SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 8-K/A-1
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Data of Report (Date of earliest event reported) JULY 31, 1997
Commission file number 0-16079
AIR METHODS CORPORATION
(Exact name of Registrant as Specified in Its Charter)
Delaware 84-0915893
- ---------------------------------------- ---------------------------------------
(State or Other Jurisdiction (I.R.S. Employer Identification Number)
of Incorporation or Organization)
7301 South Peoria, Englewood, Colorado 80112
- ----------------------------------------- --------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (303) 792-7400
Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report: N/A
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On July 31, 1997, Air Methods Corporation, a Delaware corporation ("the
Company"), acquired all of the common stock of Mercy Air Service, Inc., a
California corporation, and substantially all of the net assets of Helicopter
Services, Inc., a California corporation (together "Mercy"), two affiliated
entities, for $6,211,000. The purchase price was negotiated by the Company and
the sellers and is subject to working capital post-closing adjustments to be
determined by independent audit within 90 days of the closing date. The purchase
will be accounted for using the purchase method of accounting. Of the purchase
price, $4,595,000 was paid in cash at closing with the remaining balance
financed by the selling shareholders over five years at 9% interest. Most of the
funding for the cash payment was primarily provided by the refinancing of six of
Mercy's helicopters with Finova Capital Corporation ("Finova"). The note from
Finova provides for monthly principal and interest payments at 9.52% interest
with a 28% balloon at the end of ten years.
The shareholders of Mercy consisted of Homer L. Aerts, J. Steven Dickmeyer, Don
D. Reed, Terry L. Russ, and Richard J. Silva. In connection with the
acquisition, each of the shareholders entered into a consulting and
non-competition agreement with the Company in exchange for $10,000 and a monthly
consulting fee over five years. Each shareholder was also granted options to
purchase 100,000 shares of the Company's common stock at the closing price on
July 31, 1997, the effective date of the grant. The options vest over three
years and expire after five years.
Mercy has operated as an independent provider of air medical transportation
services throughout southern California since 1988. As an independent provider,
Mercy's operations include medical care, aircraft operation and maintenance,
communications and dispatch, and medical billing and collections. Mercy will
continue its operations as a wholly-owned subsidiary of the Company.
-2-
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
The following financial statements, pro forma financial information, and
exhibits are filed as part of this report:
a. Combined Financial Statements of Mercy Air Service, Inc., and Helicopter
Services, Inc.:
Unaudited Combined Balance Sheet - June 30, 1997
Unaudited Combined Statements of Operations for the six months ended June
30, 1997 and 1996
Unaudited Combined Statements of Cash Flows for the six months ended June
30, 1997 and 1996
Notes to Unaudited Combined Financial Statements
Independent Auditors' Report
Combined Balance Sheets - December 31, 1996 and 1995
Combined Statements of Operations for the years ended December 31, 1996,
1995 and 1994
Combined Statements of Stockholders' Equity for the years ended December
31, 1996, 1995 and 1994
Combined Statements of Cash Flows for the years ended December 31, 1996,
1995 and 1994
b. Pro Forma Financial Statements:
Unaudited Pro Forma Combined Balance Sheet - June 30, 1997
Unaudited Pro Forma Combined Statement of Operations for the six months
ended June 30, 1997
Unaudited Pro Forma Combined Statement of Operations for the year ended
December 31, 1996
Notes to Unaudited Pro Forma Combined Financial Statements
c. Exhibits:
2.1* Stock Purchase Agreement, dated July 11, 1997, among the Company and
shareholders of Mercy Air Service, Inc.
2.2* Asset Purchase Agreement, dated July 11, 1997, by and among the
Company, Helicopter Services, Inc., and shareholders of Mercy Air
Service, Inc.
10.1*Letter Agreement, dated July 29, 1997, between the Company and Finova
Capital Corporation 10.2* Secured Promissory Note, dated July 31,
1997, issued by the Company to Finova Capital Corporation
10.3*Stock Pledge Agreement, dated July 31, 1997, between the Company and
Finova Capital Corporation
10.4*Secured Loan Agreement, dated July 31, 1997, between Finova Capital
Corporation and Mercy Air Service, Inc.
10.5*Aircraft Chattel Mortgage and Security Agreement, dated July 31, 1997,
between Finova Capital Corporation and Mercy Air Service, Inc.
