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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2006
 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.
  2001 SE Evangeline Thruway
Lafayette, Louisiana 70508
(337) 235-2452
   Title of Each Class
 o þ
 o þ
 þ o
 þ
  o þ o
 o þ
   Voting Common Stock
    2,852,616 shares.
    
    Non-Voting Common Stock
    12,423,992 shares.
 Documents Incorporated by Reference




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##### 



PHI, INC.
 INDEX  FORM 10-K
 PART IItem 1.
    
    Business
    
    
    1Item 1.A.
    
    Risk Factors
    
    
    4Item 1.B.
    
    Unresolved Staff Comments
    
    
    10Item 2.
    
    Properties
    
    
    11Item 3.
    
    Legal Proceedings
    
    
    13Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    13PART IIItem 5.
    
    Market for Registrants Common Equity and Related Shareholders Matters and Issuer Purchases of Equity Securities
    
    
    13Item 6.
    
    Selected Financial Data
    
    
    15Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 7.A.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    26Item 8.
    
    Financial Statements and Supplementary Data
    
    
    27PHI, Inc. and Consolidated Subsidiaries:Report of Independent Registered Public Accounting Firm
    
    
    27Consolidated Balance Sheets  December 31, 2006 and December 31, 2005
    
    
    28Consolidated Statements of Operations  Year ended December 31, 2006, Year ended December 31, 2005 and Year ended December 31, 2004
    
    
    29Consolidated Statements of Shareholders Equity  Year ended December 31, 2006, Year ended December 31, 2005, and Year ended December 31, 2004
    
    
    30Consolidated Statements of Cash Flows  Year ended December 31, 2006, Year ended December 31, 2005, and Year ended December 31, 2004
    
    
    31Notes to Consolidated Financial Statements
    
    
    32Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    54Item 9.A.
    
    Controls and Procedures
    
    
    54Report of Independent Registered Public Accounting FirmItem 9.B.
    
    Other Information
    
    
    56PART IIIItem 10.
    
    Directors, Executive Officers and Corporate Governance
    
    
    56Item 11.
    
    Executive Compensation
    
    
    56Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management
    
    
    56Item 13.
    

Certain
Relationships, Related Transactions, and Director Independence
    
    
    56Item 14.
    
    Principal Accounting Fees and Services
    
    
    56PART IVItem 15.
    
    Exhibits and Financial Statement Schedules
    
    
    57Signatures
    
    
    60Amended Articles of IncorporationAmended 401(k) Retirement PlanAmended 1995 Incentive Compensation PlanForm of Non-Qualified Stock Option AgreementOfficer Deferred Compensation Plan IIArticles of AgreementSubsidiariesConsent of Deloitte & Touche LLPCertification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906
  i




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PART I
 Forward-Looking Statements
  
 ITEM 1. BUSINESS
 General
  Availability of SEC filings and other information
 www.phihelico.com. www.sec.gov.
 Description of Operations
  1




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Domestic Oil and Gas.
   Air
Medical.
 International.
 Technical Services.
  Seasonal Aspects
  Inventories
  2




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Customers
  Competition
     Employees
     3




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Environmental Matters
  
 ITEM 1.A. Risk Factors
  RISKS INHERENT IN OUR BUSINESS
 Our operations are affected by adverse weather conditions and 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.
    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.
   4




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Our contracts generally can be terminated or downsized by our customers without penalty.
  Increased governmental regulations could increase our costs or reduce our ability to operate
successfully.
      The helicopter services business is highly competitive.
    5




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The failure to maintain our safety record would seriously harm our ability to attract new customers
and maintain our existing customers.
  Helicopter operations involve risks that may not be covered by our insurance or may increase the
cost of our insurance.
    Our air medical operations, which we are expanding, expose us to numerous special risks, including
collection risks, high start-up costs and potential medical malpractice claims.
   Our international operations are subject to political, economic and regulatory uncertainty.
  Ø
    
    political, social and economic instability;Ø
    
    terrorism, kidnapping and extortion;Ø
    
    potential seizure or nationalization of assets;Ø
    
    import-export quotas; andØ
    
    currency fluctuations or devaluation.
 6




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Ø
    
    the awarding of contracts to local contractors;Ø
    
    the employment of local citizens; andØ
    
    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.
  RISKS SPECIFIC TO OUR COMPANY
 We are highly dependent on the offshore oil and gas industry.
  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; andØ
    
    the price and availability of alternative fuels.
    7




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Our pilot workforce represented by Office and Professional Employees International Union conducted
a general strike beginning on September 20, 2006.
   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.
  Our Chairman of the Board and Chief Executive Officer is also our principal stockholder and has
voting control of the Company.
  Our substantial indebtedness could adversely affect our financial condition and impair our ability
to operate our business.
    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;
 8




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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 limit our ability to obtain
additional financing to fund future working capital, capital expenditures and other aspects of our business plan.Ø
    
    limit our ability to obtain additional financing for working capital, capital expenditures and other aspects of our
business plan.
  The DOJ investigation could result in criminal proceedings and the imposition of fines and
penalties.
   Our stock has a low trading volume.
  We do not pay dividends.
  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.
  9




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Future sales of our shares could depress the market price of our non-voting common stock.
  
 ITEM 1.B. UNRESOLVED STAFF COMMENTS
  10




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ITEM 2. PROPERTIES
 Aircraft
  Cruise
    
    Appr.Number
    
    
    
    
    
    
    
    Speed
    
    RangeManufacturer
    
    Type
    
    in Fleet
    
    Engine
    
    Passengers
    
    (mph)
    
    (miles)(2)Light AircraftBell
    
    206 / 407
    
    
    93
    
    
    Turbine
    
    
    4  6
    
    
    
    130  150
    
    
    
    300  420Eurocopter
    
    BK-117 / BO-105
    
    
    15
    
    
    Twin Turbine
    
    
    4  6
    
    
    
    135
    
    
    
    255  270Eurocopter
    
    EC-135 (1)
    
    
    20
    
    
    Twin Turbine
    
    
    7
    
    
    
    143
    
    
    
    382Aerospatiale
    
    AS350 B2 / B3
    
    
    24
    
    
    Turbine
    
    
    5
    
    
    
    140
    
    
    
    337  385Medium AircraftBell
    
    212 (1) / 222 (1)230 (1) / 412 (1)
    
    
    25
    
    
    Twin Turbine
    
    
    8  13
    
    
    
    115  160
    
    
    
    300  370Sikorsky
    
    S-76 (1) A, A++, C+
    
    
    28
    
    
    Twin Turbine
    
    
    12
    
    
    
    150
    
    
    
    400Transport AircraftBell
    
    214ST (1)
    
    
    4
    
    
    Twin Turbine
    
    
    18
    
    
    
    155
    
    
    
    429Sikorsky
    
    S-92A (1)
    
    
    8
    
    
    Twin Turbine
    
    
    19
    
    
    
    160
    
    
    
    495Total Helicopters
    
    
    217Fixed WingRockwell (3)
    
    Aero Commander
    
    
    2
    
    
    Turboprop
    
    
    6
    
    
    
    300-340
    
    
    
    1,200-1,600Lear Jet (3)
    
    31A(1)
    
    
    1
    
    
    Turbojet
    
    
    8
    
    
    
    527
    
    
    
    1,437Cessna (4)
    
    Conquest 441 (1)
    
    
    3
    
    
    Turboprop
    
    
    6
    
    
    
    330
    
    
    
    1,200Beech (4)
    
    King Air(1)
    
    
    1
    
    
    Turboprop
    
    
    8
    
    
    
    300
    
    
    
    1,380Total Fixed Wing
    
    
    7Total Aircraft
    
    
    224
 
 (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.   11




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Facilities
    Facility
    
    Lease Expiration
    
    Area
    
    Facilities
    
    CommentsMorgan City
(Louisiana)
    
    June 30, 2008
    
    53 acres
    
    Operational and
maintenance
facilities, landing
pads for 46
helicopters
    
    Options to extend
to June 30, 2018Intracoastal City
(Louisiana)
    
    December 31, 2008
    
    18 acres
    
    Operational and
maintenance
facilities, landing
pads for 45
helicopters
    
    Options to extend
to December 31,
2010Houma-Terrebonne 
Airport (Louisiana)
    
    August 31, 2008
    
    14 acres
    
    Operational and
maintenance
facilities, landing
pads for 30
helicopters
    
    Three renewal
options to extend
for one year eachGalveston (Texas)
    
    May 31, 2021
    
    4 acres
    
    Operational and
maintenance
facilities, landing
pads for 30
helicopters
    
    Lease period to May
31, 2021 with
certain
cancellation
provisionsFourchon
(Louisiana)
    
    February 28, 2008
    
    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.
    12




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ITEM 3. LEGAL PROCEEDINGS
   
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 PART II
 
 ITEM 5.
    
    MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
  Voting
    
    
    Non-VotingPeriod
    
    High
    
    
    Low
    
    
    High
    
    
    LowJanuary 1, 2006 to March 31, 2006
    
    $
    41.00
    
    
    $
    29.00
    
    
    $
    39.48
    
    
    $
    30.00April 1, 2006 to June 30, 2006
    
    
    38.00
    
    
    
    29.99
    
    
    
    38.54
    
    
    
    29.00July 1, 2006 to September 30, 2006
    
    
    34.24
    
    
    
    29.01
    
    
    
    34.39
    
    
    
    26.69October 1, 2006 to December 31, 2006
    
    
    34.10
    
    
    
    27.29
    
    
    
    33.06
    
    
    
    27.56January 1, 2005 to March 31, 2005
    
    $
    30.25
    
    
    $
    23.42
    
    
    $
    30.11
    
    
    $
    20.75April 1, 2005 to June 30, 2005
    
    
    30.95
    
    
    
    24.10
    
    
    
    30.50
    
    
    
    23.12July 1, 2005 to September 30, 2005
    
    
    35.48
    
    
    
    23.90
    
    
    
    32.48
    
    
    
    23.02October 1, 2005 to December 31, 2005
    
    
    34.59
    
    
    
    27.25
    
    
    
    32.40
    
    
    
    26.35
   Stock Performance Graph
  13




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Index
    
    
    2001
    
    
    2002
    
    
    2003
    
    
    2004
    
    
    2005
    
    
    2006PHI
    
    
    
    100.00
    
    
    
    
    148.20
    
    
    
    
    122.50
    
    
    
    
    128.90
    
    
    
    
    155.00
    
    
    
    
    165.00Peer Group
    
    
    
    100.00
    
    
    
    
    94.64
    
    
    
    
    100.71
    
    
    
    
    135.61
    
    
    
    
    147.59
    
    
    
    
    187.73OSX
    
    
    
    100.00
    
    
    
    
    99.50
    
    
    
    
    107.82
    
    
    
    
    142.23
    
    
    
    
    209.02
    
    
    
    
    229.40Russell 2000
    
    
    
    100.00
    
    
    
    
    79.30
    
    
    
    
    115.60
    
    
    
    
    135.25
    
    
    
    
    139.75
    
    
    
    
    163.50
     14




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##### Table of Contents



ITEM 6. SELECTED FINANCIAL DATA
  Year EndedDecember 31,2006
    
    2005
    
    2004
    
    2003
    
    2002(Thousands)Income Statement DataOperating revenues
    
    $
    413,118
    
    
    $
    363,610
    
    
    $
    291,308
    
    
    $
    269,392
    
    
    $
    283,751Net earnings (loss)
    
    
    (667
    )
    
    
    14,154
    
    
    
    3,972
    
    
    
    1,139
    
    
    
    9,231Net earnings (loss) per shareBasic
    
    
    (0.05
    )
    
    
    1.76
    
    
    
    0.74
    
    
    
    0.21
    
    
    
    1.73Diluted
    
    
    (0.05
    )
    
    
    1.76
    
    
    
    0.72
    
    
    
    0.21
    
    
    
    1.70Weighted average shares outstandingBasic
    
    
    13,911
    
    
    
    8,040
    
    
    
    5,383
    
    
    
    5,383
    
    
    
    5,334Diluted
    
    
    13,911
    
    
    
    8,063
    
    
    
    5,486
    
    
    
    5,486
    
    
    
    5,438Cash dividends declared per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cash Flow DataNet cash provided by operating activities
    
    $
    30,324
    
    
    $
    28,020
    
    
    $
    10,905
    
    
    $
    29,415
    
    
    $
    39,529Net cash used in investing activities (1)
    
    
    (178,928
    )
    
    
    (137,464
    )
    
    
    (18,594
    )
    
    
    (30,943
    )
    
    
    (169,760
    )Net cash provided by financing activities
    
    
    146,388
    
    
    
    108,947
    
    
    
    8,275
    
    
    
    2,026
    
    
    
    127,245Balance Sheet Data (2)Current assets
    
    $
    307,689
    
    
    $
    224,265
    
    
    $
    128,405
    
    
    $
    110,135
    
    
    $
    103,851Working capital
    
    
    254,099
    
    
    
    162,527
    
    
    
    88,716
    
    
    
    70,300
    
    
    
    72,751Property, plant and equipment, net
    
    
    369,465
    
    
    
    311,678
    
    
    
    253,241
    
    
    
    258,526
    
    
    
    252,577Total assets
    
    
    700,970
    
    
    
    549,209
    
    
    
    394,173
    
    
    
    377,454
    
    
    
    366,707Total debt
    
    
    205,500
    
    
    
    204,300
    
    
    
    210,275
    
    
    
    202,000
    
    
    
    200,000Shareholders equity
    
    
    400,125
    
    
    
    239,051
    
    
    
    109,975
    
    
    
    105,993
    
    
    
    104,854
 
 
 (1)
    
    See Restatement in Note 1 to the Consolidated Financial Statements.(2)
    
    As of the end of the period. 15




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ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Overview
        16




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17




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Results of Operations
  Year EndedDecember 31,2006
    
    
    2005
    
    
    2004(Thousands of dollars)Segment operating revenuesDomestic Oil and Gas
    
    $
    248,035
    
    
    $
    219,644
    
    
    $
    180,102Air Medical
    
    
    133,397
    
    
    
    112,123
    
    
    
    77,476International
    
    
    25,588
    
    
    
    28,192
    
    
    
    24,342Technical Services
    
    
    6,098
    
    
    
    3,651
    
    
    
    9,388Total operating revenues
    
    
    413,118
    
    
    
    363,610
    
    
    
    291,308Segment direct expenseDomestic Oil and Gas
    
    
    213,279
    
    
    
    173,177
    
    
    
    151,107Air Medical
    
    
    130,412
    
    
    
    104,465
    
    
    
    67,664International
    
    
    18,456
    
    
    
    19,099
    
    
    
    18,668Technical Services
    
    
    4,125
    
    
    
    2,522
    
    
    
    7,935Total direct expense
    
    
    366,272
    
    
    
    299,263
    
    
    
    245,374Segment selling, general and administrative expenseDomestic Oil and Gas
    
    
    1,010
    
    
    
    1,003
    
    
    
    1,499Air Medical
    
    
    7,384
    
    
    
    6,503
    
    
    
    6,525International
    
    
    96
    
    
    
    214
    
    
    
    49Technical Services
    
    
    82
    
    
    
    7
    
    
    
    12Total selling, general and administrative expense
    
    
    8,572
    
    
    
    7,727
    
    
    
    8,085Total direct and selling, general and administrative
expense
    
    
    374,844
    
    
    
    306,990
    
    
    
    253,459Net segment profit (loss)Domestic Oil and Gas
    
    
    33,746
    
    
    
    45,464
    
    
    
    27,496Air Medical
    
    
    (4,399
    )
    
    
    1,155
    
    
    
    3,287International
    
    
    7,036
    
    
    
    8,879
    
    
    
    5,625Technical Services
    
    
    1,891
    
    
    
    1,122
    
    
    
    1,441Total
    
    
    38,274
    
    
    
    56,620
    
    
    
    37,849Other, net (1)
    
    
    9,946
    
    
    
    3,230
    
    
    
    2,961Unallocated selling, general and administrative costs
    
    
    (19,267
    )
    
    
    (17,169
    )
    
    
    (12,949
    )Interest expense
    
    
    (17,243
    )
    
    
    (20,448
    )
    
    
    (20,109
    )Loss on debt restructuring
    
    
    (12,790
    )
    
    
    
    
    
    
    Earnings (loss) before income taxes
    
    $
    (1,080
    )
    
    $
    22,233
    
    
    $
    7,752Flight hoursDomestic Oil and Gas
    
    
    107,735
    
    
    
    111,236
    
    
    
    100,814Air Medical
    
    
    29,980
    
    
    
    26,619
    
    
    
    19,595International
    
    
    13,265
    
    
    
    16,788
    
    
    
    15,871Total
    
    
    150,980
    
    
    
    154,643
    
    
    
    136,280Air Medical Transports
    
    
    20,808
    
    
    
    17,200
    
    
    
    11,390Aircraft operated at period endDomestic Oil and Gas
    
    
    152
    
    
    
    155
    
    
    
    151Air Medical
    
    
    68
    
    
    
    64
    
    
    
    51International
    
    
    16
    
    
    
    16
    
    
    
    19Total (2)
    
    
    236
    
    
    
    235
    
    
    
    221
 
 (1)
    
    Including gains on disposition of property and equipment, and other income.(2)
    
    Includes 12, 12, and 14 aircraft as of December 31, 2006, 2005 and 2004, respectively
that are customer owned or leased by customers but operated by us. 
 18




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Year Ended December 31, 2006 compared with Year Ended December 31, 2005
 Combined Operations
 Revenues
 Other Income and Losses
 Direct Expenses
    Selling, General, and Administrative Expenses
 Income Taxes .
 Earnings
 19




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Segment Discussion
 Domestic Oil and Gas 
   Air Medical 
    International 
 20




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Technical Services 
   Year Ended December 31, 2005 compared with Year Ended December 31, 2004
 Combined Operations
 Revenues
 Other Income and Losses
 Direct Expenses
 Selling, General, and Administrative Expenses
 Income Taxes
 21




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Earnings
 Segment Discussion
 Domestic Oil and Gas 
   Air Medical 
    International 
 22




