraft. At December 31, 2007, we had a total of four aircraft on order for delivery in 2008 for the Air Medical segment.
Air Medical direct expense increased $7.3 million due to increased employee costs ($4.4 million) due primarily to compensation increases including incentive and safety compensation accruals, aircraft warranty costs increases ($1.4 million) due to additional aircraft added to manufacturers’ warranty programs, and increased outside services expenses ($2.2 million) related to medical director fees and collection expenses. In addition to expected flight operation costs, the Air Medical segment incurs additional costs for necessary medical personnel. Other items decreased, net ($0.7 million).
Selling, general and administrative expenses was $7.9 million for the year ended December 31, 2007, compared to $7.4 million for the year ended December 31, 2006. Air Medical operations are headquartered in Phoenix, Arizona, where we maintain significant separate facilities and administrative staff dedicated to this segment. Those costs are charged directly to the Air Medical segment, resulting in higher selling, general and administrative expenses as compared to our other reportable segments.
Our Air Medical segment’s operating income was $4.0 million for the year ended December 31, 2007, compared to an operating loss of $4.4 million for the year ended December 31, 2006. Operating margins increased to 3% in the year ended December 31, 2007, compared to a loss in the same period in 2006. Segment revenues and expenses were affected in 2006 by the pilots’ strike. The increases in the current year in operating income and margin are a result of recovery from the effects of the strike, along with rate increases initiated in 2007 and increased patient transports related to the expansion of new locations in the segment during the past three years. Operating margins were lower in this segment compared to our other segments as it takes some time for these new locations to grow revenues to a level that will cover their costs and produce operating income. Operating margins may also be affected by the mix of payors in any period.
Technical Services – Technical Services revenues were $10.7 million for the year ended December 31, 2007, compared to $9.0 million for the year ended December 31, 2006. The $1.7 million increase was due to increased activity in the segment.

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Direct expense was $6.6 million for the year ended December 31, 2007, compared to $7.1 million for the year ended December 31, 2006.
The Technical Services segment had operating income of $4.0 million for the year ended December 31, 2007, compared to $1.9 million for the year ended December 31, 2006. Operating margins in the Technical Services segment were 38% for the year ended December 31, 2007, compared to 21% for the same period in 2006. Technical Services includes maintenance and repairs performed primarily for our existing customers that own their aircraft. These services are generally labor intensive with higher operating margins as compared to other segments.
Year Ended December 31, 2006 compared with Year Ended December 31, 2005
Combined Operations
Revenues – Operating revenues for 2006 were $413.1 million compared to $363.6 million for 2005, an increase of $49.5 million, or 14%. Operating revenues increased in the Oil and Gas segment $28.2 million due to an increase in contracted aircraft and an increase due to contractual rate increases. Although revenues increased in the Oil and Gas segment, flight hours were negatively impacted in the fourth quarter by the pilots’ strike, resulting in an estimated revenue decrease of $4.7 million. Operating revenues in the Air Medical segment also increased $21.3 million in 2006, due to the additional operating locations established in 2005 that were in service for all of 2006, although patient transport volume and operating revenues were also negatively impacted in the fourth quarter by the pilots’ strike. We estimate a decrease in operating revenues in the Air Medical segment of $4.2 million as a result of the strike. Revenues in the Technical Services segment were $9.0 million for the year ended December 31, 2006 and December 31, 2005. These items are discussed in the Segment Discussion below.
Other Income and Losses — Gain on equipment dispositions was $1.9 million for 2006 compared to $1.2 million for 2005. Gain or loss on equipment dispositions is related to dispositions of aircraft. Other income increased approximately $6.0 million in 2006 due to interest income on unspent proceeds from securities offerings.
Direct Expenses – Direct expense was $366.3 million for 2006 compared to $299.3 million for 2005, an increase of $67.0 million, or 22%. Included in direct expense are costs incurred as a result of the strike which includes overtime pay and a work completion bonus for working pilots ($5.7 million), other pilot associated costs ($1.9 million), and security costs ($0.6 million).
Direct expense in the Oil and Gas segment increased by $39.9 million due to increased employee costs ($7.2 million) including the strike related amount mentioned above, aircraft parts and repair costs ($3.9 million), aircraft warranty costs ($5.4 million), aircraft rent ($6.7 million), insurance expense ($3.0 million), aircraft fuel ($1.7 million), outside services ($5.1 million), also including ($1.9 million) pilot associated costs mentioned above, and training costs ($3.3 million). The remaining increase ($3.6 million) was due to travel expenses, security services, temporary labor and property taxes. The effect of the strike on this segment, as well as a further discussion of the above items, is described in the Segment Discussion.
Air Medical segment direct expense increased ($25.9 million) due to new locations opened in 2005 being in service for a full twelve months in 2006 as well as an increase related to the pilots’ strike, which is discussed in the Segment Discussion below.
There was also an increase in the Technical Services segment ($1.1 million).
Selling, General and Administrative Expenses – Selling, general and administrative expenses was $27.8 million for 2006 compared to $24.9 million for 2005, an increase of $2.9 million, or 12%. This increase resulted from legal costs and other expenses ($1.5 million) related to the pilots’ strike and other union issues, increased employee costs ($0.5 million), and increased insurance expense ($0.9 million).
Income Taxes — Income tax benefit for 2006 was $0.4 million, compared to income tax expense of $8.1 million for 2005. The effective tax rate was 38% for 2006 compared to 36% for 2005. The 2005 rate benefited from a Hurricane Katrina tax credit of $0.8 million in 2005.
Earnings — Our net loss for 2006 was $0.7 million, compared to net earnings of $14.2 million for 2005. Losses before tax for 2006 were $1.1 million compared to earnings before tax of $22.2 million in 2005. Losses per diluted

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share were $0.05 for 2006 as compared to earnings per diluted share of $1.76 for 2005. The loss for 2006 included $12.8 million related to the early call premium and associated costs for redemption of our 9 3/8% Senior Notes, and also the impact of the pilots’ strike.
Segment Discussion
Oil and Gas — Oil and Gas segment revenues for 2006 were $270.7 million compared to $242.5 million for 2005, an increase of $28.2 million or 12%. The increase was due to increased use of medium and transport aircraft and an increase in contracted aircraft prior to the pilots’ strike and contractual rate increases. Flight hours were 119,503 for 2006 compared to 126,591 for 2005, a decrease of 7,088 hours, which was also attributable to the strike, resulting in an estimated revenue decrease of $4.7 million, and due to the scheduled release of one aircraft from contract by the customer in our foreign operations. The number of aircraft in the segment at December 31, 2006 was 164 compared to 167 aircraft at December 31, 2005. In 2006, we sold 18 light aircraft, which had little flight time in 2006, and had 20 new aircraft delivered. We also converted five aircraft from the Oil and Gas segment for Air Medical use.
Direct expenses in the Oil and Gas segment were $228.8 million for the year ended December 31, 2006, compared to $188.9 million for the prior year, an increase of $39.9 million, or 21%. Included in this increase were increases in employee costs ($7.2 million). Of this amount, $2.5 million was related to increased pilot compensation expense, related to overtime and a work completion bonus, due to the pilots’ strike. There was also an increase in outside services ($5.1 million). Of this amount, $1.9 million was other pilot associated costs related to the strike. Other increases include aircraft parts usage ($2.1 million), aircraft rent ($6.7 million) due to additional aircraft on lease, aircraft warranty costs ($5.4 million) due to additional aircraft covered under the manufacturers’ warranty programs, fuel ($1.7 million) due to increased prices and increased use of medium and transport aircraft, component repair costs ($1.9 million), and insurance expense ($3.0 million) due to a contractual premium refund in 2005 due to favorable loss experience. There were also increases in training costs ($3.3 million), travel expenses ($1.7 million), security services ($0.6 million), which were also partially strike related costs, and other items ($1.2 million).
The Oil and Gas segment’s operating income was $40.8 million for 2006 compared to $52.4 million for 2005. The decrease was due to decreased flight hours and revenues, and increased employee and other strike related costs in the fourth quarter due to the pilots’ strike, and a decrease in flight hour activity and the scheduled release of one aircraft from contract by the customer in our foreign operations.
Air Medical — Air Medical segment revenues were $133.4 million for 2006 compared to $112.1 million for 2005. The increase was due to the additional operations established in 2005 that were in service for all of 2006. Operating revenues in 2006 from the locations opened in 2005 were $37.2 million. Flight hours were 29,980 for 2006 compared to 26,619 for 2005. Patient transports were 20,808 for 2006, compared to 17,200 for 2005. Patient transport volume was negatively impacted by the pilots’ strike in the fourth quarter 2006. We estimated a decrease of approximately 700 transports related to the strike in the fourth quarter resulting in an estimated revenue decrease of $4.2 million. The number of aircraft in the segment was 68 at December 31, 2006, compared to 64 at December 31, 2005.
Direct expenses in the Air Medical segment increased to $130.4 million for 2006 compared to $104.5 million for 2005. During fiscal year 2005, we opened 15 locations, and the increase in direct expense in 2006 reflects a full year of operations at those locations. The $25.9 million increase includes increases in employee costs ($13.8 million) primarily due to new locations opened in the prior year being in service for a full twelve months, but also pilot compensation expenses related to the strike ($3.2 million). There were also increases in fuel costs ($2.3 million), aircraft rent ($0.3 million) and aircraft warranty costs ($1.7 million) as additional aircraft were added to the manufacturers’ warranty programs, insurance expense ($1.2 million), depreciation expense ($2.5 million), and other operating costs ($0.9 million).
Selling, general and administrative expenses was $7.4 million for the year ended December 31, 2006, compared to $6.5 million for the year ended December 31, 2005.
The Air Medical segment operating loss was $4.4 million for 2006 compared to operating income of $1.2 million for 2005. Although the Air Medical segment revenues increased in 2006, the decrease in transports in the fourth quarter related to the strike resulted in an estimated revenue decrease of $4.2 million. Expenses related to the strike also increased an estimated $3.2 million.
Technical Services — Technical Services segment revenues were $9.0 million in 2006 and 2005.

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Direct expenses were $7.1 million for 2006 compared to $5.9 million for 2005, which was due to the recategorization of contract revenue and expense of certain contractual work for third parties that was previously recorded in the Oil and Gas segment.
The Technical Services segment had operating income of $1.9 million for December 31, 2006, compared to $3.1 million for December 31, 2005.
Liquidity and Capital Resources
General
Our ongoing liquidity requirements arise primarily from the funding of working capital needs, such as the acquisition or leasing of aircraft, the maintenance and refurbishment of aircraft, improvement of facilities, and acquisition of equipment and inventory. Our principal sources of liquidity historically have been net cash provided by our operations and borrowings under our revolving credit facility, as augmented in recent years by the issuance of our Senior Notes in 2002, which were refinanced in 2006, and the sale of non-voting common stock in 2005 and 2006.
As we grow our operations, we continually monitor the capital resources available to meet our future financial obligations, planned capital expenditures and liquidity. We also review acquisition opportunities on an ongoing basis. If we were to make a significant acquisition for cash, we would need to obtain additional equity or debt financing.
Cash Flow
Our cash position at December 31, 2007 was $1.4 million, compared to $0.8 million at December 31, 2006. Short-term investments were $63.0 million at December 31, 2007, compared to $153.4 million at December 31, 2006. Working capital was $176.6 million at December 31, 2007, as compared to $254.1 million at December 31, 2006, a decrease of $77.5 million. The decrease in working capital was primarily a result of a decrease in short-term investments of $90.4 million and an increase in accounts receivable of $8.8 million. The decrease in short-term investments was primarily a result of spending a substantial portion of the proceeds from our April 2006 stock offering to acquire new aircraft.
Net cash provided by operating activities was $25.2 million for 2007 compared to $30.3 million for 2006, a decrease of $5.1 million. The decrease was due primarily to changes in operating assets and liabilities of $6.1 million, an increase in net earnings of $28.9 million, in part due to the loss of $12.8 million recorded in the second quarter of 2006 as a result of refinancing our 9 3/8% Senior Notes, a decrease in depreciation and amortization expense of $0.3 million, an increase in the deferred tax provision of $18.1 million, and an increase in gain on sales of assets of $33.0 million. The increase in deferred tax is due to the tax expense associated with the earnings before tax of $45.7 million in the current year compared to a tax benefit associated with the loss before tax of $1.1 million in the prior year. Capital expenditures were $159.7 million for 2007 compared to $123.3 million for 2006. Capital expenditures for 2007 were $126.5 million for aircraft purchases, $22.8 million for refurbishments and equipment installations for new aircraft, $10.4 million for facility improvements, operating equipment, engine spares, and medical equipment. Capital expenditures for 2006 were $94.7 million for aircraft purchases, $18.3 million for refurbishments and equipment installations for new aircraft, $10.3 million for facility improvements, operating equipment, engine spares, and medical equipment. Gross proceeds from aircraft sales were $58.1 million for 2007 compared to $36.8 million for 2006.
Financing Activities
On April 12, 2006, we completed the sale of 4,287,920 non-voting common shares at $35.00 per share and on May 1, 2006, we completed the sale of another 578,680 shares pursuant to the underwriters’ over-allotment option, also at $35.00 per share. Proceeds from the offering were $160.7 million, net of expenses, and were used to fund the acquisition of aircraft delivered in 2006 and 2007. Also on April 12, 2006, we issued $200 million of 7.125% Senior Notes due 2013. Net proceeds of $196.0 million were used to repurchase $184.8 million of our existing 9 3/8% Senior Notes, which were tendered by April 12, 2006, at a total cost of $201.6 million including an early call premium and accrued interest. We redeemed the remaining $15.2 million of 9 3/8% Senior Notes on May 1, 2006,