10.6*Secured Promissory Note, dated July 31, 1997, issued by Mercy Air
Service, Inc. to Finova Capital Corporation
10.7*Continuing Guaranty and Subordination Agreement, dated July 31, 1997,
between Finova Capital Corporation and the Company
23.1 Consent of KPMG Peat Marwick LLP
- --------------------------
* Filed previously as exhibits to the issuer's Current Report on Form 8-K dated
July 31, 1997.
-3-
AIR METHODS CORPORATION
INDEX TO FINANCIAL STATEMENTS
Combined Financial Statements - Mercy Air Service, Inc. and Helicopter Services,
Inc:
Unaudited Combined Balance Sheet - June 30, 1997........................F-2
Unaudited Combined Statements of Operations for the six months
ended June 30, 1997 and 1996............................................F-3
Unaudited Combined Statements of Cash Flows for the six months
ended June 30, 1997 and 1996............................................F-4
Notes to Unaudited Combined Financial Statements........................F-5
Independent Auditors' Report............................................F-6
Combined Balance Sheets - December 31, 1996 and 1995....................F-7
Combined Statements of Operations for the years ended
December 31, 1996, 1995, and 1994.......................................F-9
Combined Statements of Stockholders' Equity for the
years ended December 31, 1996, 1995, and 1994..........................F-10
Combined Statements of Cash Flows for the years ended
December 31, 1996, 1995, and 1994......................................F-11
Notes to Combined Financial Statements.................................F-12
Unaudited Pro Forma Financial Statements:
Unaudited Pro Forma Combined Balance Sheet - June 30, 1997.............F-19
Unaudited Pro Forma Combined Statement of Operations
for the six months ended June 30, 1997.................................F-21
Unaudited Pro Forma Combined Statement of Operations
for the year ended December 31, 1996...................................F-22
Notes to Unaudited Pro Forma Combined Financial Statements.............F-23
F-1
MERCY AIR SERVICE, INC. AND HELICOPTER SERVICES, INC.
UNAUDITED COMBINED BALANCE SHEET
JUNE 30, 1997
(AMOUNTS IN THOUSANDS)
ASSETS
Cash and cash equivalents $ 256
Receivables, net, including $685 from related
parties and stockholders 3,517
Current installment of notes receivable, primarily
from stockholders 247
Accrued interest from related party 564
Inventories 383
Work-in-process on maintenance contracts 26
Prepaid expenses and other 124
-----------
Total current assets 5,117
-----------
Aircraft 12,086
Other equipment 1,872
-----------
Total equipment 13,958
Less accumulated depreciation (4,379)
-----------
Equipment, net 9,579
Intangible and other assets, net 293
Notes receivable, primarily from stockholders 3,528
-----------
Total assets $ 18,517
===========
LIABILITIES & STOCKHOLDERS' EQUITY
Notes payable $ 13
Current installments of long-term debt, including
$295 from stockholders 1,739
Accounts payable 157
Accrued overhaul and parts replacement costs 475
Other accrued liabilities 374
-----------
Total current liabilities 2,758
Long-term debt, less current installments, including
$1,639 from stockholders 5,778
Accrued overhaul and parts replacement costs 1,150
Other liabilities 46
-----------
Total liabilities 9,732
Common stock, $500 par value; 20,000 combined shares
authorized; 183 combined shares issued
and outstanding 92
Additional paid-in capital 3,866
Retained earnings 4,837
Stock subscription receivable (10)
-----------
Total stockholders' equity (note 2) 8,785
-----------
Total liabilities and stockholders' equity $ 18,517
===========
See accompanying notes to unaudited combined financial statements.
F-2
MERCY AIR SERVICE, INC. AND HELICOPTER SERVICES, INC.
UNAUDITED COMBINED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(AMOUNTS IN THOUSANDS)
SIX MONTHS
ENDED
1997 1996
------------------ ----------------
Revenue:
Flight revenue $ 6,738 6,899
Parts sales 376 509
Maintenance and fuel sales 504 104
Other 34 -
------------------ ----------------
Total revenue 7,652 7,512
------------------ ----------------
Operating expenses:
Flight centers 1,809 1,855
Bad debt expense 1,496 1,705
Aircraft operations 1,116 1,218
Cost of parts sales 302 406
Cost of maintenance and fuel sales 429 132
Aircraft rental 304 238
Depreciation and amortization 317 300
Other 21 -
General and administrative 1,136 989
------------------ ----------------
Total operating expenses 6,930 6,843
------------------ ----------------
Operating income 722 669
Other income (expense):
Interest income, primarily from related parties 147 189
Interest expense, including $55 in 1997 from stockholders (343) (384)
Aircraft lease income, including $111 in 1997 from related
party 379 268
Other, net 58 158
------------------ ----------------
Net Income $ 963 900
================== ================
See accompanying notes to unaudited combined financial statements.