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Technical Services 
   Liquidity and Capital Resources
 General
   Cash Flow
   23




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Financing Activities
   Credit Facility
  Contractual Obligations
  Payment Due by YearBeyondTotal
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    2011(Thousands of dollars)Aircraft Purchase
commitments (1)
    
    $
    144,593
    
    
    $
    127,364
    
    
    $
    17,229
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Aircraft Purchase
commitments (2)
    
    
    37,181
    
    
    
    37,181
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Aircraft lease
obligations
    
    
    157,090
    
    
    
    15,663
    
    
    
    15,663
    
    
    
    15,663
    
    
    
    16,265
    
    
    
    17,533
    
    
    
    76,303Other lease
obligations
    
    
    21,199
    
    
    
    3,237
    
    
    
    2,652
    
    
    
    1,945
    
    
    
    1,664
    
    
    
    1,348
    
    
    
    10,353Long term debt
    
    
    205,500
    
    
    
    
    
    
    
    5,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    200,000$
    565,563
    
    
    $
    183,445
    
    
    $
    41,044
    
    
    $
    17,608
    
    
    $
    17,929
    
    
    $
    18,881
    
    
    $
    286,656
 
 (1)
    
    These commitments are for aircraft that we intend to finance with remaining cash from
the equity offering completed April 2006, and with cash from operations.(2)
    
    These commitments are for aircraft that we intend to finance with an operating lease. 24




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##### Table of Contents



Critical Accounting Policies and Estimates
     25




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##### Table of Contents



New Accounting Pronouncements
  Environmental Matters
   
 ITEM 7.A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    26




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##### Table of Contents



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
    Internal ControlIntegrated Framework
  
 27




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##### Table of Contents



PHI, INC. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 (Thousands of dollars)
 December 31,
    
    
    December 31,2006
    
    
    2005ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    820
    
    
    $
    3,036Short-term investments
    
    
    153,414
    
    
    
    66,525Accounts receivable  net of allowance:Trade
    
    
    87,366
    
    
    
    89,351Other
    
    
    1,928
    
    
    
    6,766Inventories of spare parts and supplies
    
    
    55,596
    
    
    
    48,123Other current assets
    
    
    7,930
    
    
    
    10,042Refundable income taxes
    
    
    635
    
    
    
    422Total current assets
    
    
    307,689
    
    
    
    224,265Other
    
    
    23,816
    
    
    
    13,266Property and equipment, net
    
    
    369,465
    
    
    
    311,678Total Assets
    
    $
    700,970
    
    
    $
    549,209LIABILITIES AND SHAREHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    35,815
    
    
    $
    40,506Accrued liabilities
    
    
    8,511
    
    
    
    10,807Accrued interest
    
    
    3,045
    
    
    
    3,175Accrued vacation payable
    
    
    2,583
    
    
    
    3,811Accrued salaries and wages
    
    
    3,636
    
    
    
    2,439Notes payable
    
    
    
    
    
    
    1,000Total current liabilities
    
    
    53,590
    
    
    
    61,738Long-term debt
    
    
    205,500
    
    
    
    203,300Deferred income taxes
    
    
    32,828
    
    
    
    38,906Other long-term liabilities
    
    
    8,927
    
    
    
    6,214Commitments and contingencies (Note 8)Shareholders Equity:Voting common stock  par value of $0.10;
authorized shares of 12,500,000
    
    
    285
    
    
    
    285Non-voting common stock  par value of $0.10;
authorized shares of 12,500,000
    
    
    1,242
    
    
    
    742Additional paid-in capital
    
    
    290,695
    
    
    
    129,531Accumulated other comprehensive income
    
    
    77
    
    
    
    Retained earnings
    
    
    107,826
    
    
    
    108,493Total shareholders equity
    
    
    400,125
    
    
    
    239,051Total Liabilities and Shareholders Equity
    
    $
    700,970
    
    
    $
    549,209
  28




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##### Table of Contents



PHI, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (Thousands of dollars and shares, except per share data)
 Year Ended
    
    
    Year Ended
    
    
    Year EndedDecember 31,
    
    
    December 31,
    
    
    December 31,2006
    
    
    2005
    
    
    2004Operating revenues
    
    $
    413,118
    
    
    $
    363,610
    
    
    $
    291,308Gain on disposition of property
and equipment, net
    
    
    1,910
    
    
    
    1,173
    
    
    
    2,569Other
    
    
    8,036
    
    
    
    2,057
    
    
    
    392423,064
    
    
    
    366,840
    
    
    
    294,269Expenses:Direct expenses
    
    
    366,272
    
    
    
    299,263
    
    
    
    245,374Selling, general and
administrative expenses
    
    
    27,839
    
    
    
    24,896
    
    
    
    21,034Interest expense
    
    
    17,243
    
    
    
    20,448
    
    
    
    20,109Loss on debt restructuring
    
    
    12,790
    
    
    
    
    
    
    
    424,144
    
    
    
    344,607
    
    
    
    286,517Earnings (loss) before income taxes
    
    
    (1,080
    )
    
    
    22,233
    
    
    
    7,752Income taxes
    
    
    (413
    )
    
    
    8,079
    
    
    
    3,780Net earnings (loss)
    
    $
    (667
    )
    
    $
    14,154
    
    
    $
    3,972Earnings (loss) per shareBasic
    
    $
    (0.05
    )
    
    $
    1.76
    
    
    $
    0.74Diluted
    
    $
    (0.05
    )
    
    $
    1.76
    
    
    $
    0.72Weighted average shares outstanding:Basic
    
    
    13,911
    
    
    
    8,040
    
    
    
    5,383Diluted
    
    
    13,911
    
    
    
    8,063
    
    
    
    5,486
  29




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##### Table of Contents



PHI, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
 (Thousands of dollars and shares)
 AccumulatedVoting
    
    
    Non-Voting
    
    
    Additional
    
    
    Other Com-Common Stock
    
    
    Common Stock
    
    
    Paid-in
    
    
    prehensive
    
    
    RetainedShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Income
    
    
    EarningsBalance at Dec. 31, 2003
    
    
    2,852
    
    
    $
    285
    
    
    
    2,531
    
    
    $
    253
    
    
    $
    15,088
    
    
    $
    
    
    
    $
    90,367Stock options exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10
    
    
    
    
    
    
    
    Net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,972Balance at Dec. 31, 2004
    
    
    2,852
    
    
    
    285
    
    
    
    2,531
    
    
    
    253
    
    
    
    15,098
    
    
    
    
    
    
    
    94,339Stock issuance, net
    
    
    
    
    
    
    
    
    
    
    4,887
    
    
    
    489
    
    
    
    113,352
    
    
    
    
    
    
    
    Stock options exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,081
    
    
    
    
    
    
    
    Net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,154Balance at Dec. 31, 2005
    
    
    2,852
    
    
    
    285
    
    
    
    7,418
    
    
    
    742
    
    
    
    129,531
    
    
    
    
    
    
    
    108,493Stock issuance, net
    
    
    
    
    
    
    
    
    
    
    4,867
    
    
    
    487
    
    
    
    160,235
    
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    139
    
    
    
    13
    
    
    
    929
    
    
    
    
    
    
    
    SFAS No. 158
incremental effect
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    77
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (667
    )Balance at Dec. 31, 2006
    
    
    2,852
    
    
    $
    285
    
    
    
    12,424
    
    
    $
    1,242
    
    
    $
    290,695
    
    
    $
    77
    
    
    $
    107,826
  30




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##### Table of Contents



PHI, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Thousands of dollars)
 Year Ended
    
    
    Year Ended
    
    
    Year EndedDecember 31,
    
    
    December 31,
    
    
    December 31,2006
    
    
    2005
    
    
    2004Cash flows from operating activities:Net earnings (loss)
    
    $
    (667
    )
    
    $
    14,154
    
    
    $
    3,972Adjustments to reconcile net earnings (loss) to net
cash provided by operating activities:Depreciation
    
    
    30,297
    
    
    
    27,133
    
    
    
    27,843Deferred income taxes
    
    
    (1,631
    )
    
    
    6,415
    
    
    
    3,845Gain on asset dispositions
    
    
    (1,910
    )
    
    
    (1,173
    )
    
    
    (2,569
    )Loss on debt restructuring
    
    
    12,790
    
    
    
    
    
    
    
    Other
    
    
    806
    
    
    
    1,411
    
    
    
    1,332Changes in operating assets and liabilities:Accounts receivable  trade
    
    
    1,985
    
    
    
    (31,109
    )
    
    
    (16,499
    )Inventories
    
    
    (7,473
    )
    
    
    (8,898
    )
    
    
    1,180Refundable income taxes
    
    
    (213
    )
    
    
    
    
    
    
    (876
    )Other assets
    
    
    177
    
    
    
    (2,313
    )
    
    
    (7,241
    )Accounts payable, accrued liabilities and
vacation payable
    
    
    (6,679
    )
    
    
    23,049
    
    
    
    (146
    )Other long-term liabilities
    
    
    2,842
    
    
    
    (649
    )
    
    
    64Net cash provided by operating activities
    
    
    30,324
    
    
    
    28,020
    
    
    