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at a redemption price of 104.688% of the face amount plus accrued interest. As a result of the refinancing of the 9 3/8% Senior Notes, we recorded a pretax charge of $12.8 million ($7.7 million, net of tax) in the quarter ended June 30, 2006, which consisted of a $9.8 million early call premium, $2.6 million of unamortized issuance costs, and $0.4 million in related expenses of the tender for the outstanding notes.
Credit Facility
We have a $35 million revolving credit facility with a commercial bank that expires on September 1, 2009. At December 31, 2007, there were no borrowings and $4.6 million in letters of credit outstanding under the facility. The facility includes covenants related to working capital, funded debt to net worth, and consolidated net worth. As of December 31, 2007, we were in compliance with these covenants.
Contractual Obligations
The table below sets out our contractual obligations as of December 31, 2007 related to operating lease obligations, purchase commitments, credit facility, and the 7.125% Senior Notes due 2013. The operating leases are not recorded as liabilities on the balance sheet, but payments are treated as an expense as incurred. Each contractual obligation included in the table contains various terms, conditions, or covenants which, if violated, accelerate the payment of that obligation. We currently lease eighteen aircraft included in the lease obligations below.
                                                         
            Payment Due by Year  
                                                    Beyond  
    Total     2008     2009     2010     2011     2012     2012  
    (Thousands of dollars)  
Aircraft Purchase commitments (1)
  $ 153,967     $ 72,468     $ 81,499     $     $     $     $  
Aircraft Purchase commitments (2)
    127,407       20,255       107,152                          
Aircraft lease obligations
    169,150       18,274       18,274       18,876       20,144       20,811       72,771  
Other lease obligations
    21,211       3,463       2,726       2,325       1,897       1,442       9,358  
Long term debt
    200,000                                     200,000  
 
                                         
 
  $ 671,735     $ 114,460     $ 209,651     $ 21,201     $ 22,041     $ 22,253     $ 282,129  
 
                                         
 
(1)   These commitments are for aircraft that we intend to fund from existing cash, short-term investments, and operating leases, as required.
 
(2)   These commitments are for aircraft that we intend to finance with an operating lease. Once the leases are entered into, the lease payments will be made over the term of the leases.
Estimated interest costs on the debt obligations set forth above, without considering any additional debt that may be obtained relative to purchase commitments for aircraft, are $14.5 million for 2008 and each successive year through 2012, including amortization of debt issuance costs.
At December 31, 2007, we had an order for six additional transport category aircraft, with scheduled delivery dates throughout 2008 and 2009. The approximate cost for these aircraft is $127.4 million.
At December 31, 2007, we also had orders for 30 additional aircraft with a total cost of $154.0 million and scheduled delivery dates throughout 2008 and 2009.
We believe that cash flow from operations will be sufficient to fund operating requirements and required interest payments on the 7.125% Senior Notes for the next twelve months. We have capital requirements for aircraft on order totaling $154.0 million over 2008 and 2009, which we intend to fund from existing cash, short-term investments, and operating leases, as required. The balance of the aircraft purchase commitment of $127.4 million will be financed with operating leases.

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Critical Accounting Policies and Estimates
Management’s discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to allowances for doubtful accounts, inventories of spare parts, long-lived assets, income taxes, and self-insurance liabilities. We base our estimates on historical experience and on various other assumptions 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, and the differences may be material. We believe the following critical accounting policies affect our more significant judgments and estimates used in preparation of our consolidated financial statements.
Revenues related to Air Medical Services are recorded net of contractual allowances under agreements with third party payors and estimated uncompensated care when services are provided. We estimate contractual allowances and uncompensated care based on historical collection experience by payor category. The main payor categories are Medicaid, Medicare, Insurance, and Self-Pay. Payor mix and changes in reimbursement rates are the factors most subject to sensitivity and variability in calculating our allowances. We compute an 18 month historical payment analysis of accounts paid in full, by category. The allowance percentages calculated are applied to the payor categories, and the necessary adjustments are made to the revenue allowance. There have not been any material adjustments to the estimated amounts recorded for the years ended December 31, 2007, 2006, and 2005.
We maintain a significant parts inventory to service our own aircraft and the aircraft and components of customers. Portions of that inventory are used parts that are often exchanged with parts removed from aircraft or components and reworked to a useable condition. We use systematic procedures to estimate the valuation of the used parts, which includes consideration of their condition and continuing utility. If our valuation of these parts should be significantly different from amounts ultimately realizable or if we discontinue using or servicing certain aircraft models, then we may have to record a write-down of our inventory. We also record provisions against inventory for obsolescent and slow-moving parts, relying principally on specific identification of such inventory. If we fail to identify such parts, additional provisions may be necessary.
Our principal long-lived assets are aircraft. We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We measure recoverability of assets to be held and used by comparing the carrying amount of an asset to the future undiscounted net cash flows that we expect the asset to generate. When an asset is determined to be impaired, we recognize the impairment amount, which is the amount by which the carrying value of the asset exceeds its estimated fair value. Similarly, we report assets that we expect to sell at the lower of the carrying amount or fair value less costs to sell. Future adverse market conditions or poor operating results could result in an inability to recover the current carrying value of certain long-lived assets, thereby possibly requiring an impairment charge in the future.
Effective July 1, 2007, we changed the estimated residual value of certain aircraft from 40% to 54%. We believe the revised amounts reflect our historical experience and more appropriately match costs over the estimated useful lives and salvage values of these assets. The change in residual values of certain aircraft was based on our experience in sales of such aircraft and industry data which indicated that these aircraft were retaining on average a salvage value of at least 54% by model type. The effect of this change for 2007 was a reduction in depreciation expense of $1.6 million ($1.0 million after tax or $0.07 per diluted share).
We must make estimates for certain of our liabilities and expenses, losses, and gains related to self-insured programs, insurance deductibles, and good-experience premium returns. Our group medical insurance program is largely self-insured, and we use estimates to record our periodic expenses related to that program. We also carry deductibles on our workers’ compensation program and aircraft hull and liability insurance, and poor experience or higher accidents rates could result in additional recorded losses.
We estimate what our effective tax rate will be for the full year and record a quarterly income tax expense in accordance with the anticipated effective annual tax rate. As the year progresses, we continually refine our estimate

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based upon actual events and income before income taxes by jurisdiction during the year. This process may result in a change to our expected effective tax rate for the year. When this occurs, we adjust the income tax expense during the quarter in which the change in estimate occurs so that the year-to-date expense equals the annual rate.
New Accounting Pronouncements
For a discussion of new accounting pronouncements applicable to the Company, see Note 1 to the Consolidated Financial Statements.
Environmental Matters
We have an aggregate estimated liability of $0.2 million as of December 31, 2007 and 2006 for environmental remediation costs that are probable and estimable. We have conducted environmental surveys of our former Lafayette Facility, which we vacated in 2001, and have determined that limited soil and groundwater contamination exists at the facility. We have installed groundwater monitoring wells at the facility and periodically monitor and report on the contamination. In May 2003, we submitted a Louisiana Risk Evaluation/Corrective Action Plan (“RECAP”) Standard Site Assessment Report to the Louisiana Department of Environmental Quality (“LDEQ”) fully delineating the extent and type of contamination. In April, 2006 the Site Assessment was updated to include recent analytical data. LDEQ is reviewing the assessment report. Once LDEQ completes its review and reports on whether all contamination has been fully defined, a risk evaluation in accordance with RECAP will be submitted and evaluated by LDEQ. At that point, LDEQ will establish what cleanup standards must be met at the site. When the process is complete, we will be in a position to develop an appropriate remediation plan and determine the resulting cost of remediation. We have not recorded any estimated liability for remediation and contamination and, based upon the May 2003 Site Assessment Report, the April 2006 update and ongoing monitoring, we believe the ultimate remediation costs for the former Lafayette facility will not be material to our consolidated financial position, results of operations, or cash flows.
During 2004, LDEQ advised us that groundwater contaminants impacting monitor wells at the PHI Lafayette Heliport were originating from an off-site location and that we would no longer be required to perform further monitoring at the site. Subsequently, based upon site investigation work performed by the Lafayette Airport Commission, the source of the contamination was identified as residing at another location, for which PHI is not responsible. The Lafayette Airport Commission has begun remediation of the PHI Lafayette Heliport.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the past we made limited use of derivative financial instruments to manage interest rate risk. When used, all derivatives for interest rate risk management were closely monitored by our senior management. We do not hold derivatives for trading purposes and we do not use derivatives with leveraged or complex features. Derivative instruments were transacted either with creditworthy major financial institutions or over national exchanges. The Company has not engaged in activities involving financial derivatives during the years 2007, 2006, and 2005.
The market value of the Senior Notes will vary as changes occur in market interest rates, the remaining maturity of the Senior Notes, and our credit-worthiness. At December 31, 2007, the market value of the Notes was $191.0 million. A hypothetical 100 basis-point increase in the Senior Notes imputed rate at December 31, 2007 would have resulted in a market value decline of approximately $8.0 million.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
PHI, Inc.
Lafayette, Louisiana
We have audited the accompanying consolidated balance sheets of PHI, Inc. and subsidiaries (the “Company”) as of December 31, 2007 and 2006, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2007. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of PHI, Inc. and subsidiaries as of December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2007, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 11, 2008 expressed an unqualified opinion on the Company’s internal control over financial reporting.
DELOITTE & TOUCHE LLP
New Orleans, Louisiana
March 11, 2008

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PHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of dollars)
                 
    December 31,     December 31,  
    2007     2006  
ASSETS
               
Current Assets:
               
Cash and cash equivalents
  $ 1,425     $ 820  
Short-term investments
    62,970       153,414  
Accounts receivable – net:
               
Trade
    95,111       87,366  
Other
    2,973       1,928  
Inventories of spare parts and supplies
    55,831       55,596  
Other current assets
    11,194       7,930  
Refundable income taxes
    525       635  
 
           
Total current assets
    230,029       307,689  
 
               
Other
    27,148       23,816  
Property and equipment, net
    484,119       369,465  
 
           
Total Assets
  $ 741,296     $ 700,970  
 
           
 
               
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Current Liabilities:
               
Accounts payable
  $ 28,454     $ 35,815  
Accrued liabilities
    24,942       17,775  
 
           
Total current liabilities
    53,396       53,590  
 
               
Long-term debt
    200,000       205,500  
Deferred income taxes
    51,644       32,828  
Other long-term liabilities
    7,587       8,927  
Commitments and contingencies (Note 9)
               
 
               
Shareholders’ Equity:
               
Voting common stock – par value of $0.10; authorized shares of 12,500,000
    285       285  
Non-voting common stock – par value of $0.10; authorized shares of 12,500,000
    1,242       1,242  
Additional paid-in capital
    291,037       290,695  
Accumulated other comprehensive income
    61       77  
Retained earnings
    136,044       107,826  
 
           
Total shareholders’ equity
    428,669       400,125  
 
           
Total Liabilities and Shareholders’ Equity
  $ 741,296     $ 700,970  
 
           
The accompanying notes are an integral part of these consolidated financial statements.