F-3
MERCY AIR SERVICE, INC. AND HELICOPTER SERVICES, INC.
UNAUDITED COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
SIX MONTHS
ENDED
1997 1996
------------------ ----------------
Cash flows from operating activities:
Net income $ 963 900
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization expense 317 300
Loss on retirement and sale of equipment - 9
Changes in assets and liabilities:
Decrease (increase) in prepaid and other current assets 29 (381)
Decrease (increase) in receivables, net (771) 48
Decrease (increase) in inventories 81 (26)
Increase in accounts payable 39 295
Increase (decrease) in accrued expenses 86 (43)
Decrease in other liabilities (10) (126)
Increase (decrease) in accrued overhaul and parts
replacement costs (632) 160
------------------- ---------------
Net cash flow provided by operating activities 102 1,136
------------------- ---------------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of equipment and leasehold improvements (29) (60)
Proceeds from retirement and sale of equipment - 100
Net decrease (increase) in intangible and other assets 49 (425)
------------------- ----------------
Net cash provided (used) by investing activities 20 (385)
------------------- ----------------
CASH FLOW FROM FINANCING ACTIVITIES:
Dividend payments (201) (192)
Capital contribution through forgiveness of notes payable
to stockholders - 498
Net borrowings (payments) under short-term notes payable (282) 577
Proceeds from issuance of debt 416 -
Payments of long-term debt (385) (1,569)
----------------- ----------------
Net cash used by financing activities (452) (686)
----------------- ----------------
Increase (decrease) in cash and cash equivalents (330) 65
Cash and cash equivalents at beginning of period 586 286
----------------- ----------------
Cash and cash equivalents at end of period $ 256 351
================= ================
See accompanying notes to unaudited combined financial statements.
F-4
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited combined
financial statements contain all adjustments (consisting of only
normal recurring accruals) necessary to present fairly the combined
financial statements for the respective periods. Interim results are
not necessarily indicative of results for a full year. The financial
statements should be read in conjunction with the audited combined
financial statements and notes thereto for the fiscal year ended
December 31, 1996.
(2) STOCKHOLDERS' EQUITY
Changes in the stockholders' equity for the six months ended June 30,
1997, consisted of the following (amounts in thousands):
Balance at January 1, 1997 $ 8,023
Net Income $ 963
Dividends $ (201)
-------
Balance at June 30, 1997 $ 8,785
=======
F-5
INDEPENDENT AUDITORS' REPORT
The Boards of Directors
Mercy Air Service, Inc. and
Helicopter Services, Inc.:
We have audited the accompanying combined balance sheets of Mercy Air Service,
Inc. and Helicopter Services, Inc., as of December 31, 1996 and 1995, and the
related combined statements of operations, stockholders' equity, and cash flows
for each of the years in the three-year period ended December 31, 1996. These
combined financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these combined
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Mercy Air Service,
Inc. and Helicopter Services, Inc., as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Denver, Colorado
June 5, 1997
F-6
MERCY AIR SERVICE, INC. AND HELICOPTER SERVICES, INC.
COMBINED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
ASSETS (NOTE 4) 1996 1995
- ---------------
---------------- ----------------
Current assets
Cash and cash equivalents $ 585,910 286,297
Receivables:
Trade, net of allowance for doubtful accounts of $1,872,792 and
$1,823,155 in 1996 and 1995, respectively 2,703,195 2,659,040
Related parties, net of allowance for doubtful accounts of $125,000 in
1996 (note 7) -- 340,001
Loans from related parties (note 7) 160,212 48,051
Notes from stockholders (note 7) 238,670 218,201
Accrued interest from related party (note 7) 455,013 314,588
---------------- ----------------
3,557,090 3,579,881
---------------- ----------------
Inventories 489,979 443,398
Prepaid expenses and other 152,684 111,057
---------------- ----------------
Total current assets 4,785,663 4,420,633
---------------- ----------------
Property, plant and equipment, net (note 3) 9,864,355 10,327,667
Other assets and long-term receivables:
Intangible assets, net of accumulated amortization of $50,568 and $29,643,
respectively 196,448 217,373
Notes receivable from related parties and stockholders (note 7) 3,509,358 3,687,528
Other 167,453 194,896
---------------- ----------------
3,873,259 4,099,797
---------------- ----------------
Total assets $ 18,523,277 18,848,097
================ ================
(Continued)
F-7
MERCY AIR SERVICE, INC. AND HELICOPTER SERVICES, INC.