    10,905Cash flows from investing activities:Purchase of property and equipment
    
    
    (123,253
    )
    
    
    (96,165
    )
    
    
    (33,921
    )Acquisition of additional operating locations
    
    
    
    
    
    
    
    
    
    
    (1,518
    )Proceeds from asset dispositions
    
    
    36,809
    
    
    
    10,751
    
    
    
    14,395Purchase of short-term investments
    
    
    (186,339
    )
    
    
    (97,950
    )
    
    
    (16,975
    )Proceeds from sale of short-term investments
    
    
    99,450
    
    
    
    45,900
    
    
    
    19,425Other
    
    
    (5,595
    )
    
    
    
    
    
    
    Net cash used in investing activities
    
    
    (178,928
    )
    
    
    (137,464
    )
    
    
    (18,594
    )Cash flows from 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
    
    
    181,900
    
    
    
    114,875
    
    
    
    37,008Payments on line of credit
    
    
    (179,700
    )
    
    
    (119,850
    )
    
    
    (28,733
    )Proceeds from stock issuance
    
    
    161,155
    
    
    
    115,162
    
    
    
    Less related fees and expenses
    
    
    (433
    )
    
    
    (1,265
    )
    
    
    Proceeds from exercise of stock options
    
    
    
    
    
    
    1,025
    
    
    
    Other
    
    
    (469
    )
    
    
    
    
    
    
    Net cash provided by financing activities
    
    
    146,388
    
    
    
    108,947
    
    
    
    8,275(Decrease) Increase in cash and cash equivalents
    
    
    (2,216
    )
    
    
    (497
    )
    
    
    586Cash and cash equivalents, beginning of year
    
    
    3,036
    
    
    
    3,533
    
    
    
    2,947Cash and cash equivalents, end of year
    
    $
    820
    
    
    $
    3,036
    
    
    $
    3,533
  31




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##### Table of Contents



PHI, INC. AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (1)
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESNature of Operations, Basis of Consolidation, and Other General PrinciplesSince 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 RecognitionThe 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 EstimatesThe 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.Cash EquivalentsThe Company considers cash equivalents to include demand deposits and investments with
original maturity dates of three months or less.Short-term InvestmentsShort-term investments consist primarily of auction rate securities, 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s auction rate securities generally have long-term stated
maturities, but have characteristics of short-term investments due to a rate-setting
mechanism and the ability to liquidate them through a Dutch auction process that occurs on
pre-determined intervals of less than 90 days. 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, 2006 and 2005.Inventories of Spare Parts and SuppliesThe 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
 32




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##### Table of Contents



in inventory at the average cost of comparable parts. The rework costs are expensed as
incurred. The Company also records an allowance for obsolescent and slow-moving parts,
relying principally on specific identification of such inventory. Valuation reserves
related to obsolescence and slow-moving inventory were $7.3 million and $6.3 million at
December 31, 2006 and 2005, respectively.Property and EquipmentThe 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. The salvage value used in calculating
depreciation of aircraft ranges from 30% to 40%. 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 January 1, 2005 and prospectively, the Company reassessed the salvage values
applicable to major modifications to aircraft 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). In addition, the Company incurred approximately $1.1 million of
expense in 2005 for repairs to an aircraft that incurred substantial damage due to a weather
related incident.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-InsuranceThe 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. As of December 31,
2006 and 2005, the Company had $1.3 million and $1.1 million, respectively, of accrued
liabilities related to health care claims.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 2006 and 2005
totaled $3.2 million and $1.9 million, respectively. The financial position and operations
of the insurance captive were not significant in 2006 nor 2005. The captive is fully
consolidated in the accompanying financial statements.Concentration of Credit RiskFinancial instruments that potentially expose the Company to concentrations of credit risk
consist primarily of short-term investments and trade accounts receivable. Short-term
investments include auction rate securities and money market securities. The Company does
not believe significant credit risk exists with respect to these securities at December 31,
2006.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. Collection efforts are typically exhausted at
approximately nine months, at which time unpaid amounts are charged off as uncollectible.
The allowance for doubtful accounts was $0.1 million and $0.2 million at December 31, 2006
and December 31, 2005,
 33




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##### Table of Contents



Stock Compensation
   Income Taxes
  Earnings per Share
  Deferred Financing Costs
  Derivative Financial Instruments
  34




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##### Table of Contents



New Accounting Pronouncements
    ChangeBefore Adoption
    
    due to
    
    After Adoption ofof SFAS No. 158
    
    SFAS No. 158
    
    SFAS No. 158Other Long-Term Liabilities:Benefit obligations
    
    $
    1,192
    
    
    $
    (129
    )
    
    $
    1,063Deferred income taxes
    
    
    
    
    
    
    52
    
    
    
    52Shareholders Equity:Accumulated other comprehensive income
    
    
    
    
    
    
    77
    
    
    
    77
  Comprehensive Income
  35




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##### Table of Contents



Goodwill
 st st
 Restatement
  (2)
    
    PROPERTY AND EQUIPMENT
  December 31,
    
    
    December 31,2006
    
    
    2005(Thousands of dollars)Flight equipment
    
    $
    480,934
    
    
    $
    416,076Other
    
    
    74,638
    
    
    
    67,645555,572
    
    
    
    483,721Less accumulated depreciation
    
    
    (186,107
    )
    
    
    (172,043
    )Property and equipment, net
    
    $
    369,465
    
    
    $
    311,678
  (3)
    
    LONG-TERM DEBT
  36




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##### Table of Contents



(4)
    
    INCOME TAXES
  Year Ended
    
    
    Year Ended
    
    
    Year EndedDecember 31,
    
    
    December 31,
    
    
    December 31,2006
    
    
    2005
    
    
    2004(Thousands of dollars)CurrentFederal
    
    $
    
    
    
    $
    343
    
    
    $
    State
    
    
    
    
    
    
    (50
    )
    
    
    (1,142
    )Foreign
    
    
    1,175
    
    
    
    1,371
    
    
    
    1,077Deferred  principally Federal
    
    
    (1,588
    )
    
    
    6,415
    
    
    
    3,845Total
    
    $
    (413
    )
    
    $
    8,079
    
    
    $
    3,780
 37




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##### Table of Contents



Year Ended
    
    
    Year Ended
    
    
    Year EndedDecember 31, 2006
    
    
    December 31, 2005
    
    
    December 31, 2004(Thousands of dollars, except percentage amounts)Amount
    
    
    %
    
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %Income taxes at statutory rate
    
    $
    (367
    )
    
    
    (34
    )
    
    $
    7,559
    
    
    
    34
    
    
    $
    2,636
    
    
    
    34Increase (decrease) in taxes
resulting from:Effect of foreign tax expense,
net of U.S. benefits
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    679
    
    
    
    9Hurricane relief credit
    
    
    
    
    
    
    
    
    
    
    (537
    )
    
    
    (2
    )
    
    
    
    
    
    
    Effect of state income taxes
    
    
    (35
    )
    
    
    (3
    )
    
    
    762
    
    
    
    3
    
    
    
    298
    
    
    
    4Other items  net
    
    
    (11
    )
    
    
    (1
    )
    
    
    295
    
    
    
    1
    
    
    
    167
    
    
    
    2Total
    
    $
    (413
    )
    
    
    (38
    )
    
    $
    8,079
    
    
    
    36
    
    
    $
    3,780
    
    
    
    49
  December 31,
    
    
    December 31,2006
    
    
    2005Deferred tax assets:Deferred compensation
    
    $
    1,644
    
    
    $
    1,652Foreign tax credits
    
    
    5,792
    
    
    
    4,617Vacation accrual
    
    
    962
    
    
    
    1,419Inventory valuation
    
    
    3,355
    
    
    
    3,549Workmans compensation reserve
    
    
    323
    
    
    
    190Allowance for uncollectible accounts
    
    
    19
    
    
    
    2,297Alternative minimum tax credit
    
    
    343
    
    
    
    343Hurricane relief credit
    
    
    814
    
    
    
    814Other
    
    
    720
    
    
    
    1,321Net operating loss
    
    
    34,192
    
    
    
    23,282Total deferred tax assets
    
    
    48,164
    
    
    
    39,484Valuation allowance  tax credit carryforwards
    
    
    (2,142
    )
    
    
    (2,142
    )Total deferred tax assets, net
    
    
    46,022
    
    
    
    37,342Deferred tax liabilities:Tax depreciation in excess of book depreciation
    
    
    (74,326
    )
    
    
    (68,167
    )Total deferred tax liabilities
    
    
    (74,326
    )
    
    
    (68,167
    )Net deferred tax liabilities
    
    $
    (28,304
    )
    
    $
    (30,825
    )
   38




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##### Table of Contents



(5)
    
    EMPLOYEE BENEFIT PLANS
 Savings and Retirement Plans
     Years Ended December 31,2006
    
    
    2005
    
    
    2004(Thousands of dollars)Service cost
    
    $
    
    
    
    $
    259
    
    
    $
    302Interest cost
    
    
    64
    
    
    
    124
    
    
    
    111Recognized actuarial (gain) loss
    
    
    62
    
    
    
    53
    
    
    