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PHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Thousands of dollars and shares, except per share data)
                         
    Year Ended     Year Ended     Year Ended  
    December 31,     December 31,     December 31,  
    2007     2006     2005  
Operating revenues
  $ 446,406     $ 413,118     $ 363,610  
Gain on disposition of assets, net
    34,953       1,910       1,173  
Other
    5,098       8,036       2,057  
 
                 
 
    486,457       423,064       366,840  
 
                 
 
                       
Expenses:
                       
Direct expenses
    394,421       366,272       299,263  
Selling, general and administrative expenses
    30,226       27,839       24,896  
Interest expense
    16,121       17,243       20,448  
Loss on debt restructuring
          12,790        
 
                 
 
    440,768       424,144       344,607  
 
                 
 
                       
Earnings (loss) before income taxes
    45,689       (1,080 )     22,233  
Income tax expense (benefit)
    17,471       (413 )     8,079  
 
                 
Net earnings (loss)
  $ 28,218     $ (667 )   $ 14,154  
 
                 
 
                       
Earnings (loss) per share
                       
Basic
  $ 1.85     $ (0.05 )   $ 1.76  
Diluted
  $ 1.85     $ (0.05 )   $ 1.76  
 
                       
Weighted average shares outstanding:
                       
Basic
    15,277       13,911       8,040  
Diluted
    15,286       13,911       8,063  
The accompanying notes are an integral part of these consolidated financial statements.

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PHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Thousands of dollars and shares)
                                                                 
                                            Accumulated             Total  
    Voting     Non-Voting     Additional     Other Com-             Share-  
    Common Stock     Common Stock     Paid-in     prehensive     Retained     Holders’  
    Shares     Amount     Shares     Amount     Capital     Income     Earnings     Equity  
Balance at Dec. 31, 2004
    2,852     $ 285       2,531     $ 253     $ 15,098     $     $ 94,339     $ 109,975  
Stock issuance, net
                4,887       489       113,352                   113,841  
Stock options exercised
                            1,081                   1,081  
Net earnings
                                        14,154       14,154  
 
                                               
Balance at Dec. 31, 2005
    2,852       285       7,418       742       129,531             108,493       239,051  
Stock issuance, net
                4,867       487       160,235                   160,722  
Other
                139       13       929                   942  
SFAS No. 158 incremental effect
                                  77             77  
Net loss
                                        (667 )     (667 )
 
                                               
Balance at Dec. 31, 2006
    2,852       285       12,424       1,242       290,695       77       107,826       400,125  
Stock options exercised
                            342                   342  
SFAS No. 158 incremental effect
                                  (16 )           (16 )
Net earnings
                                        28,218       28,218  
 
                                               
Balance at Dec. 31, 2007
    2,852     $ 285       12,424     $ 1,242     $ 291,037     $ 61     $ 136,044     $ 428,669  
 
                                               
The accompanying notes are an integral part of these consolidated financial statements.

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PHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of dollars)
                         
    Year Ended     Year Ended     Year Ended  
    December 31,     December 31,     December 31,  
    2007     2006     2005  
Operating activities:
                       
Net earnings (loss)
  $ 28,218     $ (667 )   $ 14,154  
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
                       
Depreciation and amortization
    30,047       30,297       27,133  
Deferred income taxes
    16,498       (1,631 )     6,415  
Gain on asset dispositions
    (34,953 )     (1,910 )     (1,173 )
Loss on debt restructuring
          12,790        
Other
    868       806       1,411  
Changes in operating assets and liabilities:
                       
Accounts receivable
    (8,790 )     1,985       (31,109 )
Inventories
    (1,492 )     (7,473 )     (8,898 )
Refundable income taxes
    110       (213 )      
Other assets
    (1,824 )     177       (2,313 )
Accounts payable and accrued liabilities
    (2,100 )     (6,679 )     23,049  
Other long-term liabilities
    (1,356 )     2,842       (649 )
 
                 
Net cash provided by operating activities
    25,226       30,324       28,020  
 
                 
 
                       
Investing activities:
                       
Purchase of property and equipment
    (159,715 )     (123,253 )     (96,165 )
Proceeds from asset dispositions
    58,105       36,809       10,751  
Purchase of short-term investments
    (134,241 )     (186,339 )     (97,950 )
Proceeds from sale of short-term investments
    224,685       99,450       45,900  
Other
    (8,298 )     (5,595 )      
 
                 
Net cash used in investing activities
    (19,464 )     (178,928 )     (137,464 )
 
                 
 
                       
Financing activities:
                       
Proceeds of debt issuance – Senior Notes
          200,000        
Premium and costs to retire debt early
          (10,208 )      
Repayment of Senior Notes
          (200,000 )      
Debt issuance costs
          (4,857 )      
Payments on long-term debt
          (1,000 )     (1,000 )
Proceeds from line of credit
    37,200       181,900       114,875  
Payments on line of credit
    (42,700 )     (179,700 )     (119,850 )
Proceeds from stock issuance
          161,155       115,162  
Less related fees and expenses
          (433 )     (1,265 )
Proceeds from exercise of stock options
    343             1,025  
Other
          (469 )      
 
                 
Net cash (used in) provided by financing activities
    (5,157 )     146,388       108,947  
 
                 
 
                       
Increase (decrease) in cash and cash equivalents
    605       (2,216 )     (497 )
Cash and cash equivalents, beginning of year
    820       3,036       3,533  
 
                 
Cash and cash equivalents, end of year
  $ 1,425     $ 820     $ 3,036  
 
                 
 
                       
Supplemental Disclosures Cash Flow Information
                       
 
                 
Accrued payables related to purchases of property and equipment
  $ 1,906     $     $  
 
                 
The accompanying notes are an integral part of these consolidated financial statements.

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PHI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1)   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
    Nature of Operations, Basis of Consolidation, and Other General Principles
 
    Since its inception, PHI, Inc.’s primary business has been to transport personnel and, to a lesser extent, parts and equipment, to, from and among offshore facilities for customers engaged in the oil and gas exploration, development, and production industry. The Company also provides air medical transportation services for hospitals, medical programs, and aircraft maintenance services to third parties.
 
    The consolidated financial statements include the accounts of PHI, Inc. and its subsidiaries (“PHI” or the “Company”) after the elimination of all intercompany accounts and transactions.
 
    A principal stockholder has substantial control. Al A. Gonsoulin, Chairman of the Board and Chief Executive Officer, beneficially owns stock representing approximately 52% of the total voting power. As a result, he exercises control over the election of PHI’s directors and the outcome of matters requiring a stockholder vote.
 
    Revenue Recognition
 
    The Company recognizes revenue related to aviation transportation services after the services are performed or the contractual obligations are met. Aircraft maintenance services revenues are recognized at the time the repair or services work is completed. Revenues related to emergency flights generated by the Company’s Air Medical segment are recorded net of contractual allowances under agreements with third party payors when the services are provided.
 
    Use of Estimates
 
    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 the disclosure of contingent assets and liabilities at the date of the financial statements, as well as reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
    Estimates Include:
Allowance for doubtful accounts receivable,
Estimates of contractual allowances applicable to billings in the Air Medical segment,
Valuation reserve related to obsolete and excess inventory,
Depreciable lives and salvage values of property and equipment,
Valuation allowance for deferred tax assets,
Insurance reserves for hull liability and health insurance care claims, and
Impairment of long lived assets.
    Cash Equivalents
 
    The Company considers cash equivalents to include demand deposits and investments with original maturity dates of three months or less. The Company’s cash and cash equivalents are maintained in one financial institution in amounts that typically exceed federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to significant credit risk.
 
    Short-term Investments
 
    Short-term investments consist primarily of money market funds, which represent funds available for current operations. In accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” these short-term investments are classified as available for sale. The Company has not recorded any unrealized gains or losses associated with short-term investments as the carrying value approximates fair value at December 31, 2007 and 2006.

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    Investments included in Other Assets as detailed in Note 7 are comprised of mutual funds. These investments are amounts related to the liability for the Officers’ Deferred Compensation Plan.
 
    Inventories of Spare Parts and Supplies
 
    The Company’s inventories are stated at the lower of average cost or market and consist primarily of spare parts. Portions of the Company’s inventories are used parts that are often exchanged with parts removed from aircraft, reworked to a useable condition according to manufacturers’ and FAA specifications, and returned to inventory. The Company uses systematic procedures to estimate the valuation of the used parts, which includes consideration of their condition and continuing utility. Reusable aircraft parts are included in inventory at the average cost of comparable parts. The rework costs are expensed as incurred. The Company also records an allowance for obsolete and slow-moving parts, relying principally on specific identification of such inventory. Valuation reserves related to obsolescence and slow-moving inventory were $7.5 million and $7.3 million at December 31, 2007 and 2006, respectively.
 
    Property and Equipment
 
    The Company records its property and equipment at cost less accumulated depreciation. For financial reporting purposes, the Company uses the straight-line method to compute depreciation based upon estimated useful lives of five to fifteen years for flight equipment and three to ten years for other equipment. Leasehold improvements are amortized over the shorter of the life of the respective lease, or the asset, and range from six to ten years. The salvage value used in calculating depreciation of aircraft ranges from 30% to 54%. The Company uses accelerated depreciation methods for tax purposes. The cost of scheduled inspections and modifications for flight equipment are charged to maintenance expense as incurred. Modifications that enhance the operating performance or extend the useful lives of the aircraft are capitalized and depreciated over the remaining life of the asset. Upon selling or otherwise disposing of property and equipment, the Company removes the cost and accumulated depreciation from the accounts and reflects any resulting gain or loss in earnings at the time of sale or other disposition.
 
    Effective July 1, 2007, the Company changed the estimated residual value of certain aircraft from 40% to 54%. The Company believes the revised amounts reflect their historical experience and more appropriately match costs over the estimated useful lives and salvage values of these assets. The change in residual values of certain aircraft was based on the Company’s experience in sales of such aircraft and industry data which indicated that these aircraft were retaining on average a salvage value of at least 54% by model type. The effect of this change for the year ended December 31, 2007 was a reduction in depreciation expense of $1.6 million ($1.0 million after tax or $0.07 per diluted share).
 
    The Company had previously reassessed the salvage values applicable to major modifications to aircraft at January 1, 2005 based on updated estimates derived from recent aircraft sales. The adjustment for the year 2005 resulted in a decrease in depreciation expense ($1.6 million).
 
    The Company reviews its long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company measures recoverability of assets to be held and used by comparing the carrying amount of an asset to future undiscounted net cash flows that it expects the asset to generate. When an asset is determined to be impaired, the Company recognizes that impairment amount, which is measured by the amount that the carrying value of the asset exceeds its fair value. Similarly, the Company reports assets that it expects to sell at the lower of the carrying amount or fair value less costs to sell.
 
    Self-Insurance
 
    The Company maintains a self-insurance program for a portion of its health care costs. Self-insurance costs are accrued based upon the aggregate of the liability for reported claims and the estimated liability for claims incurred but not reported. The Company’s insurance retention is $200,000 per claim through December 31, 2007. As of December 31, 2007 and 2006, the Company had $1.5 million and $1.3 million, respectively, of accrued liabilities related to health care claims.

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    During 2005, the Company established an offshore insurance captive to realize savings in reinsurance costs on its insurance premiums. Amounts paid to the captive in 2007 and 2006 totaled $1.5 million and $3.2 million, respectively. The financial position and operations of the insurance captive were not significant in 2007 nor 2006. The captive is fully consolidated in the accompanying financial statements.
 
    Concentration of Credit Risk
 
    Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of short-term investments and trade accounts receivable. Short-term investments at December 31, 2007 include money market securities. The Company does not believe significant credit risk exists with respect to these securities at December 31, 2007.
 
    PHI conducts a majority of its business with major and independent oil and gas exploration and production companies with operations in the Gulf of Mexico. The Company also provides services to major medical centers and US governmental agencies. The Company continually evaluates the financial strength of its customers but generally does not require collateral to support the customer receivables. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, current market conditions, and other information. Amounts are charged off as uncollectible when collection efforts have been exhausted. The allowance for doubtful accounts was $0.1 million at December 31, 2007 and 2006. The Company’s largest oil and gas customer accounted for 15%, 17%, and 14% of consolidated operating revenues for years ended December 31, 2007, 2006, and 2005, respectively. The Company also carried accounts receivable from this same customer totaling 12% and 14% of net trade receivable on December 31, 2007 and 2006, respectively.
 