COMBINED BALANCE SHEETS, CONTINUED
- -------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
- ------------------------------------
---------------- ----------------
Current liabilities:
Current portion of notes payable (note 4):
Stockholders $ 294,899 364,120
Other 1,787,175 1,411,863
Accounts payable 117,629 269,880
Accrued interest payable:
Related parties 47,840 58,394
Other 33,898 28,211
Accrued payroll and related taxes 206,708 157,730
Accrued overhaul and parts replacement costs 666,049 317,999
Other 56,062 127,506
---------------- ----------------
Total current liabilities 3,210,260 2,735,703
---------------- ----------------
Notes payable, less current portion (note 4):
Stockholders 1,757,552 2,126,451
Other 3,941,329 5,526,993
---------------- ----------------
5,698,881 7,653,444
Accrued overhaul and parts replacement costs 1,590,911 1,638,049
---------------- ----------------
Total liabilities 10,500,052 12,027,196
---------------- ----------------
Stockholders' equity:
Common stock, $500 par value, 20,000 combined shares authorized; 183
combined shares issued and outstanding 91,667 91,667
Additional paid-in capital 3,866,300 3,368,369
Retained earnings 4,075,258 3,370,865
Stock subscription receivable (10,000) (10,000)
---------------- ----------------
Total stockholders' equity 8,023,225 6,820,901
---------------- ----------------
Commitments and contingencies (notes 5 and 8)
Total liabilities and stockholders' equity $ 18,523,277 18,848,097
================ ================
See accompanying notes to combined financial statements.
F-8
MERCY AIR SERVICE, INC. & HELICOPTER SERVICES, INC.
COMBINED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
----------------- ----------------- -----------------
Revenue:
Patient service revenue, net of contractual allowances $ 14,149,829 11,494,509 11,774,045
Parts sales 1,075,425 666,479 212,143
Maintenance:
Related parties (note 7) 141,771 715,373 26,435
Other 131,637 405,804 90,872
Fuel and ground support 53,189 45,255 14,763
Flight operations (note 2) 37,621 459,479 215,820
----------------- ----------------- -----------------
Total revenue 15,589,472 13,786,899 12,334,078
----------------- ----------------- -----------------
Operation expenses:
Flight centers 4,861,533 4,400,884 3,858,942
Bad debts expense 3,630,013 2,548,638 2,700,868
Aircraft rental 571,552 278,400 548,554
Costs of parts sales 883,742 488,899 159,965
Outside maintenance:
Related parties (note 7) 115,878 592,622 18,476
Other 122,840 247,118 85,470
Outside fuel and ground support 18,123 44,488 4,955
Outside flight operations (note 2) 18,578 285,401 135,634
Repairs and maintenance on aircraft (note 7) 2,074,540 1,054,815 1,366,806
Depreciation and amortization 639,865 624,257 474,143
General and administrative 1,986,659 1,770,073 1,324,769
----------------- ----------------- -----------------
Total operating costs and expenses 14,923,323 12,335,595 10,678,582
----------------- ----------------- -----------------
Operating income 666,149 1,451,304 1,655,496
Other income (expense):
Interest income, primarily from related parties (note 7) 300,481 250,337 112,181
Interest expense:
Stockholders (note 4) (212,229) (272,574) (259,307)
Other (566,136) (543,763) (467,208)
Aircraft lease income:
Related party, net (note 7) 222,300 175,988 6,702
Other 535,920 535,920 491,260
Other, net (note 2) 136,796 60,963 207,940
----------------- ----------------- -----------------
Total other income 417,132 206,871 91,568
----------------- ----------------- -----------------
Net income $ 1,083,281 1,658,175 1,747,064
================= ================= =================
Pro forma information (note 1):
Historical net income $ 1,083,281 1,658,175 1,747,064
Pro forma adjustment to income tax expense 426,595 651,597 671,130
----------------- ----------------- -----------------
Pro forma net income $ 656,686 1,006,578 1,075,934
================= ================= =================
See accompanying notes to combined financial statements.