    (30
    )Net periodic plan cost
    
    
    126
    
    
    
    436
    
    
    
    383
  December 31,2006
    
    
    2005(Thousands of dollars)Change in benefit obligation:Benefit obligation at the beginning of the year
    
    $
    3,413
    
    
    $
    3,148Service cost
    
    
    
    
    
    
    259Interest cost
    
    
    64
    
    
    
    124Actuarial loss
    
    
    (18
    )
    
    
    13Benefits paid
    
    
    (384
    )
    
    
    (131
    )Transferred to deferred compensation
    
    
    (2,012
    )
    
    
    Benefit obligation at the end of the year
    
    
    1,063
    
    
    
    3,413
 39




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##### Table of Contents



December 31,2006
    
    
    2005(Thousands of dollars)Reconciliation of funded statusUnfunded status
    
    
    (1,063
    )
    
    
    (3,413
    )Unrecognized actuarial gains
    
    
    
    
    
    
    (123
    )Total liability included in other long term
liabilities on the consolidated balance sheet
    
    $
    (1,063
    )
    
    $
    (3,536
    )Weighted average assumptionsDiscount rate
    
    
    5.8
    %
    
    
    4.0
    %Employee turnover/early retirement rate
    
    
    
    
    
    
    
    Stock Based Compensation
    40




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##### Table of Contents



1995PlanOptions
    
    WeightedNon-
    
    AverageVoting
    
    Exercise PriceBalance outstanding at
December 31, 2003
    
    
    217,703
    
    
    
    11.63Options settled for cash
    
    
    (10,750
    )
    
    
    12.75Balance outstanding at
December 31, 2004
    
    
    206,953
    
    
    
    11.57Options exercised
    
    
    (150,000
    )
    
    
    11.06Options settled for cash
    
    
    (10,203
    )
    
    
    8.50Balance outstanding at
December 31, 2005
    
    
    46,750
    
    
    
    13.87Options exercised
    
    
    (8,500
    )
    
    
    12.75Options cancelled
    
    
    (500
    )
    
    
    12.75Balance outstanding at
December 31, 2006
    
    
    37,750
    
    
    
    14.14Shares exercisable at
December 31, 2006
    
    
    37,750
    
    
    
    14.14December 31, 2005
    
    
    46,750
    
    
    
    13.87December 31, 2004
    
    
    206,953
    
    
    
    11.57
  Options Outstanding and ExercisableRemainingNumber
    
    Contractual
    
    ExerciseOutstanding
    

Life (Years)
    

Price22,750
    
    
    
    2.5
    
    
    $
    12.7515,000
    
    
    
    1.8
    
    
    
    16.2537,750
    
    
    
    2.4
    (1)
    
    
    14.14
 
 (1)
    
    Weighted Average Incentive Compensation
  41




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##### Table of Contents



(6)
    
    OTHER ASSETS
  December 31,
    
    
    December 31,2006
    
    
    2005(Thousands of dollars)Goodwill acquired
    
    $
    2,747
    
    
    $
    2,747Security deposits on aircraft
    
    
    10,170
    
    
    
    4,576Deferred financing cost
    
    
    5,231
    
    
    
    3,520Investments
    
    
    3,298
    
    
    
    910Other
    
    
    2,370
    
    
    
    1,513Total
    
    $
    23,816
    
    
    $
    13,266
  (7)
    
    FINANCIAL INSTRUMENTS
 Fair Value .
 December 31, 2006
    
    December 31, 2005Carrying
    
    Estimated
    
    Carrying
    
    EstimatedAmounts
    
    Fair Value
    
    Amounts
    
    Fair ValueLong-term debt
    
    $
    200,000
    
    
    $
    194,000
    
    
    $
    200,000
    
    
    $
    210,500
  (8)
    
    COMMITMENTS AND CONTINGENCIES
 Operating Leases
 Year Ended
    
    
    Year Ended
    
    
    Year EndedDecember 31,
    
    
    December 31,
    
    
    December 31,2006
    
    
    2005
    
    
    2004(Thousands of dollars)Aircraft
    
    $
    15,663
    
    
    $
    5,817
    
    
    $
    748Other
    
    
    5,174
    
    
    
    5,167
    
    
    
    3,906Total
    
    $
    20,837
    
    
    $
    10,984
    
    
    $
    4,654
   42




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##### Table of Contents



Aircraft
    
    
    Other
    
    
    Total(Thousands of dollars)2007
    
    $
    15,663
    
    
    $
    3,237
    
    
    $
    18,9002008
    
    
    15,663
    
    
    
    2,652
    
    
    
    18,3152009
    
    
    15,663
    
    
    
    1,945
    
    
    
    17,6082010
    
    
    16,265
    
    
    
    1,664
    
    
    
    17,9292011
    
    
    17,533
    
    
    
    1,348
    
    
    
    18,881Thereafter
    
    
    76,303
    
    
    
    10,353
    
    
    
    86,656$
    157,090
    
    
    $
    21,199
    
    
    $
    178,289
     Environmental Matters
  43




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##### Table of Contents



Legal Matters
  Purchase Commitments
 Employee Matters
  (9)
    
    BUSINESS SEGMENTS AND GEOGRAPHIC AREAS
   44




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##### Table of Contents



Year EndedDecember 31,2006
    
    
    2005
    
    
    2004(Thousands of dollars)Segment operating revenuesDomestic Oil and Gas
    
    $
    248,035
    
    
    $
    219,644
    
    
    $
    180,102Air Medical
    
    
    133,397
    
    
    
    112,123
    
    
    
    77,476International
    
    
    25,588
    
    
    
    28,192
    
    
    
    24,342Technical Services
    
    
    6,098
    
    
    
    3,651
    
    
    
    9,388Total operating revenues
    
    
    413,118
    
    
    
    363,610
    
    
    
    291,308Segment direct expenseDomestic Oil and Gas
    
    
    213,279
    
    
    
    173,177
    
    
    
    151,107Air Medical
    
    
    130,412
    
    
    
    104,465
    
    
    
    67,664International
    
    
    18,456
    
    
    
    19,099
    
    
    
    18,668Technical Services
    
    
    4,125
    
    
    
    2,522
    
    
    
    7,935Total direct expense
    
    
    366,272
    
    
    
    299,263
    
    
    
    245,374Segment selling, general and administrative expenseDomestic Oil and Gas
    
    
    1,010
    
    
    
    1,003
    
    
    
    1,499Air Medical
    
    
    7,384
    
    
    
    6,503
    
    
    
    6,525International
    
    
    96
    
    
    
    214
    
    
    
    49Technical Services
    
    
    82
    
    
    
    7
    
    
    
    12Total selling, general and administrative expense
    
    
    8,572
    
    
    
    7,727
    
    
    
    8,085Total direct and selling, general and administrative
expense
    
    
    374,844
    
    
    
    306,990
    
    
    
    253,459Net segment profit (loss)Domestic Oil and Gas
    
    
    33,746
    
    
    
    45,464
    
    
    
    27,496Air Medical
    
    
    (4,399
    )
    
    
    1,155
    
    
    
    3,287International
    
    
    7,036
    
    
    
    8,879
    
    
    
    5,625Technical Services
    
    
    1,891
    
    
    
    1,122
    
    
    
    1,441Total
    
    
    38,274
    
    
    
    56,620
    
    
    
    37,849Other, net (1)
    
    
    9,946
    
    
    
    3,230
    
    
    
    2,961Unallocated selling, general and administrative costs
    
    
    (19,267
    )
    
    
    (17,169
    )
    
    
    (12,949
    )Interest expense
    
    
    (17,243
    )
    
    
    (20,448
    )
    
    
    (20,109
    )Loss on debt restructuring
    
    
    (12,790
    )
    
    
    
    
    
    
    Earnings (loss) before income taxes
    
    $
    (1,080
    )
    
    $
    22,233
    
    
    $
    7,752
 
 (1)
    
    Including gains on disposition of property and equipment and other income. 45




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##### Table of Contents



Year EndedDecember 31,2006
    
    
    2005
    
    
    2004(Thousands of dollars)Expenditures for long lived
AssetsDomestic Oil and Gas
    
    $
    107,896
    
    
    $
    55,876
    
    
    $
    7,614Air Medical
    
    
    14,446
    
    
    
    39,361
    
    
    
    18,071International
    
    
    136
    
    
    
    284
    
    
    
    198Corporate
    
    
    775
    
    
    
    644
    
    
    
    8,038Total
    
    $
    123,253
    
    
    $
    96,165
    
    
    $
    33,921
 Year EndedDecember 31,2006
    
    
    2005
    
    
    2004(Thousands of dollars)Depreciation and
AmortizationDomestic Oil and Gas
    
    $
    15,939
    
    
    $
    15,829
    
    
    $
    18,342Air Medical
    
    
    8,634
    
    
    
    6,023
    
    
    
    4,992International
    
    
    1,443
    
    
    
    1,236
    
    
    
    1,587Technical Services
    
    
    
    
    
    
    
    
    
    
    42Corporate
    
    
    4,281
    
    
    
    4,045
    
    
    