    Trade receivables representing amounts due pursuant to air medical services are carried net of an allowance for estimated contractual adjustments on unsettled invoices. The Company monitors its collection experience by payor category within the Air Medical segment and updates its estimated collections to be realized as deemed necessary.
 
    Stock Compensation
 
    Effective January 1, 2006, the Company adopted the accounting policies described in Statement of Financial Accounting Standards (“SFAS”) No. 123 (R),”Share Based Payment.” The Company chose to use the modified prospective method of transition, and accordingly, no adjustments to prior period financial statements were made. SFAS No. 123 (R) superseded Accounting Principles Board (“APB’’) Opinion No. 25, “Accounting for Stock Issued to Employees,” and amended SFAS No. 95, “Statement of Cash Flows”. Generally, the approach in SFAS No. 123 (R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123 (R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. Prior to January 1, 2006, the Company accounted for share-based payments to employees using the intrinsic value method of and, as such, generally recognized no compensation expense for employee stock options. In September 2001, the Company underwent a change of control and as a result, all awards issued prior to the change of control became fully vested. The Company has not issued any shares, options or rights under its stock plan since 2001. As a result, no pro forma information for 2005 is necessary under SFAS No. 123. As no employee stock options were granted in 2007 and 2006, the adoption of SFAS No. 123 (R) had no impact on the Company’s results of operations for the years ended December 31, 2007 and 2006. The impact on future periods will be dependent on levels of share based payments granted in the future.
 
    Stock-based employee compensation expense relates to restricted stock grants and stock options that were settled for cash. The employee compensation expense for stock grants and options settled for cash was $0 for 2007, $0 for 2006, and $122,498 for 2005. There have been no stock awards granted since 2001.
 
    Income Taxes
 
    The Company provides for income taxes using the asset and liability method under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The deferred tax assets and liabilities measurement uses enacted tax rates that are expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The

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    Company recognizes the effect of any tax rate changes in income of the period that included the enactment date.
    In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting and disclosure for uncertain tax positions, as defined. FIN 48 seeks to reduce the diversity in practice associated with certain aspects of the recognition and measurement related to accounting for income taxes. On January 1, 2007, the Company adopted the provisions of FIN 48. Based on the Company’s evaluation, the Company concluded that there are no significant uncertain tax positions requiring recognition in their financial statements. The Company’s evaluation was performed for the tax years ended December 31, 2001 to 2006, the tax years which remained subject to examination by major tax jurisdictions.
 
    Based on a review and evaluation at December 31, 2007, it was determined that there are no material tax positions requiring recognition for the current tax year. The Company’s evaluation was performed for the tax years ended December 31, 2004 to 2007, the tax years which remain subject to examination by major tax jurisdictions as of December 31, 2007.
 
    Earnings per Share
 
    The Company computes basic earnings per share by dividing income available to common stockholders by the weighted average number of common shares outstanding during the period. The diluted earnings per share computation uses the weighted average number of shares outstanding adjusted for incremental shares attributed to dilutive outstanding options to purchase common stock.
 
    Deferred Financing Costs
 
    Costs of obtaining long term debt financing are deferred and amortized ratably over the term of the related debt agreement.
 
    Derivative Financial Instruments
 
    The Company has not engaged in activities involving financial derivatives during the years 2007, 2006, and 2005.
 
    New Accounting Pronouncements
 
    In September 2006, FASB issued SFAS No. 157, “Fair Value Measurements” which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. Earlier application is encouraged provided that the reporting entity has not yet issued financial statements for that fiscal year including financial statements for an interim period within that fiscal year. The Company is assessing SFAS No. 157 and has not determined yet the impact that the adoption of SFAS No. 157 will have on its results of operations, financial position, or cash flows.
 
    In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” SAB No. 108 provides interpretive guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements when evaluating materiality. The application of the guidance in SAB No. 108 did not have a significant impact on the Company’s consolidated financial statements.
 
    In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statements No. 115” (“SFAS No. 159”). SFAS No. 159 permits the Company to choose, at specified election dates, to measure eligible items at fair value (the “fair value option”). The Company would report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting period. This accounting standard is effective as of the beginning of the first fiscal year that begins after November 15, 2007. The Company is assessing SFAS No. 159 and has not determined yet the impact that the adoption of SFAS No. 159 will

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    have on its results of operations, financial position, or cash flows.
    Comprehensive Income
 
    Comprehensive Income includes net earnings and other comprehensive income items such as revenues, expenses, gains or losses that under generally accepted accounting principles are included in comprehensive income, but excluded from net income.
 
    The following table summarizes the components of total comprehensive income (net of taxes):
                         
    Year Ended December 31,  
    2007     2006     2005  
    (Thousands of dollars)  
Net earnings (loss)
  $ 28,218     $ (667 )   $ 14,154  
SFAS No. 158 adjustment
    (16 )     77        
 
                 
Comprehensive income (loss)
  $ 28,202     $ (590 )   $ 14,154  
 
                 
    Goodwill
 
    Goodwill represents costs in excess of the fair value acquired in connection with purchase business combinations. Goodwill arose in connection with the acquisition of a company related to the planned expansion of the Air Medical segment. In accordance with the provisions of SFAS No. 142, Goodwill and Other Intangibles, the Company tests its goodwill for impairment annually on December 31 or if impairment indicators are present. The impairment evaluation for goodwill is performed by using a two-step process. In the first step, the fair value of each reporting unit is compared with the carrying amount of the reporting unit, including goodwill. The estimated fair value of the reporting unit is generally determined on the basis of discounted future cash flows. If the estimated fair value of the reporting unit is less than the carrying amount of the reporting unit, then a second step must be completed in order to determine the amount of the goodwill impairment that should be recorded. In the second step, the implied fair value of the reporting unit’s goodwill is determined by allocating the reporting unit’s fair value to all of its assets and liabilities other than goodwill (including any unrecognized intangible assets) in a manner similar to a purchase price allocation. The resulting implied fair value of the goodwill that results from the application of this second step is then compared to the carrying amount of the goodwill and an impairment charge is recorded for the difference. The Company performed the test at December 31, 2007 and determined that no impairment charge for goodwill was required.
 
(2)   PROPERTY AND EQUIPMENT
 
    The following table summarizes the Company’s property and equipment at December 31, 2007 and 2006.
                 
    December 31,     December 31,  
    2007     2006  
    (Thousands of dollars)  
Flight equipment
  $ 583,076     $ 480,934  
Other
    81,829       74,638  
 
           
 
    664,905       555,572  
Less accumulated depreciation and amortization
    (180,786 )     (186,107 )
 
           
Property and equipment, net
  $ 484,119     $ 369,465  
 
           
Gain on equipment dispositions was $35.0 million for 2007 compared to $1.9 million for 2006. These amounts represent gains and losses on sales of aircraft and related parts inventory that no longer meet the Company’s strategic needs.

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(3)   ACCRUED LIABILITIES
 
    Accrued liabilities consisted of the following:
                 
    December 31,     December 31,  
    2007     2006  
    (Thousands of dollars)  
Salaries & Wages
  $ 9,654     $ 4,141  
Vacation Payable
    3,103       2,583  
Interest
    2,974       3,045  
Helicopter Lease
    2,821        
Group Medical
    1,480       1,260  
Transportations Tax
    1,195       738  
Workers Compensation
    1,332       1,158  
Other
    2,383       4,850  
 
           
Total Accrued Liabilities
  $ 24,942     $ 17,775  
 
           
(4)   LONG-TERM DEBT
 
    On April 12, 2006, the Company issued $200.0 million of 7.125% Senior Notes that mature in 2013. These Notes were offered and sold in a private placement under Rule 144A and Regulation S under the Securities Act of 1933. Net proceeds of $196.0 million were used to repurchase $184.8 million of the Company’s outstanding 9 3/8% Senior Notes due 2009 pursuant to a tender offer that also closed on April 12, 2006. The total cost to repurchase those notes was $201.6 million, including the tender offer premium and accrued interest. The Company called for redemption on May 1, 2006, the remaining $15.2 million of 9 3/8% notes outstanding, at a redemption price of 104.688% of their face amount plus accrued and unpaid interest. Interest on the 7.125% notes is payable semi-annually on April 15 and October 15, and those notes mature April 15, 2013. The estimated annual interest cost of the new notes is $14.3 million, excluding amortization of issuance costs, which represents a reduction in annual interest cost on the notes of $4.5 million. As a result of the early redemption of the 9 3/8% notes, a pretax charge of $12.8 million ($7.7 million, net of tax) was recorded as a charge for debt restructuring in the quarter ended June 30, 2006, which consisted of $9.8 million for the early call premium, $2.6 million of unamortized issuance costs, and $0.4 million in related expenses for the tender of outstanding notes.
 
    The new notes contain restrictive covenants, including limitations on indebtedness, liens, dividends, repurchases of capital stock and other payments affecting restricted subsidiaries, issuance and sales of restricted subsidiary stock, dispositions of proceeds of asset sales, and mergers and consolidations or sales of assets. The Senior Notes are fully and unconditionally guaranteed on a joint and several senior basis by all of the Company’s Guarantor Subsidiaries, which are all of the domestic subsidiaries. See Note 14 of the Notes to Consolidated Financial Statements. The Company was in compliance with the covenants applicable to these notes as of December 31, 2007 and 2006.
 
    The Company has a $35 million revolving credit facility with a commercial bank, which is scheduled to expire on September 1, 2009. At December 31, 2007, the Company had no borrowings under the revolving credit facility, and the Company had $5.5 million under the credit facility at December 31, 2006. The Company had four letters of credit for $4.6 million outstanding at December 31, 2007, and five letters of credit for $5.1 million outstanding at December 31, 2006. The credit agreement permits both prime rate based borrowings and “LIBOR” rate borrowings plus a spread. The spread for LIBOR borrowings is from 1.25% to 3.0%. The Company will pay an annual 0.25% commitment fee on the unused portion of the revolving credit facility. The credit agreement includes covenants related to working capital, funded debt to net worth, and consolidated net worth. As of December 31, 2007 and 2006, the Company was in compliance with these covenants. The credit agreement is collateralized by accounts receivable and inventory.
 
    Cash paid for interest was $15.4 million, $16.5 million, and $19.5 million, for the years ended December 31, 2007, 2006, and 2005, respectively.

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(5)   INCOME TAXES
 
    Income tax expense (benefit) is composed of the following:
                         
    Year Ended     Year Ended     Year Ended  
    December 31,     December 31,     December 31,  
    2007     2006     2005  
    (Thousands of dollars)  
Current
                       
Federal
  $     $     $ 343  
State
                (50 )
Foreign
    973       1,175       1,371  
Deferred — principally Federal
    16,498       (1,588 )     6,415  
 
                 
Total
  $ 17,471     $ (413 )   $ 8,079  
 
                 
    Income tax expense (benefit) as a percentage of pre-tax earnings varies from the effective Federal statutory rate of 35% as a result of the following:
                                                 
    Year Ended     Year Ended     Year Ended  
    December 31, 2007     December 31, 2006     December 31, 2005  
    (Thousands of dollars, except percentage amounts)  
    Amount     %     Amount     %     Amount     %  
Income taxes at statutory rate
  $ 15,991       35     $ (367 )     (34 )   $ 7,559       34  
Increase (decrease) in taxes resulting from:
                                               
Hurricane relief credit
    (134 )                       (537 )     (2 )
Effect of state income taxes
    1,479       3     (35 )     (3 )     762       3  
Other items – net
    135             (11 )     (1 )     295       1  
 
                                   
Total
  $ 17,471       38     $ (413 )     (38 )   $ 8,079       36  
 
                                   
    The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2007 and 2006 are presented below:
                 
    December 31,     December 31,  
    2007     2006  
    (Thousands of dollars)  
Deferred tax assets:
               
Deferred compensation
  $ 1,889     $ 1,644  
Foreign tax credits
    6,466       5,792  
Vacation accrual
    2,563       962  
Inventory valuation
    4,065       3,355  
Workman’s compensation reserve
          323  
Allowance for uncollectible accounts
    19       19  
Alternative minimum tax credit
          343  
Hurricane relief credit
    1,083       814  
Other
    770       720  
Net operating loss
    28,464       34,192  
 
           
Total deferred tax assets
    45,319       48,164  
Valuation allowance – tax credit carryforwards
    (1,945 )     (2,142 )
 
           
Total deferred tax assets, net
    43,374       46,022  
 
           
Deferred tax liabilities:
               
Tax depreciation in excess of book depreciation
    (88,331 )     (74,326 )
 
               
 
           
Total deferred tax liabilities
    (88,331 )     (74,326 )
 
           
Net deferred tax liabilities
  $ (44,957 )   $ (28,304 )
 
           

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    A valuation allowance was recorded against certain foreign tax credits paid in 2004 and prior as management believes it is more likely than not that the deferred tax asset related to certain foreign tax credit carryforwards will not be realized during their carryforward period. The estimated future U.S. taxable income, after utilization of the available net operating loss carryforwards, will limit the ability of the Company to utilize the foreign tax credit carryforwards during their carryforward period. Due to recent changes in the tax laws extending the credit carryforward period, management believes that a valuation allowance is not necessary for foreign tax credits generated after 2005. A tax credit of $0.1 million was realized in 2006 and 2007 as a result of Hurricanes Katrina and Rita Legislation. At December 31, 2007 and 2006, other current assets include $6.6 million and $4.5 million, respectively, of deferred tax assets.
 