F-9
MERCY AIR SERVICE, INC. AND HELICOPTER SERVICES, INC.
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
ADDITIONAL STOCK
COMMON PAID-IN RETAINED SUBSCRIPTION
STOCK CAPITAL EARNINGS RECEIVABLE TOTAL
------------ ------------- --------------- ---------------- --------------
BALANCES AT JANUARY 1, 1994 $ 41,667 3,368,369 1,720,570 -- 5,130,606
Issuance of common stock 50,000 -- -- (10,000) 40,000
Dividends -- -- (1,112,278) -- (1,112,278)
Net income -- -- 1,747,064 -- 1,747,064
------------ ------------- --------------- ---------------- --------------
BALANCES AT DECEMBER 31, 1994 91,667 3,368,369 2,355,356 (10,000) 5,805,392
Dividends -- -- (642,666) -- (642,666)
Net income -- -- 1,658,175 -- 1,658,175
------------ ------------- --------------- ---------------- --------------
BALANCES AT DECEMBER 31, 1995 91,667 3,368,369 3,370,865 (10,000) 6,820,901
Capital contribution through
forgiveness of notes payable to
stockholders -- 497,931 -- -- 497,931
Dividends -- -- (378,888) -- (378,888)
Net income -- -- 1,083,281 -- 1,083,281
------------ ------------- --------------- ---------------- --------------
BALANCES AT DECEMBER 31, 1996 $ 91,667 3,866,300 4,075,258 (10,000) 8,023,225
============ ============= =============== ================ ==============
See accompanying notes to combined financial statements.
F-10
MERCY AIR SERVICE, INC. & HELICOPTER SERVICES, INC.
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
---------------- ---------------- ----------------
Cash flows from operating activities:
Net income $ 1,083,281 1,658,175 1,747,064
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 639,865 624,257 474,143
Provision for bad debts 3,630,013 2,548,638 2,700,868
Changes in operating assets and liabilities:
Receivables (3,484,592) (3,447,244) (2,281,667)
Inventories (46,581) 36,874 (480,272)
Prepaid expenses and other assets (2,872) 75,387 (146,888)
Accounts payable (152,251) 13,548 171,996
Other liabilities (337,075) 190,777 278,074
---------------- ---------------- ----------------
Net cash provided by operating activities 2,003,938 1,700,412 2,463,318
---------------- ---------------- ----------------
Cash flows from investing activities:
Purchase of property, plant and equipment (245,375) (324,208) (2,615,166)
Payment of organization costs -- -- (33,425)
Purchase of trade name -- -- (5,000)
Purchase of goodwill -- -- (208,591)
Increase in notes receivable -- (2,100,943) (1,896,178)
Increase in loans receivable to related parties (112,161) -- --
Net repayments on notes receivable 161,670 -- --
Advances (repayments) to related parties -- 171,942 (57,947)
Other, net 20,971 (37,702) (102,883)
---------------- ---------------- ----------------
Net cash used by investing activities (174,895) (2,290,911) (4,919,190)
---------------- ---------------- ----------------
Cash flows from financing activities:
Proceeds from issuance of common stock -- 40,000 --
Proceeds from issuance of notes payable 978,414 3,382,236 6,526,364
Principal payments on notes payable (2,128,956) (2,335,536) (3,000,637)
Dividends (378,888) (642,666) (1,112,278)
---------------- ---------------- ----------------
Net cash provided (used) by financing
activities (1,529,430) 444,034 2,413,449
---------------- ---------------- ----------------
Net increase (decrease) in cash 299,613 (146,465) (42,423)
Cash and cash equivalents at beginning of year 286,297 432,762 475,185
---------------- ---------------- ----------------
Cash and cash equivalents at end of year $ 585,910 286,297 432,762
================ ================ ================
Cash paid for: $ 783,232 766,730 693,052
Interest
See accompanying notes to combined financial statements.