    2,880Total
    
    $
    30,297
    
    
    $
    27,133
    
    
    $
    27,843AssetsDomestic Oil and Gas
    
    $
    289,349
    
    
    $
    247,657
    
    
    $
    227,929Air Medical
    
    
    166,367
    
    
    
    137,911
    
    
    
    89,722International
    
    
    15,170
    
    
    
    13,560
    
    
    
    12,289Corporate
    
    
    230,084
    
    
    
    150,081
    
    
    
    64,233Total
    
    $
    700,970
    
    
    $
    549,209
    
    
    $
    394,173
  Year Ended
    
    
    Year Ended
    
    
    Year EndedDecember 31,
    
    
    December 31,
    
    
    December 31,2006
    
    
    2005
    
    
    2004(Thousands of dollars)Operating revenues:United States
    
    $
    387,530
    
    
    $
    335,418
    
    
    $
    266,966International
    
    
    25,588
    
    
    
    28,192
    
    
    
    24,342Total
    
    $
    413,118
    
    
    $
    363,610
    
    
    $
    291,308Long-Lived Assets:United States
    
    $
    362,527
    
    
    $
    303,924
    
    
    $
    246,819International
    
    
    6,938
    
    
    
    7,754
    
    
    
    6,422Total
    
    $
    369,465
    
    
    $
    311,678
    
    
    $
    253,241
 (10)
    
    EFFECTS OF HURRICANES
  46




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##### Table of Contents



(11)
    
    QUARTERLY FINANCIAL DATA (UNAUDITED)
  Quarter EndedMarch 31,
    
    
    June 30,
    
    
    September 30,
    
    
    December 31,2006
    
    
    2006
    
    
    2006
    
    
    2006(Thousands of dollars, except per share data)Operating revenues
    
    $
    101,372
    
    
    $
    107,157
    
    
    $
    109,315
    
    
    $
    95,274Gross profit
    
    
    14,317
    
    
    
    17,946
    
    
    
    16,091
    
    
    
    (1,508
    )Net earnings (loss)
    
    
    2,225
    
    
    
    (2,755
    )
    
    
    5,122
    
    
    
    (5,259
    )Net earnings (loss) per shareBasic
    
    
    0.21
    
    
    
    (0.19
    )
    
    
    0.34
    
    
    
    (0.34
    )Diluted
    
    
    0.21
    
    
    
    (0.19
    )
    
    
    0.33
    
    
    
    (0.34
    )
 Quarter EndedMarch 31,
    
    June 30,
    
    September 30,
    
    December 31,2005
    
    2005
    
    2005
    
    2005(Thousands of dollars, except per share data)Operating revenues
    
    $
    74,239
    
    
    $
    86,783
    
    
    $
    100,018
    
    
    $
    102,570Gross profit
    
    
    10,203
    
    
    
    13,887
    
    
    
    19,834
    
    
    
    20,422Net earnings
    
    
    359
    
    
    
    1,961
    
    
    
    5,460
    
    
    
    6,374Net earnings per shareBasic
    
    
    0.07
    
    
    
    0.32
    
    
    
    0.53
    
    
    
    0.62Diluted
    
    
    0.07
    
    
    
    0.31
    
    
    
    0.53
    
    
    
    0.62
 (12)
    
    SHAREHOLDERS EQUITY
   (13)
    
    CONDENSED FINANCIAL INFORMATION  GUARANTOR ENTITIES
   47




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##### Table of Contents



PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
(Thousands of dollars)
 December 31, 2006ParentCompany
    
    
    GuarantorOnly
    
    
    Subsidiaries(1)
    
    
    Eliminations
    
    
    ConsolidatedASSETSCurrent Assets:Cash and cash equivalents
    
    $
    385
    
    
    $
    435
    
    
    $
    
    
    
    $
    820Short-term investments
    
    
    153,414
    
    
    
    
    
    
    
    
    
    
    
    153,414Accounts receivable  net of allowance
    
    
    75,642
    
    
    
    13,652
    
    
    
    
    
    
    
    89,294Inventories of spare parts and supplies
    
    
    55,596
    
    
    
    
    
    
    
    
    
    
    
    55,596Other current assets
    
    
    7,922
    
    
    
    8
    
    
    
    
    
    
    
    7,930Refundable income taxes
    
    
    44
    
    
    
    591
    
    
    
    
    
    
    
    635Total current assets
    
    
    293,003
    
    
    
    14,686
    
    
    
    
    
    
    
    307,689Investment in subsidiaries
    
    
    46,226
    
    
    
    
    
    
    
    (46,226
    )
    
    
    Intercompany receivable
    
    
    
    
    
    
    44,085
    
    
    
    (44,085
    )
    
    
    Other assets
    
    
    23,759
    
    
    
    57
    
    
    
    
    
    
    
    23,816Property and equipment, net
    
    
    361,570
    
    
    
    7,895
    
    
    
    
    
    
    
    369,465Total assets
    
    $
    724,558
    
    
    $
    66,723
    
    
    $
    (90,311
    )
    
    $
    700,970LIABILITIES AND
SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable and accrued liabilities
    
    $
    46,653
    
    
    $
    4,354
    
    
    $
    
    
    
    $
    51,007Intercompany payable
    
    
    44,085
    
    
    
    
    
    
    
    (44,085
    )
    
    
    Accrued vacation payable
    
    
    2,295
    
    
    
    288
    
    
    
    
    
    
    
    2,583Total current liabilities
    
    
    93,033
    
    
    
    4,642
    
    
    
    (44,085
    )
    
    
    53,590Long-term debt
    
    
    205,500
    
    
    
    
    
    
    
    
    
    
    
    205,500Deferred income taxes and other long-term
liabilities
    
    
    25,900
    
    
    
    15,855
    
    
    
    
    
    
    
    41,755Shareholders Equity
Paid-in capital
    
    
    292,222
    
    
    
    4,402
    
    
    
    (4,402
    )
    
    
    292,222Accumulated other comprehensive
income
    
    
    77
    
    
    
    
    
    
    
    
    
    
    
    77Retained earnings
    
    
    107,826
    
    
    
    41,824
    
    
    
    (41,824
    )
    
    
    107,826Total shareholders equity
    
    
    400,125
    
    
    
    46,226
    
    
    
    (46,226
    )
    
    
    400,125Total 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. 48




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##### Table of Contents



PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
(Thousands of dollars)
 December 31, 2005ParentCompany
    
    
    GuarantorOnly
    
    
    Subsidiaries(1)
    
    
    Eliminations
    
    
    ConsolidatedASSETSCurrent Assets:Cash and cash equivalents
    
    $
    2,577
    
    
    $
    459
    
    
    $
    
    
    
    $
    3,036Short-term investments
    
    
    66,525
    
    
    
    
    
    
    
    
    
    
    
    66,525Accounts receivable  net of allowance
    
    
    81,881
    
    
    
    14,236
    
    
    
    
    
    
    
    96,117Inventories of spare parts and supplies
    
    
    48,123
    
    
    
    
    
    
    
    
    
    
    
    48,123Other current assets
    
    
    9,978
    
    
    
    64
    
    
    
    
    
    
    
    10,042Refundable income taxes
    
    
    (61
    )
    
    
    483
    
    
    
    
    
    
    
    422Total current assets
    
    
    209,023
    
    
    
    15,242
    
    
    
    
    
    
    
    224,265Investment in subsidiaries
    
    
    38,700
    
    
    
    
    
    
    
    (38,700
    )
    
    
    Intercompany receivable
    
    
    
    
    
    
    39,867
    
    
    
    (39,867
    )
    
    
    Other assets
    
    
    13,253
    
    
    
    13
    
    
    
    
    
    
    
    13,266Property and equipment, net
    
    
    303,421
    
    
    
    8,257
    
    
    
    
    
    
    
    311,678Total assets
    
    $
    564,397
    
    
    $
    63,379
    
    
    $
    (78,567
    )
    
    $
    549,209LIABILITIES AND
SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable and accrued liabilities
    
    $
    46,322
    
    
    $
    10,605
    
    
    $
    
    
    
    $
    56,927Intercompany payable
    
    
    39,867
    
    
    
    
    
    
    
    (39,867
    )
    
    
    Accrued vacation payable
    
    
    3,522
    
    
    
    289
    
    
    
    
    
    
    
    3,811Notes payable
    
    
    1,000
    
    
    
    
    
    
    
    
    
    
    
    1,000Total current liabilities
    
    
    90,711
    
    
    
    10,894
    
    
    
    (39,867
    )
    
    
    61,738Long-term debt
    
    
    203,300
    
    
    
    
    
    
    
    
    
    
    
    203,300Deferred income taxes and other long-term
liabilities
    
    
    31,335
    
    
    
    13,785
    
    
    
    
    
    
    
    45,120Shareholders Equity
Paid-in capital
    
    
    130,558
    
    
    
    4,402
    
    
    
    (4,402
    )
    
    
    130,558Retained earnings
    
    
    108,493
    
    
    
    34,298
    
    
    
    (34,298
    )
    
    
    108,493Total shareholders equity
    
    
    239,051
    
    
    
    38,700
    
    
    
    (38,700
    )
    
    
    239,051Total liabilities and
shareholders equity
    
    $
    564,397
    
    
    $
    63,379
    
    
    $
    (78,567
    )
    