    The Company has net operating loss carryforwards (“NOLs”), of approximately $72.0 million that, if not used will expire beginning in 2022 through 2027. Additionally, for state income tax purposes, the Company has NOLs of approximately $84.0 million available to reduce future state taxable income. These NOLs expire in varying amounts beginning in 2012 through 2027, the majority of which expires in 2017 and through 2020. Most of these NOLs arose from accelerated tax depreciation deductions related to substantial aircraft additions since 2002.
 
    Income taxes paid were approximately $0.02 million, $0.1 million, and $0.1 million, for the years ended December 31, 2007, 2006, and 2005, respectively. The Company received net income tax refunds of approximately $0.9 million, $0.3 million and $0.8 million during the years ended December 31, 2007, 2006 and 2005, respectively.
 
(6)   EMPLOYEE BENEFIT PLANS
 
    Savings and Retirement Plans
 
    The Company maintains an Employee Savings Plan under Section 401(k) of the Internal Revenue Code. The Company matches 2% for every 1% of an employee’s salary deferral contribution, not to exceed 3% of the employee’s compensation. The Company contributions were $7.0 million for the year ended December 31, 2007, $6.2 million for the year ended December 31, 2006 and $5.4 million for the year ended December 31, 2005.
 
    The Company maintains a Supplemental Executive Retirement Plan (“SERP”). During January 2006, selected active employees were given a substitute benefit in the Officer Deferred Compensation Plan based on a calculated present value of the participant’s interest in the SERP, except for the four remaining retired participants. As a result, approximately $2.0 million of the SERP liability was transferred to the Deferred Compensation Liability in 2006.
 
    As of December 31, 2006, the Company adopted SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — An Amendment of FASB Statements No. 87, 88, 106 and 132(R),” for its SERP plan.
 
    The Company recorded the following plan costs for the years ended December 31, 2007, 2006, and 2005.
                         
    Years Ended December 31,  
    2007     2006     2005  
    (Thousands of dollars)  
Service cost
  $     $     $ 259  
Interest cost
    56       64       124  
Recognized actuarial (gain) loss
    (4 )     62       53  
 
                 
Net periodic plan cost
  $ 52     $ 126     $ 436  
 
                 

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The benefit obligation, funded status, and assumptions of the plan on December 31, 2007 and 2006 were as follows:
                 
    December 31,  
    2007     2006  
    (Thousands of dollars)  
Change in benefit obligation:
               
Benefit obligation at the beginning of the year
  $ 1,063     $ 3,413  
Service cost
           
Interest cost
    56       64  
Actuarial loss (gain)
    24       (18 )
Benefits paid
    (131 )     (384 )
Transferred to deferred compensation
          (2,012 )
 
           
Benefit obligation at the end of the year
  $ 1,012     $ 1,063  
 
           
                 
    December 31,  
    2007     2006  
    (Thousands of dollars)  
Reconciliation of funded status
               
Unfunded status
    (1,012 )     (1,063 )
Unrecognized actuarial gains
    (101 )     (129 )
 
           
Total liability included in other long term liabilities on the consolidated balance sheet
  $ (1,113 )   $ (1,192 )
 
           
 
               
Weighted average assumptions
Discount rate
    5.4 %     5.8 %
Amounts recognized in accumulated other comprehensive income consists of approximately $101,000 and $129,000 pre-tax in unrecognized actuarial gain in 2007 and 2006, respectively.
The SERP plan is an unfunded arrangement. However, the Company has purchased life insurance contracts on the lives of the participants in anticipation of using the life insurance’s cash values and death benefits to help fulfill the obligations of the plan. The Company, as owner of such policies, may sell or redeem the contracts at any time without any obligation to the plan participants. The Company recorded expenses of approximately $0.1 million for 2007, $0.2 million for 2006, and $0.5 million for 2005 related to the life insurance contracts. Cash values of the life insurance contracts, recorded in other assets, are $0.5 million at December 31, 2007 and $0.4 million at December 31, 2006.
The Company maintains an Officer Deferred Compensation Plan that permits key officers to defer a portion of their compensation. The plan is nonqualified and funded. The Company has established a separate account for each participant, which is invested and reinvested from time to time in investments that the participant selects from a list of eligible investment choices. Earnings and losses on the book reserve accounts accrue to the plan participants. Liabilities for the plan are included in other long-term liabilities, and the corresponding investment accounts are included in other assets. Aggregate amounts deferred under the plans were $3.8 million and $3.2 million, respectively, for the years December 31, 2007 and 2006.
Stock Based Compensation
Under the PHI 1995 Incentive Plan (the “1995 Plan”), the Company is authorized to issue up to 175,000 shares of voting common stock and 575,000 shares of non-voting common stock. The Compensation Committee of the Board of Directors is authorized under the 1995 Plan to grant stock options, restricted stock, stock appreciation rights, performance shares, stock awards, and cash awards. The exercise prices of the stock option grants are equal to the fair market value of the underlying stock at the date of grant. The 1995 Plan also allows awards under the plan to fully vest upon a change in control of the Company. In September of 2001, the Company underwent a change of control as defined in the 1995 plan and as a result, all awards issued prior to the change of control became fully vested.

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During the year ended December 31, 2001, the Company granted 20,000 non-voting restricted shares and 150,000 non-voting stock options under the 1995 Plan. The non-voting restricted shares had a fair value of $11.06 on the date of issue and became unrestricted during 2001. The non-voting stock options are 100% vested and expire on September 1, 2010. Such options were exercised in 2005. The Company has not issued any shares, options or rights under the 1995 Plan since 2001.
At December 31, 2007, there were 116,520 voting shares and 183,802 non-voting shares available for issuance under the 1995 Plan. The Company did not record any compensation expense related to the 1995 Plan for the years ended December 31, 2007 and 2006, and recorded $0.2 million for the year ended December 31, 2005. There was no unearned stock compensation expense at December 31, 2007 and 2006.
The following table summarizes employee and director stock option activities for the years ended December 31, 2007, 2006, and 2005. All of the options were issued with an exercise price equal to or greater than the market price of the stock at the time of issue.
                 
    1995    
    Plan    
    Options   Weighted
    Non-   Average
    Voting   Exercise Price
Balance outstanding at December 31, 2004
    206,953     $ 11.57  
Options exercised
    (150,000 )     11.06  
Options settled for cash
    (10,203 )     8.50  
 
               
Balance outstanding at December 31, 2005
    46,750       13.87  
Options exercised
    (8,500 )     12.75  
Options cancelled
    (500 )     12.75  
 
               
Balance outstanding at December 31, 2006
    37,750       14.14  
Options exercised
    (15,000 )     16.25  
 
               
Balance outstanding at December 31, 2007
    22,750       12.75  
 
               
Shares exercisable at December 31, 2007
    22,750       12.75  
 
               
December 31, 2006
    37,750       13.87  
 
               
December 31, 2005
    46,750       11.57  
 
               
The following table summarizes information about stock options outstanding as of December 31, 2007. All of the outstanding stock options are exercisable.
         
Options Outstanding and Exercisable
    Remaining    
Number   Contractual   Exercise
Outstanding   Life (Years)   Price
22,750
  1.5   $12.75
Incentive Compensation
In 2002, the Company implemented an incentive compensation plan for non-executive and non-represented employees. For calendar year 2007, the represented pilots were added to this plan as part of the Company’s implemented contract proposals. The plan allows the Company to pay up to 8.25% of earnings before tax upon achieving a specified earnings threshold. During 2004, the Company implemented an executive/senior management plan for certain corporate and business unit management employees. Pursuant to these plans, the Company accrued an estimated incentive compensation expense of $3.2 million for 2007. The Company also accrued $0.8 million for the Safety Incentive Bonus for 2007. For the year

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ended December 31, 2006, the Company did not record incentive compensation expense as certain established requirements under the plan were not met. For 2005, the Company recorded $2.3 million of incentive compensation expense related to the above plans.
(7) OTHER ASSETS
The following table summarizes the Company’s other assets at December 31, 2007 and 2006.
                 
    December 31,     December 31,  
    2007     2006  
    (Thousands of dollars)  
Goodwill acquired
  $ 2,747     $ 2,747  
Security deposits on aircraft
    13,493       10,170  
Deferred financing cost
    4,468       5,231  
Investments
    4,089       3,298  
Other
    2,351       2,370  
 
           
Total
  $ 27,148     $ 23,816  
 
           
During 2007 and 2006, the Company placed security deposits on aircraft to be leased or purchased. Upon delivery of the aircraft, the deposits will be applied to the lease or purchase.
(8) FINANCIAL INSTRUMENTS
Fair Value — The following table presents the carrying amounts and estimated fair values of financial instruments held by the Company at December 31, 2007 and 2006. The table excludes cash and cash equivalents, short-term investments, accounts receivable, accounts payable and accrued liabilities, and term notes payable, all of which had fair values approximating carrying amounts.
                                 
    December 31, 2007     December 31, 2006  
    Carrying     Estimated     Carrying     Estimated  
    Amounts     Fair Value     Amounts     Fair Value  
Long-term debt
  $ 200,000     $ 191,000     $ 200,000     $ 194,000  
At December 31, 2007 and 2006, the fair value of long-term debt is based on quoted market indications.
(9) COMMITMENTS AND CONTINGENCIES
Operating Leases — The Company leases certain aircraft, facilities, and equipment used in its operations. The related lease agreements, which include both non-cancelable and month-to-month terms, generally provide for fixed monthly rentals and, for certain real estate leases, renewal options. The Company generally pays all insurance, taxes, and maintenance expenses associated with these aircraft and some of these leases contain renewal and purchase options at fair market values. Rental expense incurred under these leases consisted of the following:
                         
    Year Ended     Year Ended     Year Ended  
    December 31,     December 31,     December 31,  
    2007     2006     2005  
    (Thousands of dollars)  
Aircraft
  $ 19,110     $ 15,663     $ 5,817  
Other
    6,715       5,174       5,167  
 
                 
Total
  $ 25,825     $ 20,837     $ 10,984  
 
                 
In September 2001, the Company began leasing a principal operating facility at Lafayette, Louisiana for twenty years. The lease expires in 2021 and has three five-year renewal options.

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The following table presents the remaining aggregate lease commitments under operating lease having initial non-cancelable terms in excess of one year. The table includes renewal periods on the principal operating facility lease.
                         