F-11
MERCY AIR SERVICE, INC. & HELICOPTER SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS AND BASIS OF PRESENTATION
Mercy Air Service, Inc. (Mercy) is one of the nations's largest private,
independent provider of air medical services, covering more than 20 million
people in a five-county area in Southern California. Mercy employs over 100
full-time people, including pilots, nurses, paramedics, mechanics and
dispatchers, and operates from 5 bases in Southern California, utilizing
six Bell helicopters. Mercy also leases an additional two helicopters.
Mercy grants credit to individuals for services and receives direct
payments from individuals, insurance companies and contracting services
with government agencies.
Helicopter Services, Inc. (dba Western Helicopters, Inc.) (Western)
provides helicopter maintenance services, as well as helicopter parts and
aviation fuel sales in Southern California, primarily to Mercy and other
related parties.
The accompanying financial statements include the accounts of Mercy and
Western (collectively the Company), which are under common control.
Accordingly, the accompanying financial statements have been prepared on a
combined basis. All intercompany balances and transactions have been
eliminated.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid instruments with original
maturities of three months or less to be cash equivalents.
INVENTORIES
Inventories are comprised primarily of expendable aircraft parts which are
recorded at the lower of average cost or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost. Maintenance and repairs
are expensed as incurred. Major modifications and costs incurred to place
aircraft in service are capitalized.
Depreciation is computed using the straight-line method over the following
useful lives:
Buildings and hangar 31 - 40 years
Leasehold improvements 39 years
Helicopters, including medical equipment 13 - 25 years
Communication, medical, office and other equipment 5 - 7 years
F-12
MERCY AIR SERVICE, INC. & HELICOPTER SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
EXCESS OF COST OVER THE FAIR VALUE OF NET ASSETS ACQUIRED
Excess of cost over the value of net assets acquired, or goodwill, is being
amortized using the straight-line method over 15 years.
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of (SFAS 121).
SFAS 121 requires that long-lived assets and certain identifiable
intangible assets held, including goodwill, and used by an entity, be
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of these assets is measured by a comparison of the carrying
amount of the asset to future net undiscounted cash flows expected to be
generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value,
less costs to sell. The adoption of SFAS 121, effective January 1, 1996 did
not have an effect on the Company's combined financial statements.
ENGINE AND AIRFRAME OVERHAUL COSTS
The Company uses the accrual method of accounting for major engine and
airframe overhauls, whereby the cost of the next overhaul is estimated and
accrued based on usage of the aircraft over the period between overhauls.
COMMON STOCK
Common stock included in the accompanying combined financial statements
represents the combined common stock of Mercy and Western of $41,667 and
$50,000, respectively.
REVENUE RECOGNITION
Patient service revenue is recorded at the estimated net realizable amounts
from patients, third-party payors and government agencies for services
rendered. The provision for doubtful accounts and contractual adjustments
is accrued on an estimated basis in the period the related services are
rendered and is adjusted as required in subsequent periods. Revenue and
related trade receivables are recorded net of estimated contractual
allowances.
INCOME TAXES AND PRO FORMA INFORMATION
The Company has elected tax treatment under Subchapter S of the Internal
Revenue Code whereby the Company's taxable income or loss is reported in
the tax returns of the individual stockholders.
Pro forma information represents the net income of the Company as if Mercy
and Western had been taxable entities subject to federal and state income
taxes at the marginal rates applicable in each year.
F-13
MERCY AIR SERVICE, INC. & HELICOPTER SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(2) ACQUISITION AND SALE OF OPERATION
On August 11, 1994, the stockholders of Mercy entered into an Asset
Purchase Agreement (the Agreement) with Rocky Mountain Helicopters, Inc.
(RMH) whereby the stockholders issued cash and assumed debt of RMH in the
aggregate of $817,245, as consideration to acquire the net assets of
Western. The combined statement of operations for the year ended December
31, 1994 only includes the operations of Western from its acquisition date.
On February 1, 1996, the Company entered into an agreement to sell the
rights to the flight operations business of Western to a third party. The
Company received a seven-year promissory note bearing interest at 8% per
annum, in the amount of $80,515 in consideration for the sale, with the
Company recording a gain for the full amount. The disposition of the flight
operations of Western have not been presented as discontinued in the
combined financial statements as the net assets and operations of that
business were not significant to the Company.