    $
    549,209
 49




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##### Table of Contents



PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(Thousands of dollars)
 For the year ended December 31, 2006ParentCompany
    
    
    GuarantorOnly
    
    
    Subsidiaries(1)
    
    
    Eliminations
    
    
    ConsolidatedOperating revenues
    
    $
    357,355
    
    
    $
    55,763
    
    
    $
    
    
    
    $
    413,118Management fees
    
    
    2,231
    
    
    
    
    
    
    
    (2,231
    )
    
    
    Gain on dispositions of property and
equipment, net
    
    
    1,910
    
    
    
    
    
    
    
    
    
    
    
    1,910Other
    
    
    8,016
    
    
    
    20
    
    
    
    
    
    
    
    8,036369,512
    
    
    
    55,783
    
    
    
    (2,231
    )
    
    
    423,064Expenses:Direct expenses
    
    
    325,115
    
    
    
    41,157
    
    
    
    
    
    
    
    366,272Management fees
    
    
    
    
    
    
    2,231
    
    
    
    (2,231
    )
    
    
    Selling, general, and administrative
    
    
    25,106
    
    
    
    2,733
    
    
    
    
    
    
    
    27,839Equity in net income of consolidated
subsidiaries
    
    
    (7,592
    )
    
    
    
    
    
    
    7,592
    
    
    
    Interest expense
    
    
    17,243
    
    
    
    
    
    
    
    
    
    
    
    17,243Loss on debt restructuring
    
    
    12,790
    
    
    
    
    
    
    
    
    
    
    
    12,790372,662
    
    
    
    46,121
    
    
    
    5,361
    
    
    
    424,144Earnings (loss) before income taxes
    
    
    (3,150
    )
    
    
    9,662
    
    
    
    (7,592
    )
    
    
    (1,080
    )Income taxes
    
    
    (2,483
    )
    
    
    2,070
    
    
    
    
    
    
    
    (413
    )Net earnings (loss)
    
    $
    (667
    )
    
    $
    7,592
    
    
    $
    (7,592
    )
    
    $
    (667
    )
 For the year ended December 31, 2005ParentCompany
    
    
    GuarantorOnly
    
    
    Subsidiaries(1)
    
    
    Eliminations
    
    
    ConsolidatedOperating revenues
    
    $
    310,868
    
    
    $
    52,742
    
    
    $
    
    
    
    $
    363,610Management fees
    
    
    1,485
    
    
    
    
    
    
    
    (1,485
    )
    
    
    Gain on dispositions of property and
equipment, net
    
    
    1,173
    
    
    
    
    
    
    
    
    
    
    
    1,173Other
    
    
    1,988
    
    
    
    69
    
    
    
    
    
    
    
    2,057315,514
    
    
    
    52,811
    
    
    
    (1,485
    )
    
    
    366,840Expenses:Direct expenses
    
    
    263,861
    
    
    
    35,402
    
    
    
    
    
    
    
    299,263Management fees
    
    
    
    
    
    
    1,485
    
    
    
    (1,485
    )
    
    
    Selling, general, and administrative
    
    
    22,110
    
    
    
    2,786
    
    
    
    
    
    
    
    24,896Equity in net income of consolidated
subsidiaries
    
    
    (8,921
    )
    
    
    
    
    
    
    8,921
    
    
    
    Interest expense
    
    
    20,448
    
    
    
    
    
    
    
    
    
    
    
    20,448297,498
    
    
    
    39,673
    
    
    
    7,436
    
    
    
    344,607Earnings before income taxes
    
    
    18,016
    
    
    
    13,138
    
    
    
    (8,921
    )
    
    
    22,233Income taxes
    
    
    3,862
    
    
    
    4,217
    
    
    
    
    
    
    
    8,079Net earnings
    
    $
    14,154
    
    
    $
    8,921
    
    
    $
    (8,921
    )
    
    $
    14,154
 
 1)
    
    Foreign subsidiaries represent minor subsidiaries and are included in the guarantors
subsidiaries amounts. 50




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##### Table of Contents



PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(Thousands of dollars)
 For the year ended December 31, 2004ParentCompany
    
    
    GuarantorOnly
    
    
    Subsidiaries(1)
    
    
    Eliminations
    
    
    ConsolidatedOperating revenues
    
    $
    244,230
    
    
    $
    47,078
    
    
    $
    
    
    
    $
    291,308Management fees
    
    
    4,943
    
    
    
    
    
    
    
    (4,943
    )
    
    
    Gain on dispositions of property and
equipment, net
    
    
    2,575
    
    
    
    (6
    )
    
    
    
    
    
    
    2,569Other
    
    
    373
    
    
    
    19
    
    
    
    
    
    
    
    392252,121
    
    
    
    47,091
    
    
    
    (4,943
    )
    
    
    294,269Expenses:Direct expenses
    
    
    217,072
    
    
    
    28,302
    
    
    
    
    
    
    
    245,374Management fees
    
    
    
    
    
    
    4,943
    
    
    
    (4,943
    )
    
    
    Selling, general, and administrative
    
    
    17,354
    
    
    
    3,680
    
    
    
    
    
    
    
    21,034Equity in net income of consolidated
subsidiaries
    
    
    (7,398
    )
    
    
    
    
    
    
    7,398
    
    
    
    Interest expense
    
    
    20,109
    
    
    
    
    
    
    
    
    
    
    
    20,109247,137
    
    
    
    36,925
    
    
    
    2,455
    
    
    
    286,517Earnings before income taxes
    
    
    4,984
    
    
    
    10,166
    
    
    
    (7,398
    )
    
    
    7,752Income taxes
    
    
    1,012
    
    
    
    2,768
    
    
    
    
    
    
    
    3,780Net earnings
    
    $
    3,972
    
    
    $
    7,398
    
    
    $
    (7,398
    )
    
    $
    3,972
 51




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##### Table of Contents



PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(Thousands of dollars)
 For the year ended December 31, 2006ParentCompany
    
    
    GuarantorOnly
    
    
    Subsidiaries(1)
    
    
    Eliminations
    
    
    ConsolidatedNet cash provided by operating activities
    
    $
    30,142
    
    
    $
    182
    
    
    $
    
    
    
    $
    30,324Cash flows from investing activities:Purchase of property and equipment
    
    
    (123,047
    )
    
    
    (206
    )
    
    
    
    
    
    
    (123,253
    )Proceeds from asset dispositions
    
    
    36,809
    
    
    
    
    
    
    
    
    
    
    
    36,809Purchase (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
    )Cash flows from financing activities:Proceeds of debt issuance  Senior Notes
    
    
    200,000
    
    
    
    
    
    
    
    
    
    
    
    200,000Premium 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 (payments) line of credit, net
    
    
    2,200
    
    
    
    
    
    
    
    
    
    
    
    2,200Proceeds from stock issuance, net
    
    
    160,722
    
    
    
    
    
    
    
    
    
    
    
    160,722Other
    
    
    (469
    )
    
    
    
    
    
    
    
    
    
    
    (469
    )Net cash provided by financing activities
    
    
    146,388
    
    
    
    
    
    
    
    
    
    
    
    146,388Increase in cash and cash equivalents
    
    
    (2,192
    )
    
    
    (24
    )
    
    
    
    
    
    
    (2,216
    )Cash and cash equivalents, beginning of
period
    
    
    2,577
    
    
    
    459
    
    
    
    
    
    
    
    3,036Cash and cash equivalents, end of period
    
    $
    385
    
    
    $
    435
    
    
    $
    
    
    
    $
    820
 
 1)
    
    Foreign subsidiaries represent minor subsidiaries and are included in the guarantors
subsidiaries amounts. 52




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##### Table of Contents



PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(Thousands of dollars)
 For the year ended December 31, 2005ParentCompany
    
    
    GuarantorOnly
    
    
    Subsidiaries(1)
    
    
    Eliminations
    
    
    ConsolidatedNet cash provided by operating activities
    
    $
    27,864
    
    
    $
    156
    
    
    $
    
    
    
    $
    28,020Cash flows from investing activities:Purchase of property and equipment
    
    
    (96,161
    )
    
    
    (4
    )
    
    
    
    
    
    
    (96,165
    )Proceeds from asset dispositions
    
    
    10,751
    
    
    
    
    
    
    
    
    
    
    
    10,751Purchase (sale) of short-term investments
    
    
    (52,050
    )
    
    
    
    
    
    
    
    
    
    
    (52,050
    )Net cash used in investing activities
    
    
    (137,460
    )
    
    
    (4
    )
    
    
    
    
    
    
    (137,464
    )Cash flows from financing activities:Proceeds from (payment of) long-term
debt, net
    
    
    (5,975
    )
    
    
    
    
    
    
    
    
    
    
    (5,975
    )Proceeds from exercise of stock options
    
    
    1,025
    
    
    
    
    
    
    
    
    
    
    
    1,025Proceeds from stock issuance, net
    
    
    113,897
    
    
    
    
    
    
    
    
    
    
    
    113,897Net cash provided by financing activities
    
    
    108,947
    
    
    
    
    
    
    
    
    
    
    