    Aircraft     Other     Total  
    (Thousands of dollars)  
2008
  $ 18,274     $ 3,463     $ 21,737  
2009
    18,274       2,726       21,000  
2010
    18,876       2,325       21,201  
2011
    20,144       1,897       22,041  
2012
    20,811       1,442       22,253  
Thereafter
    72,771       9,358       82,129  
 
                 
 
  $ 169,150     $ 21,211     $ 190,361  
 
                 
Purchase Commitments - The Company expects to finance the acquisition of new aircraft, discussed below, with existing cash and cash equivalents, short-term investments, operating leases, the issuance of debt or equity securities or some combination thereof. There are no purchase commitments other than those listed below.
In 2007, the Company took delivery of three transport category aircraft, all of which were financed with an operating lease, ten medium aircraft and twelve light aircraft for service in the Oil and Gas segment. The Company also took delivery of four light aircraft and one fixed wing aircraft for service in the Air Medical segment.
At December 31, 2007, the Company had an order for six additional transport category aircraft, with scheduled delivery dates throughout 2008 and 2009. The approximate cost for these aircraft is $127.4 million.
At December 31, 2007, the Company also had orders for 30 additional aircraft with a total cost of $154.0 million, with scheduled delivery dates throughout 2008 and 2009.
Environmental Matters — The Company has an aggregate estimated liability of $0.2 million as of December 31, 2007 and 2006 for environmental remediation costs that are probable and estimable. The Company has conducted environmental surveys of its former Lafayette Facility, which it vacated in 2001, and has determined that limited soil and groundwater contamination exists at the facility. The Company has installed groundwater monitoring wells at the facility and periodically monitors and reports on the contamination. In May 2003, the Company submitted a Louisiana Risk Evaluation/Corrective Action Plan (“RECAP”) Standard Site Assessment Report to the Louisiana Department of Environmental Quality (“LDEQ”) fully delineating the extent and type of contamination. In April, 2006, the Site Assessment was updated to include recent analytical data. LDEQ is reviewing the assessment report. Once LDEQ completes its review and reports on whether all contamination has been fully defined, a risk evaluation in accordance with RECAP will be submitted and evaluated by LDEQ. At that point, LDEQ will establish what cleanup standards must be met at the site. When the process is complete, the Company will be in a position to develop an appropriate remediation plan and determine the resulting cost of remediation. The Company has not recorded any estimated liability for remediation and contamination and, based upon the May 2003 Site Assessment Report, the April 2006 update and ongoing monitoring, it believes the ultimate remediation costs for the former Lafayette facility will not be material to its consolidated financial position, results of operations, or cash flows.
During 2004, LDEQ advised PHI that groundwater contaminants impacting monitor wells at the PHI Lafayette Heliport were originating from an off-site location and that the Company would no longer be required to perform further monitoring at the site. Subsequently, based upon site investigation work performed by the Lafayette Airport Commission, the source of the contamination was identified as residing at another location, for which PHI is not responsible. The Lafayette Airport Commission has begun remediation of the PHI Lafayette Heliport.
Legal Matters — The Company is named as a defendant in various legal actions that have arisen in the ordinary course of business and have not been finally adjudicated. In the opinion of management, the

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amount of the ultimate liability with respect to these actions will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.
As previously reported, on June 15, 2005, the Company received a subpoena from the United States Department of Justice relating to a grand jury investigation of potential antitrust violations among providers of helicopter transportation services in the Gulf of Mexico. The Company is cooperating fully with the investigation and believes it has provided all documents and other information required by the subpoena. The Company has not received any further communications from the Department of Justice since shortly after providing the requested information. At this stage, it is not possible to assess the outcome of this investigation, although based on the information available to date, management does not expect the outcome of the investigation to have a material adverse effect on its financial condition, results of operations, or cash flows.
Employee Matters - As previously reported, the Company is involved in Federal Court litigation in the Western District of Louisiana with the OPEIU (the Office and Professional Employees International Union), the union representing domestic pilots, over claims of bad faith bargaining and issues relating to the return to work of striking pilots. Pilots continue to work under the terms and conditions of employment set forth in the final implementation proposals made by the Company at the end of collective bargaining negotiations in August 2006.
A trial on strike-related matters is currently set to start on November 3, 2008. It is not possible to assess the outcome of that litigation, as these matters are still in the discovery stage. However, management is of the opinion that the Company’s claims and defenses have substantial merit.
(10) BUSINESS SEGMENTS AND GEOGRAPHIC AREAS
PHI is primarily a provider of helicopter services, including helicopter maintenance and repair services. The Company has used a combination of factors to identify its reportable segments as required by Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS 131”). The overriding determination of the Company’s segments is based on how the chief operating decision-maker of the Company evaluates the Company’s results of operations. The underlying factors include customer bases, types of service, operational management, physical locations, and underlying economic characteristics of the types of work the Company performs. Prior to the change in the Company’s reportable segments described below, the Company had four segments that met the requirements of SFAS 131 for disclosure. The reportable segments were Oil and Gas, Air Medical, International, and Technical Services.
During the quarter ended March 31, 2007, the Company combined the oil and gas customers that were previously included in its International segment into the Company’s Domestic Oil and Gas segment, and eliminated the term “Domestic” from that segment. Additionally, the contract work previously included in the International segment for the National Science Foundation is now included in the Technical Services segment. Therefore there are now three reportable segments: Oil and Gas, Air Medical, and Technical Services. All prior periods have been recast to conform to the 2007 presentation.
The Oil and Gas segment provides helicopter services to oil and gas customers operating in the Gulf of Mexico, Angola, and the Democratic Republic of Congo. The Air Medical segment provides helicopter services to hospitals and medical programs in several U.S. states, and also to individuals under which the Company is paid by either a commercial insurance company, federal or state agency, or the patient. The Company’s Air Evac subsidiary is included in the Air Medical segment. The Technical Services segment provides helicopter repair and overhaul services for existing flight operations customers. The Company also operates four aircraft for the National Science Foundation in Antarctica under the Technical Services segment.
Each segment has a portion of selling, general and administrative expenses that is charged directly to the segment and a portion that is allocated. Direct charges represent the vast majority of segment selling, general and administrative expenses. Allocated selling, general and administrative expenses is based primarily on total segment costs as a percentage of total operating costs.

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Air Medical operations are headquartered in Phoenix, AZ, where the Company maintains significant separate facilities and administrative staff dedicated to this segment. Those costs are charged directly to the Air Medical segment, resulting in a disproportionate share of selling, general and administrative expenses compared to the Company’s other reportable segments.
Customers of the Company consist principally of major integrated energy companies and independent exploration and production companies. The customers, individually or considered as a group under common ownership, which accounted for greater than 10% of accounts receivable or 10% of net sales during the periods reflected were as follows:
                                         
    Accounts Receivable   Net Sales
    December 31,   Years Ended December 31,
    2007   2006   2007   2006   2005
Customer A
    11 %     11 %     15 %     17 %     14 %
Customer B
    11 %     7 %     12 %     10 %     9 %
The following table shows information about the profit or loss and assets of each of the Company’s reportable segments for the years ended December 31, 2007, 2006, and 2005. The information contains certain allocations, including allocations of depreciation, rents, insurance, and overhead expenses that the Company deems reasonable and appropriate for the evaluation of results of operations. The Company does not allocate gains on dispositions of property and equipment, other income, interest expense, and corporate selling, general, and administrative expenses to the segments. Where applicable, the tables present the unallocated amounts to reconcile the totals to the Company’s consolidated financial statements. Segment assets are determined by where they are situated at period-end. Corporate assets are principally cash and cash equivalents, short-term investments, other assets, and certain property, and equipment.

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    Year Ended  
    December 31,  
    2007     2006     2005  
    (Thousands of dollars)  
Segment operating revenues
                       
Oil and Gas
  $ 286,118     $ 270,707     $ 242,464  
Air Medical
    149,590       133,397       112,123  
Technical Services
    10,698       9,014       9,023  
 
                 
Total operating revenues
    446,406       413,118       363,610  
 
                 
 
                       
Segment direct expense
                       
Oil and Gas
    250,110       228,797       188,872  
Air Medical
    137,703       130,412       104,465  
Technical Services
    6,608       7,063       5,926  
 
                 
Total direct expense
    394,421       366,272       299,263  
 
                       
Segment selling, general and administrative expenses
                       
Oil and Gas
    1,531       1,150       1,181  
Air Medical
    7,883       7,384       6,503  
Technical Services
    59       38       43  
 
                 
Total selling, general and administrative expenses
    9,473       8,572       7,727  
 
                 
Total direct and selling, general and administrative expenses
    403,894       374,844       306,990  
 
                 
Net segment profit (loss)
Oil and Gas
    34,477       40,760       52,411  
Air Medical
    4,004       (4,399 )     1,155  
Technical Services
    4,031       1,913       3,054  
 
                 
Total
    42,512       38,274       56,620  
 
                       
Other, net (1)
    40,051       9,946       3,230  
Unallocated selling, general and administrative expenses
    (20,753 )     (19,267 )     (17,169 )
Interest expense
    (16,121 )     (17,243 )     (20,448 )
Loss on debt restructuring
          (12,790 )      
 
                 
Earnings (loss) before income taxes
  $ 45,689     $ (1,080 )   $ 22,233  
 
                 
 
(1)   Including gains on disposition of property and equipment and other income.
                         
    Year Ended  
    December 31,  
    2007     2006     2005  
    (Thousands of dollars)  
Expenditures for long lived assets
                       
Oil and Gas
  $ 130,574     $ 107,514     $ 56,157  
Air Medical
    35,053       14,446       39,361  
Technical Services
          518       3  
Corporate
    971       775       644  
 
                 
Total
  $ 166,598     $ 123,253     $ 96,165  
 
                 

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    Year Ended  
    December 31,  
    2007     2006     2005  
    (Thousands of dollars)  
Depreciation and Amortization
                       
Oil and Gas
  $ 17,211     $ 17,147     $ 16,842  
Air Medical
    8,303       8,634       6,023  
Technical Services
    252       235       223  
Corporate
    4,281       4,281       4,045  
 
                 
Total
  $ 30,047     $ 30,297     $ 27,133  
 
                 
 
                       
Assets
                       
Oil and Gas
  $ 392,154     $ 284,981     $ 254,146  
Air Medical
    184,435       164,234       138,994  
Technical Services
    7,481       9,984       4,950  
Corporate
    157,226       241,771       151,119  
 
                 
Total
  $ 741,296     $ 700,970     $ 549,209  
 
                 
The following table presents the Company’s revenues from external customers attributed to operations in the United States and foreign areas and long-lived assets in the United States and foreign areas.
                         
    Year Ended  
    December 31,  
    2007     2006     2005  
    (Thousands of dollars)  
Operating revenues:
                       
United States
  $ 424,268     $ 387,530     $ 335,418  
International
    22,138       25,588       28,192  
 
                 
Total
  $ 446,406     $ 413,118     $ 363,610  
 
                 
 
                       
Long-Lived Assets:
                       
United States
  $ 478,795     $ 362,527     $ 303,924  
International
    5,324       6,938       7,754  
 
                 
Total
  $ 484,119     $ 369,465     $ 311,678  
 
                 
(11) EFFECTS OF HURRICANES
At December 31, 2005, the Company recognized a loss from Hurricane Katrina on August 29, 2005 and Hurricane Rita on September 24, 2005 of approximately $5.6 million consisting of write-off of inventory and other tangible assets of $2.5 million, incremental repair costs and costs to relocate operations from damaged or destroyed bases of $3.1 million. These losses were offset by insurance recoveries of $5.6 million at December 31, 2005, of which $2.7 million was reflected as receivable from the insurance carriers in accounts receivable, other at December 31, 2005. In 2006, the Company incurred additional repair costs and costs related to relocation of operations from damaged or destroyed bases of $3.0 million. This loss was offset by insurance recoveries of $3.0 million in 2006. The Company received proceeds from insurance carriers totaling $8.6 million, of which $2.9 million and $5.7 million was received in 2005 and 2006, respectively.