(3) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
1996 1995
----------------- ------------------
Helicopters and helicopter accessories(a) $ 12,095,647 12,196,416
Portable office, building and improvements 476,796 476,796
Vehicles 126,870 97,972
Data processing equipment 126,589 148,237
Office equipment 63,750 21,186
Communication equipment 173,099 75,310
Medical equipment 667,372 629,007
Shop equipment 122,676 112,311
Construction in progress 48,541 --
Leasehold improvements 27,925 27,924
----------------- ------------------
13,929,265 13,785,159
Less accumulated depreciation (4,064,910) (3,457,492)
----------------- ------------------
$ 9,864,355 10,327,667
================= ==================
(a) Additionally, one of the Company's helicopters is pledged as security for
the guarantee of the stockholders, $2,415,000 loan. See note 8.
(4) NOTES PAYABLE
Notes payable consisted of the following at December 31:
1996 1995
------------------ ------------------
Notes to stockholders, with interest from 9.0% to
13.5%, due through 2002 $ 2,052,451 2,490,571
Notes secured by commercial security agreements
covering all assets of the Company, with
interest from 8.0% to 9.5%, due through 2002 4,937,887 6,438,856
F-14
MERCY AIR SERVICE, INC. & HELICOPTER SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
Line of credit, secured by certain trade accounts
receivable, with variable interest rate, maturing
July 1997 (a) 790,617 500,000
------------------ ------------------
7,780,955 9,429,427
Less current portion (2,082,074) (1,775,983)
------------------ ------------------
$ 5,698,881 7,653,444
================== ==================
(a) The line of credit loan agreement contains financial covenants which
require the Company to maintain certain net worth and working capital
ratios. The Company was in compliance with these financial covenants as of
December 31, 1996.
Aggregate maturities of long-term debt are as follows:
STOCKHOLDERS OTHER
----------------- ------------------
Year ending December 31:
1997 $ 294,899 1,787,175
1998 318,143 1,699,617
1999 351,320 758,643
2000 388,017 832,384
2001 428,608 341,634
Thereafter 271,464 309,051
----------------- ------------------
$ 2,052,451 5,728,504
================= ==================
(5) LEASES
The Company leases two helicopters under noncancelable agreements. Future
minimum rental payments under these leases at December 31, 1996 are as
follows:
Year ending December 31:
1997 $ 667,173
1998 650,846
1999 73,284
-----------------
$ 1,391,303
=================
Rent expense during the years ended December 31, 1996, 1995 and 1994
totaled $464,400, $464,400 and $405,410, respectively. Under the terms of
certain leases, the Company pays all property taxes and operating expenses,
which amounts are not included in future minimum rental payments or rent
expense.
F-15
MERCY AIR SERVICE, INC. & HELICOPTER SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
The Company is the lessor of a helicopter under an operating lease expiring
in 2001. The helicopter subject to this lease had an original cost of
$3,450,000 and accumulated depreciation of $1,025,647 as of December 31,
1996. Minimum rental income to be received under the lease as of December
31, 1996 is as follows:
Year ending December 31:
1997 $ 535,920
1998 535,920
1999 535,920
2000 535,920
2001 44,660
-----------------
$ 2,188,340
=================
(6) RETIREMENT PLAN
The Company maintains a 401(k) profit sharing plan covering all employees
who have attained the age of twenty-one and have completed one year of
service. The plan includes a discretionary matching contribution by the
Company. The regular profit sharing contribution is determined by the
Company and is allocated to all eligible employees based upon compensation.
The Company made no contributions to the Plan in 1996, 1995 and 1994.
(7) RELATED PARTY TRANSACTIONS
The stockholders of the Company also hold ownership interests in Mercy
Ambulance Service Hawaii, Inc., and Mercy Air Hawaii, Inc. (collectively
Mercy Hawaii). The Company has made advances to the stockholders and their
related corporations at various times.
RECEIVABLES
Noninterest-bearing advances to Mercy Hawaii, totaling $160,212 and $48,051
at December 31, 1996 and 1995, respectively, which are expected to be
repaid within one year, are included in loans receivable from related
parties, in the accompanying combined financial statements.
Unsecured notes receivable bearing interest at 8.5% from stockholders and
related entities totaling $3,509,358 are included as non-current assets as
these amounts are not expected to be repaid within one year.
Included in this amount are seven unsecured notes receivable from
stockholders, all of which are payable on demand. Six of the notes, with
principal balances totaling $223,352 at December 31, 1996, bearing interest
at 8.5%, are not expected to be paid within twelve months and are
classified as noncurrent.