    108,947Increase in cash and cash equivalents
    
    
    (649
    )
    
    
    152
    
    
    
    
    
    
    
    (497
    )Cash and cash equivalents, beginning of
period
    
    
    3,226
    
    
    
    307
    
    
    
    
    
    
    
    3,533Cash and cash equivalents, end of period
    
    $
    2,577
    
    
    $
    459
    
    
    $
    
    
    
    $
    3,036
 For the year ended December 31, 2004ParentCompany
    
    
    GuarantorOnly
    
    
    Subsidiaries(1)
    
    
    Eliminations
    
    
    ConsolidatedNet cash provided by operating activities
    
    $
    10,644
    
    
    $
    261
    
    
    $
    
    
    
    $
    10,905Cash flows from investing activities:Acquisition of additional operating
locations
    
    
    (1,518
    )
    
    
    
    
    
    
    
    
    
    
    (1,518
    )Purchase of property and equipment
    
    
    (33,916
    )
    
    
    (5
    )
    
    
    
    
    
    
    (33,921
    )Proceeds from asset dispositions
    
    
    14,395
    
    
    
    
    
    
    
    
    
    
    
    14,395Purchase (sale) of short-term investments
    
    
    2,450
    
    
    
    
    
    
    
    
    
    
    
    2,450Net cash used in investing activities
    
    
    (18,589
    )
    
    
    (5
    )
    
    
    
    
    
    
    (18,594
    )Cash flows from financing activities:Proceeds from long-term debt, net
    
    
    8,275
    
    
    
    
    
    
    
    
    
    
    
    8,275Net cash provided by financing activities
    
    
    8,275
    
    
    
    
    
    
    
    
    
    
    
    8,275Increase (decrease) in cash and cash
equivalents
    
    
    330
    
    
    
    256
    
    
    
    
    
    
    
    586Cash and cash equivalents, beginning of
period
    
    
    2,896
    
    
    
    51
    
    
    
    
    
    
    
    2,947Cash and cash equivalents, end of period
    
    $
    3,226
    
    
    $
    307
    
    
    $
    
    
    
    $
    3,533
 53




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##### Table of Contents



ITEM 9.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES
  
 ITEM 9.A.
    
    CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures
   Managements Report on Internal Control over Financial Reporting
  Internal
Control-Integrated Framework
  54




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 Internal ControlIntegrated Framework
    Internal ControlIntegrated Framework Internal
ControlIntegrated Framework
   
 55




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##### Table of Contents



ITEM 9.B. OTHER INFORMATION
  
 PART III
 
 ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
  
 ITEM 11. EXECUTIVE COMPENSATION
  
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
  
 ITEM 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
  
 ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
  56




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##### Table of Contents



PART IV
 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 Page1.
    
    Financial StatementsIncluded in Part II of this report:Report of Independent Registered Public Accounting Firm
    
    
    27Consolidated Balance Sheets  December 31, 2006 and December 31, 2005.
    
    
    28Consolidated Statements of Operations for the years ended December 31, 2006,
December 31, 2005, and December 31, 2004.
    
    
    29Consolidated Statements of Shareholders Equity for the years ended
December 31, 2006,
December 31, 2005, and December 31, 2004.
    
    
    30Consolidated Statements of Cash Flows for the years ended December 31, 2006,
December 31 2005, and December 31, 2004.
    
    
    31Notes to Consolidated Financial Statements.
    
    
    322.
    
    Financial Statement SchedulesSchedule II  Valuation and Qualifying accounts for the years ended
December 31, 2006,
December 31, 2005 and December 31, 2004.
    
    
    59
 Exhibits
 3
    
    Articles of Incorporation and By-laws3.1
    
    (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)
    
    Articles of Amendment to Articles of Incorporation of the
Company (incorporated by reference to Exhibit 3.1 to PHIs Report on Form 8-K
filed January 3, 2006).(iii)
    
    Amended and Restated By-laws of the Company (As amended
through May 1, 2002).
 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).4.2
    
    1st Amendment to 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 10.4 to PHIs Report on Form 10-Q for the
quarterly period ended June 30, 2004).4.3
    
    Form of Senior Debt Indenture (incorporated by reference to Exhibit 4.5 to
PHIs Registration Statement on Form S-3, filed on March 23, 2005, File No. 333-123528)4.4
    
    Form of Subordinated Debt Indenture (incorporated by reference to Exhibit 4.6
to PHIs Registration Statement on Form S-3, filed on March 23, 2005, File No.
333-123528)4.5
    
    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).
 57




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##### Table of Contents



4.6
    
    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).4.7
    
    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).10
    
    Material Contracts10.2
    
    The Amended and Restated PHI, Inc. 401 (k) Retirement Plan effective January 1,
2006.10.3
    
    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, 1995.10.4
    
    Form of Non-Qualified Stock Option Agreement under the PHI, Inc. 1995 Incentive
Compensation Plan between PHI and certain of its key employees.10.5
    
    Officer Deferred Compensation Plan II adopted by PHIs Board effective January
1, 2005.10.6
    
    Articles of Agreement Between PHI, Inc. & Office & Professional Employees
International Union and its Local 108 dated June 13, 2001.21
    
    Subsidiaries of the Registrant23.1
    
    Consent of Deloitte & Touche LLP31.1
    
    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.
 58




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##### Table of Contents



PHI, INC. AND SUBSIDIARIES
Schedule II  Valuation and Qualifying Accounts
(Thousands of dollars)
 AdditionsBalance at
    
    Charged to
    
    
    
    
    
    Balance atBeginning
    
    Costs and
    
    
    
    
    
    EndDescription
    
    of Year
    
    Expenses
    
    Deductions
    
    of YearYear ended December 31, 2006:Allowance for doubtful accounts
    
    $
    163
    
    
    $
    
    
    
    $
    113
    
    
    $
    50Allowance for obsolescent
inventory
    
    
    6,268
    
    
    
    1,502
    
    
    
    514
    
    
    
    7,256Year ended December 31, 2005:Allowance for doubtful accounts
    
    $
    163
    
    
    $
    
    
    
    $
    
    
    
    $
    163Allowance for obsolescent
inventory
    
    
    6,988
    
    
    
    (70
    )
    
    
    650
    
    
    
    6,268Year ended December 31, 2004:Allowance for doubtful accounts
    
    $
    120
    
    
    $
    43
    
    
    $
    
    
    
    $
    163Allowance for obsolescent
inventory
    
    
    5,536
    
    
    
    2,400
    
    
    
    948
    
    
    
    6,988
 59




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##### Table of Contents



/s/ Michael J. McCann
 
  Signature
    
    Title
    
    Date/s/    Al A. Gonsoulin
    
    Chairman of the Board
    
    March 16, 2007Al A. Gonsoulin
    
    Chief Executive Officerand Director(Principal Executive Officer)/s/   Lance F. Bospflug
    
    Director
    
    March 16, 2007Lance F. Bospflug/s/   Arthur J. Breault, Jr.
    
    Director
    
    March 16, 2007Arthur J. Breault, Jr./s/   Thomas H. Murphy
    
    Director
    
    March 16, 2007Thomas H. Murphy/s/    Richard H. Matzke
    
    Director
    
    March 16, 2007Richard H. Matzke/s/    C. Russell Luigs
    
    Director
    
    March 16, 2007C. Russell Luigs/s/   Michael J. McCann
    
    Chief Financial Officer
    
    March 16, 2007Michael J. McCann
    
    (Principal Financial andAccounting Officer)
 60




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##### Table of Contents



3
    
    Articles of Incorporation and By-laws3.1
    
    (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)
    
    Articles of Amendment to Articles of Incorporation of the
Company (incorporated by reference to Exhibit 3.1 to PHIs Report on Form 8-K
filed January 3, 2006).(iii)
    
    Amended and Restated By-laws of the Company (As amended
through May 1, 2002).
 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).4.2
    
    1st Amendment to 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 10.4 to PHIs Report on Form 10-Q for the
quarterly period ended June 30, 2004).4.3
    
    Form of Senior Debt Indenture (incorporated by reference to Exhibit 4.5 to
PHIs Registration Statement on Form S-3, filed on March 23, 2005, File No. 333-123528)4.4
    
    Form of Subordinated Debt Indenture (incorporated by reference to Exhibit 4.6
to PHIs Registration Statement on Form S-3, filed on March 23, 2005, File No.
333-123528)4.5
    
    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).4.6
    
    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).4.7
    
    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).10
    
    Material Contracts10.2
    
    The Amended and Restated PHI, Inc. 401 (k) Retirement Plan effective January 1,
2006.




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##### Table of Contents



10.3
    
    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, 1995.10.4
    
    Form of Non-Qualified Stock Option Agreement under the PHI, Inc. 1995 Incentive
Compensation Plan between PHI and certain of its key employees.10.5
    
    Officer Deferred Compensation Plan II adopted by PHIs Board effective January
1, 2005.10.6
    
    Articles of Agreement Between PHI, Inc. & Office & Professional Employees
International Union and its Local 108 dated June 13, 2001.21
    
    Subsidiaries of the Registrant23.1
    
    Consent of Deloitte & Touche LLP31.1
    
    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.