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(12) QUARTERLY FINANCIAL DATA (UNAUDITED)
The condensed quarterly results of operations for the years ended December 31, 2007 and December 31, 2006 (in thousands of dollars, except per share data) are as follows:
                                 
    Quarter Ended  
    March 31,     June 30,     September 30,     December 31,  
    2007(1)     2007     2007     2007  
    (Thousands of dollars, except per share data)  
Operating revenues
  $ 101,753     $ 112,975     $ 118,401     $ 113,277  
Gross profit
    8,520       15,856       16,974       10,635  
Net earnings
    663       7,169       8,629       11,757  
Net earnings per share
                               
Basic
    0.04       0.47       0.56       0.77  
Diluted
    0.04       0.47       0.56       0.77  
                                 
    Quarter Ended  
    March 31,     June 30,     September 30,     December 31,  
    2006     2006(2)     2006(1)     2006(1)  
    (Thousands of dollars, except per share data)  
Operating revenues
  $ 101,372     $ 107,157     $ 109,315     $ 95,274  
Gross profit
    14,317       17,946       16,091       (1,508 )
Net earnings (loss)
    2,225       (2,755 )     5,122       (5,259 )
Net earnings (loss) per share
                               
Basic
    0.21       (0.19 )     0.34       (0.34 )
Diluted
    0.21       (0.19 )     0.33       (0.34 )
 
(1)   Earnings in the quarters ended September 30, 2006, December 31, 2006, and March 31, 2007, were impacted due to the pilots’ strike that commenced September 20, 2006.
 
(2)   The loss for the quarter ended June 30, 2006 was a result of the $12.8 million early call premium and associated costs for redemption of the Company’s 9 3/8% Senior Notes recorded in that period.
(13) SHAREHOLDERS’ EQUITY
On April 12, 2006, the Company completed the sale of 4,287,920 non-voting common shares at $35.00 per share and on May 1, 2006, the Company completed the sale of the over-allotment of 578,680 shares also at $35.00 per share. Proceeds from the offering were $160.7 million, net of expenses.
The Company had an average of 15.3 million common shares outstanding for the period ended December 31, 2007, compared to an average of 13.9 million shares for the period ended December 31, 2006. The increase was the result of the equity offerings in April 2006.
(14) CONDENSED FINANCIAL INFORMATION — GUARANTOR ENTITIES
On April 12, 2006, the Company issued $200 million of 7.125% Senior Notes due 2013 and retired $184.8 million of 9 3/8% Series B Senior Notes due 2009. On May 1, 2006, the Company redeemed the remaining $15.2 million 9 3/8% Series B Senior Notes.
The 7.125% Senior Notes are fully and unconditionally guaranteed on a joint and several, senior basis by all of the Company’s Guarantor Subsidiaries.
The following condensed financial information sets forth, on a consolidating basis, the balance sheet, statement of operations, and statement of cash flows information for PHI, Inc. (“Parent Company Only”) and the Guarantor Subsidiaries. The principal eliminating entries eliminate investments in subsidiaries, intercompany balances, and intercompany revenues and expenses.

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PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
(Thousands of dollars)
                                 
    December 31, 2007  
    Parent                    
    Company     Guarantor              
    Only     Subsidiaries(1)     Eliminations     Consolidated  
ASSETS
                               
Current Assets:
                               
Cash and cash equivalents
  $ 1,004     $ 421     $     $ 1,425  
Short-term investments
    62,970                   62,970  
Accounts receivable – net
    84,318       13,766             98,084  
Inventories of spare parts and supplies
    55,831                   55,831  
Other current assets
    11,184       10             11,194  
Refundable income taxes
    525                   525  
 
                       
Total current assets
    215,832       14,197             230,029  
Investment in subsidiaries and others
    59,384             (59,384 )      
Intercompany receivable
          50,729       (50,729 )      
Other assets
    26,878       270             27,148  
Property and equipment, net
    468,070       16,049             484,119  
 
                       
Total assets
  $ 770,164     $ 81,245     $ (110,113 )   $ 741,296  
 
                       
LIABILITIES AND
                               
SHAREHOLDERS’ EQUITY
                               
Current liabilities:
                               
Accounts payable
  $ 24,696     $ 3,758     $     $ 28,454  
Accrued liabilities
    24,942                   24,942  
Intercompany payable
    50,729             (50,729 )      
 
                       
Total current liabilities
    100,367       3,758       (50,729 )     53,396  
 
                               
Long-term debt
    200,000                   200,000  
Deferred income taxes and other long-term liabilities
    41,128       18,103             59,231  
Shareholders’ Equity
                               
Paid-in capital
    292,564       4,402       (4,402 )     292,564  
Accumulated other comprehensive income
    61                   61  
Retained earnings
    136,044       54,982       (54,982 )     136,044  
 
                       
Total shareholders’ equity
    428,669       59,384       (59,384 )     428,669  
 
                       
Total liabilities and shareholders’ equity
  $ 770,164     $ 81,245     $ (110,113 )   $ 741,296  
 
                       
 
1)   Foreign subsidiaries represent minor subsidiaries and are included in the guarantors’ subsidiaries amounts.

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PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
(Thousands of dollars)
                                 
    December 31, 2006  
    Parent                    
    Company     Guarantor              
    Only     Subsidiaries(1)     Eliminations     Consolidated  
ASSETS
                               
Current Assets:
                               
Cash and cash equivalents
  $ 385     $ 435     $     $ 820  
Short-term investments
    153,414                   153,414  
Accounts receivable – net
    75,642       13,652             89,294  
Inventories of spare parts and supplies
    55,596                   55,596  
Other current assets
    7,922       8             7,930  
Refundable income taxes
    44       591             635  
 
                       
Total current assets
    293,003       14,686             307,689  
Investment in subsidiaries and other
    46,226             (46,226 )      
Intercompany receivable
          44,085       (44,085 )      
Other assets
    23,759       57             23,816  
Property and equipment, net
    361,570       7,895             369,465  
 
                       
Total assets
  $ 724,558     $ 66,723     $ (90,311 )   $ 700,970  
 
                       
 
                               
LIABILITIES AND
                               
SHAREHOLDERS’ EQUITY
                               
Current liabilities:
                               
Accounts payable
  $ 31,461     $ 4,354     $     $ 35,815  
Accrued liabilities
    17,487       288             17,775  
Intercompany payable
    44,085             (44,085 )      
 
                       
Total current liabilities
    93,033       4,642       (44,085 )     53,590  
Long-term debt
    205,500                   205,500  
Deferred income taxes and other long-term liabilities
    25,900       15,855             41,755  
Shareholders’ Equity
                               
Paid-in capital
    292,222       4,402       (4,402 )     292,222  
Accumulated other comprehensive income
    77                   77  
Retained earnings
    107,826       41,824       (41,824 )     107,826  
 
                       
Total shareholders’ equity
    400,125       46,226       (46,226 )     400,125  
 
                       
Total liabilities and shareholders’ equity
  $ 724,558     $ 66,723     $ (90,311 )   $ 700,970  
 
                       
 
1)   Foreign subsidiaries represent minor subsidiaries and are included in the guarantors’ subsidiaries amounts.

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PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(Thousands of dollars)
                                 
    For the year ended December 31, 2007  
    Parent                    
    Company     Guarantor              
    Only     Subsidiaries(1)     Eliminations     Consolidated  
Operating revenues
  $ 378,092     $ 68,314     $     $ 446,406  
Management fees
    2,733             (2,733 )      
Gain on dispositions of assets, net
    34,953                   34,953  
Other
    5,090       8             5,098  
 
                       
 
    420,868       68,322       (2,733 )     486,457  
 
                       
 
                               
Expenses:
                               
Direct expenses
    347,397       47,024             394,421  
Management fees
          2,733       (2,733 )      
Selling, general, and administrative
    27,140       3,086             30,226  
Equity in net income of consolidated subsidiaries
    (13,158 )           13,158        
Interest expense
    16,121                   16,121  
 
                       
 
    377,500       52,843       10,425       440,768  
 
                       
 
                               
Earnings before income taxes
    43,368       15,479       (13,158 )     45,689  
Income taxes
    15,150       2,321             17,471  
 
                       
Net earnings
  $ 28,218     $ 13,158     $ (13,158 )   $ 28,218  
 
                       
                                 
    For the year ended December 31, 2006  
    Parent                    
    Company     Guarantor              
    Only     Subsidiaries(1)     Eliminations     Consolidated  
Operating revenues
  $ 357,355     $ 55,763     $     $ 413,118  
Management fees
    2,231             (2,231 )      
Gain on dispositions of assets, net
    1,910                   1,910  
Other
    8,016       20             8,036  
 
                       
 
    369,512       55,783       (2,231 )     423,064  
 
                       
 
                               
Expenses:
                               
Direct expenses
    325,115       41,157             366,272  
Management fees
          2,231       (2,231 )      
Selling, general, and administrative
    25,106       2,733             27,839  
Equity in net income of consolidated subsidiaries
    (7,592 )           7,592        
Interest expense
    17,243                   17,243  
Loss on debt restructuring
    12,790                   12,790  
 
                       
 
    372,662       46,121       5,361       424,144  
 
                       
 
                               
Loss before income taxes
    (3,150 )     9,662       (7,592 )     (1,080 )
Income taxes
    (2,483 )     2,070             (413 )
 
                       
 
                               
Net Loss
  $ (667 )   $ 7,592     $ (7,592 )   $ (667 )
 
                       
 
1)   Foreign subsidiaries represent minor subsidiaries and are included in the guarantors’ subsidiaries amounts.

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PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(Thousands of dollars)
                                 
    For the year ended December 31, 2005  
    Parent                    
    Company     Guarantor              
    Only     Subsidiaries(1)     Eliminations     Consolidated  
Operating revenues
  $ 310,868     $ 52,742     $     $ 363,610  
Management fees
    1,485             (1,485 )      
 
                               
Gain on dispositions of assets, net
    1,173                   1,173  
Other
    1,988       69             2,057  
 
                       
 
    315,514       52,811       (1,485 )     366,840  
 
                       
 
                               
Expenses:
                               
Direct expenses
    263,861       35,402             299,263  
Management fees
          1,485       (1,485 )      
Selling, general, and administrative
    22,110       2,786             24,896  
Equity in net income of consolidated subsidiaries
    (8,921 )           8,921        
Interest expense
    20,448                   20,448  
 
                       
 
    297,498       39,673       7,436       344,607  
 
                       
 
                               
Earnings before income taxes
    18,016       13,138       (8,921 )     22,233  
Income taxes
    3,862       4,217             8,079  
 
                       
Net earnings
  $ 14,154     $ 8,921     $ (8,921 )   $ 14,154  
 
                       
 
1)   Foreign subsidiaries represent minor subsidiaries and are included in the guarantors’ subsidiaries amounts.

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PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(Thousands of dollars)
                                 
    For the year ended December 31, 2007  
    Parent                    
    Company     Guarantor              
    Only     Subsidiaries(1)     Eliminations     Consolidated  
Net cash provided by operating activities
  $ 25,224     $ 2     $     $ 25,226  
Investing activities:
                               
Purchase of property and equipment
    (159,699 )     (16 )             (159,715 )
Proceeds from asset dispositions
    58,105                   58,105  
Purchase (sale) of short-term investments
    90,444                   90,444  
Other
    (8,298 )                 (8,298 )
 
                       
Net cash used in investing activities
    (19,448 )     (16 )           (19,464 )
 
                       
 
                               
Financing activities:
                               
Proceeds (payments) line of credit, net
    (5,500 )                 (5,500 )
Proceeds from exercise of stock options
    343                   343  
 
                       
Net cash used in by financing activities
    (5,157 )                 (5,157 )
 
                       
Increase (decrease) in cash and cash equivalents
    619       (14 )           605  
Cash and cash equivalents, beginning of period
    385       435             820  
 
                       
Cash and cash equivalents, end of period
  $ 1,004     $ 421     $     $ 1,425  
 
                       
                                 
    For the year ended December 31, 2006  
    Parent                    
    Company     Guarantor              
    Only     Subsidiaries(1)     Eliminations     Consolidated  
Net cash provided by operating activities
  $ 30,142     $ 182     $     $ 30,324  
 
                               
Investing activities:
                               
Purchase of property and equipment
    (123,047 )     (206 )           (123,253 )
Proceeds from asset dispositions
    36,809                   36,809  
Purchase (sale) of short-term investments
    (86,889 )                 (86,889 )
Other
    (5,595 )                 (5,595 )
 
                       
Net cash used in investing activities
    (178,722 )     (206 )           (178,928 )
 
                       
 
                               
Financing activities:
                               
Proceeds of debt issuance – Senior Notes
    200,000                   200,000  
Premium and costs to retire debt early
    (10,208 )                 (10,208 )
Repayment of Senior Notes
    (200,000 )                 (200,000 )
Debt issuance costs
    (4,857 )                 (4,857 )
Payments on long-term debt
    (1,000 )                 (1,000 )
Proceeds from line of credit, net
    2,200                   2,200  
Proceeds from stock issuance, net
    160,722                   160,722  
Other
    (469 )                 (469 )
 
                       
Net cash provided by financing activities
    146,388                   146,388  
 
                       
 
                               
Increase in cash and cash equivalents
    (2,192 )     (24 )           (2,216 )
Cash and cash equivalents, beginning of period
    2,577       459             3,036  
 
                       
Cash and cash equivalents, end of period
  $ 385     $ 435     $     $ 820  
 
                       
 
1)   Foreign subsidiaries represent minor subsidiaries and are included in the guarantors’ subsidiaries amounts.

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PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(Thousands of dollars)
                                 
    For the year ended December 31, 2005  
    Parent                    
    Company     Guarantor              
    Only     Subsidiaries(1)     Eliminations     Consolidated  
Net cash provided by operating activities
  $ 27,864     $ 156     $     $ 28,020  
 
                               
Investing activities:
                               
Purchase of property and equipment
    (96,161 )     (4 )             (96,165 )
Proceeds from asset dispositions
    10,751                   10,751  
Purchase of short-term investments
    (52,050 )                 (52,050 )
 
                       
Net cash used in investing activities
    (137,460 )     (4 )           (137,464 )
 
                       
 
                               
Financing activities:
                               
Payment of long-term debt, net
    (5,975 )                 (5,975 )
Proceeds from exercise of stock options
    1,025                   1,025  
Proceeds from stock issuance, net
    113,897                   113,897  
 
                       
Net cash provided by financing activities
    108,947                   108,947  
 
                       
 
                               
(Decrease) Increase in cash and cash cash equivalents
    (649 )     152             (497 )
Cash and cash equivalents, beginning of period
    3,226       307             3,533  
 
                       
Cash and cash equivalents, end of period
  $ 2,577     $ 459     $     $ 3,036  
 
                       
 
1)   Foreign subsidiaries represent minor subsidiaries and are included in the guarantors’ subsidiaries amounts.

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ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
     
ITEM 9A.  CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company’s management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the design and operation of our disclosure controls and procedures were effective as of such date to provide assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to management as appropriate to allow timely decisions regarding disclosure.
During the last quarter, there have not been any changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Our internal control system was designed to provide reasonable assurance to our management and board of directors regarding the reliability of financial reporting and preparation of financial statements for external purposes in accordance with generally accepted accounted principles.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2007. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on this assessment our management believes that, as of December 31, 2007, our internal control over financial reporting is effective under those criteria.
Deloitte & Touche LLP, our independent registered public accounting firm, has issued a report on the Company’s internal control over financial reporting as of December 31, 2007. This report appears below.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
PHI, Inc.
Lafayette, Louisiana
We have audited the Internal Control over Financial Reporting of PHI, Inc. and subsidiaries (the “Company”) maintained as of December 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control, based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2007 of the Company and our report dated March 11, 2008, expressed an unqualified opinion on those financial statements and financial statement schedule.
DELOITTE & TOUCHE LLP
New Orleans, Louisiana
March 11, 2008

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ITEM 9.B.   OTHER INFORMATION
Not Applicable.
PART III
     
ITEM 10.   DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
          Information concerning directors and executive officers required by this item will be included in our definitive information statement in connection with our 2008 Annual Meeting of Shareholders and is incorporated herein by reference.
     
ITEM 11.
  EXECUTIVE COMPENSATION
          Information required by this item will be included in our definitive information statement in connection with our 2008 Annual Meeting of Shareholders and is incorporated herein by reference.
     
ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
          Information required by this item will be included in our definitive information statement in connection with our 2008 Annual Meeting of Shareholders and is incorporated herein by reference.
     
ITEM 13.
  CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
          Information required by this item will be included in our definitive information statement in connection with our 2008 Annual Meeting of Shareholders and is incorporated herein by reference.
     
ITEM 14.
  PRINCIPAL ACCOUNTING FEES AND SERVICES
          Information required by this item will be included in our definitive information statement in connection with our 2008 Annual Meeting of Shareholders and is incorporated herein by reference.

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PART IV
     
ITEM 15.
  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
                 
1.   Financial Statements   Page
    Included in Part II of this report:        
 
      Report of Independent Registered Public Accounting Firm     26  
 
      Consolidated Balance Sheets — December 31, 2007 and December 31, 2006.     27  
 
      Consolidated Statements of Operations for the years ended December 31, 2007, December 31, 2006, and December 31, 2005.     28  
 
      Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2007, December 31, 2006, and December 31, 2005.     29  
 
      Consolidated Statements of Cash Flows for the years ended December 31, 2007, December 31 2006, and December 31, 2005.     30  
 
      Notes to Consolidated Financial Statements.     31  
2.   Financial Statement Schedules        
 
      Schedule II — Valuation and Qualifying accounts for the years ended December 31, 2007, December 31, 2006 and December 31, 2005.     59  
3.   Exhibits        
  3   Articles of Incorporation and By-laws
3.1 (i)   Amended and Restated Articles of Incorporation of the Company (incorporated by reference to Exhibit No. 3.1(i) to PHI’s Report on Form 10-Q for the quarterly period ended June 30, 2006).
 
  (ii)   Amended and Restated By-laws of the Company (incorporated by reference to Exhibit 3.1 to PHI’s Report on Form 8-K filed December 18, 2007).
  4   Instruments defining the rights of security holders, including indentures.
 
  4.1   Loan Agreement dated as of April 23, 2002 by and among PHI, Inc., Acadian Composites, LLC, Air Evac Services, Inc., Evangeline Airmotive Inc., and International Helicopter Transport, Inc. and Whitney National Bank (incorporated by reference to Exhibit 10.3 to PHI’s Report on Form 10-Q for the quarterly period ended June 30, 2002, Commission File No. 0-9827).
 
  4.2   First Amendment to Loan Agreement dated June 18, 2004 by and among PHI, Inc. Acadian Composites, LLC, Air Evac Services, Inc., Evangeline Airmotive Inc., and International Helicopter Transport, Inc. and Whitney National Bank (incorporated by reference to Exhibit 10.4 to PHI’s Report on Form 10-Q for the quarterly period ended June 30, 2004).
 
  4.3   Second Amendment to Loan Agreement dated September 30, 2005 by and among Petroleum Helicopters, Inc., Air Evac Services, Inc., Evangeline Airmotive, Inc., and International Helicopter Transport, Inc. and Whitney National Bank (incorporated by reference to Exhibit 4.7 to PHI’s Report on Form 10-Q for the quarterly period ended September 30, 2007).
 
  4.4   Third Amendment to Loan Agreement dated April 12, 2006 by and among PHI, Inc., Air Evac Services, Inc., PHI Tech Services, Inc. (formerly Evangeline Airmotive, Inc.), and International Helicopter Transport, Inc. and Whitney National Bank (incorporated by reference to Exhibit 10.4 to PHI’s Report on Form 8-K filed on April 13, 2006).
 
  4.5   Fourth Amendment to Loan Agreement dated September 30, 2006 by and among PHI, Inc., Air Evac Services, Inc., PHI Tech Services, Inc. (formerly Evangeline Airmotive, Inc.), and International Helicopter Transport, Inc. and Whitney National Bank Bank (incorporated by reference to Exhibit 4.8 to PHI’s Report on Form 10-Q for the quarterly period ended September 30, 2007).

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4.6   Fifth Amendment to Loan Agreement dated August 1, 2007 by and among PHI, Inc., Air Evac Services, Inc., PHI Tech Services, Inc. (formerly Evangeline Airmotive, Inc.), and International Helicopter Transport, Inc. and Whitney National Bank Bank (incorporated by reference to Exhibit 4.9 to PHI’s Report on Form 10-Q for the quarterly period ended September 30, 2007).
 
4.7   Indenture dated April 12, 2006 among PHI, Inc., the Subsidiary Guarantors named therein and The Bank of New York, as Trustee (incorporated by reference to Exhibit 10.2 to PHI’s Report on Form 8-K filed on April 13, 2006).
 
4.8   First Supplemental Indenture dated April 12, 2006, among PHI, Inc., the Subsidiary Guarantors named therein and The Bank of New York, as Trustee (incorporated by reference to Exhibit 10.1 to PHI’s Report on Form 8-K filed on April 13, 2006).
 
10   Material Contracts
 
10.1   The Amended and Restated PHI, Inc. 401 (k) Retirement Plan effective January 1, 2007.
 
10.2   Amended and Restated PHI, Inc. 1995 Incentive Compensation Plan adopted by PHI’s Board effective July 11, 1995 and approved by the shareholders of PHI on September 22, 1995 (incorporated by reference to Exhibit 10.3 to PHI’s Report on Form 10-K for the year ended December 31, 2006).
 
10.3   Form of Non-Qualified Stock Option Agreement under the PHI, Inc. 1995 Incentive Compensation Plan between PHI and certain of its key employees (incorporated by reference to Exhibit 10.4 to PHI’s Report on Form 10-K for the year ended December 31, 2006).
 
10.4   Officer Deferred Compensation Plan II adopted by PHI’s Board effective January 1, 2005 (incorporated by reference to Exhibit 10.5 to PHI’s Report on Form 10-K for the year ended December 31, 2006).
 
10.5   Articles of Agreement Between PHI, Inc. & Office & Professional Employees International Union and its Local 108 dated June 13, 2001 (incorporated by reference to Exhibit 10.6 to PHI’s Report on Form 10-K for the year ended December 31, 2006).
 
21   Subsidiaries of the Registrant
 
23.1   Consent of Deloitte & Touche LLP
 
31.1   Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Al A. Gonsoulin, Chief Executive Officer.
 
31.2   Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Michael J. McCann, Chief Financial Officer.
 
32.1   Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Al A. Gonsoulin, Chief Executive Officer.
 
32.2   Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Michael J. McCann, Chief Financial Officer.

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PHI, INC. AND SUBSIDIARIES
Schedule II — Valuation and Qualifying Accounts
(Thousands of dollars)
                                 
            Additions            
    Balance at   Charged to           Balance at
    Beginning   Costs and           End
Description   of Year   Expenses   Deductions   of Year
 
Year ended December 31, 2007:
                               
Allowance for doubtful accounts
  $ 50     $     $     $ 50  
Allowance for obsolescent inventory
    7,256       843       639       7,460  
Allowance for contractual discounts
    29,930       130,753       128,825       31,858  
Allowance for uncompensated care
    20,099       42,190       43,159       19,130  
 
                               
Year ended December 31, 2006:
                               
Allowance for doubtful accounts
  $ 163     $     $ 113     $ 50  
Allowance for obsolescent inventory
    6,268       1,502       514       7,256  
Allowance for contractual discounts
    24,091       97,226       91,387       29,930  
Allowance for uncompensated care
    11,597       40,073       31,571       20,099  
 
                               
Year ended December 31, 2005:
                               
Allowance for doubtful accounts
  $ 163     $     $     $ 163  
Allowance for obsolescent inventory
    6,988       (70 )     650       6,268  
Allowance for contractual discounts
    12,871       77,672       66,452       24,091  
Allowance for uncompensated care
    7,424       26,796       22,623       11,597  

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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
         
  PHI, INC.
 
 
  By:   /s/ Michael J. McCann    
    Michael J. McCann   
    Chief Financial Officer
(Principal Financial and
Accounting Officer) 
 
 
     Pursuant to requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
         
Signature   Title   Date
 
       
/s/ Al A. Gonsoulin
 
Al A. Gonsoulin
  Chairman of the Board
Chief Executive Officer and Director
(Principal Executive Officer)
  March 11, 2008
 
       
/s/ Lance F. Bospflug
  Director   March 11, 2008
 
Lance F. Bospflug
       
 
       
/s/ Arthur J. Breault, Jr.
  Director   March 11, 2008
 
Arthur J. Breault, Jr.
       
 
       
/s/ Thomas H. Murphy
  Director   March 11, 2008
 
Thomas H. Murphy
       
 
       
/s/ Richard H. Matzke
  Director   March 11, 2008
 
Richard H. Matzke
       
 
       
/s/ C. Russell Luigs
 
C. Russell Luigs
  Director    March 11, 2008
 
       
/s/ Michael J. McCann
 
Michael J. McCann A
  Chief Financial Officer
(Principal Financial and Accounting Officer)
  March 11, 2008

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