The seventh stockholder note, with outstanding principal of $1,748,296 at
December 31, 1996, bears interest at 9% and is payable in monthly principal
and interest payments of $32,194, maturing October 6, 2002.
LEASE INCOME AND MAINTENANCE EXPENSE
Mercy Hawaii leased two helicopters on a month-to-month basis from the
Company for $332,800, $379,988 and $173,412 during the years ended December
31, 1996, 1995 and 1994, respectively.
F-16
MERCY AIR SERVICE, INC. & HELICOPTER SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
Under the terms of the lease arrangement, Mercy Hawaii is responsible for
maintenance expenses incurred on the leased helicopters during the leasing
period. Upon termination of one of the month-to-month leases during 1996,
the Company incurred all related maintenance expenses necessary to
transport the aircraft to California and return it to operable condition.
Total costs incurred by the Company, and included in repairs and
maintenance expense in fiscal 1996, for the restoration of this aircraft,
including transportation, approximated $252,000.
(8) CONTINGENCIES
The Company is contingently liable as a guarantor of loans of its
stockholders and their affiliates as of December 31, 1996 as follows:
DEBTOR GUARANTEE LOAN BALANCE
Mercy Ambulance Service Hawaii, Inc.
and stockholders, as co-debtors $ 500,000 33,657
Stockholders $ 2,415,000 2,300,667
(9) EVENTS SUBSEQUENT TO DATE OF INDEPENDENT AUDITORS' REPORT (UNAUDITED)
In June 1997, the directors of the Company entered into a definitive
agreement to sell 100% of the common stock of Mercy and certain net assets
of Western to Air Methods Corporation. The sale is expected to be completed
in July 1997. Upon closing, all stockholder and related party receivables
and payables will be settled and contributed to equity for purposes of
determining the net assets to be acquired by Air Methods Corporation. Under
the terms of an employment agreement, the Company's Chief Executive Officer
would be entitled to receive 62/3% of the net sale amount (as defined in
the employment agreement) should such sale occur.
F-17
AIR METHODS CORPORATION
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined balance sheet assumes that the
acquisition of Mercy occurred on June 30, 1997 and includes the June 30, 1997
historical balance sheet of Air Methods Corporation adjusted for the pro forma
effects of this acquisition. The following unaudited pro forma combined
statements of operations for the year ended December 31, 1996 and the six months
ended June 30, 1997 assume that the acquisition of Mercy had occurred on January
1, 1996, and include the historical consolidated statements of operations for
Air Methods Corporation for the year ended December 31, 1996 and the six months
ended June 30, 1997 adjusted for the pro forma effects of the acquisition.
The unaudited pro forma combined statements of operations are not necessarily
indicative of the results of operations that would actually have occurred if the
transaction had been consummated as of January 1, 1996. These statements should
be read in conjunction with the historical financial statements, and related
notes thereto, of Air Methods Corporation and the combined Mercy financial
statements included herein.
F-18
AIR METHODS CORPORATION
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
JUNE 30, 1997
(AMOUNTS IN THOUSANDS)
HISTORICAL
-----------------------------------
AIR METHODS PRO FORMA PRO FORMA
CORPORATION MERCY ADJUSTMENTS COMBINED
-------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 2,639 256 (256)(1) 2,459
(180)(11)
Receivables, net 1,780 3,517 (685)(2) 4,867
255 (4)
Current installments of notes receivable 410 247 (410)(7) 8
(239)(2)
Accrued interest - 564 (564)(2) -
Inventories 1,642 383 2,025
Work-in-process on medical interiors,
product and maintenance contracts 199 26 225
Costs and estimated earnings in excess
of billings on uncompleted contracts 300 - 300
Prepaid expenses and other 445 124 569
-------------------------------------------------------------------------------
Total current assets 7,415 5,117 (2,079) 10,453
-------------------------------------------------------------------------------
Aircraft and ground support equipment 43,823 12,086 (3,566)(5) 56,260
3,917 (6)
Other equipment 1,551 1,872 (813)(5) 2,610
-------------------------------------------------------------------------------
Total equipment 45,374 13,958 (462) 58,870
Less accumulated depreciation (11,576) (4,379) 4,379 (5) (11,576)
-------------------------------------------------------------------------------
Net equipment 33,798 9,579 3,917 47,294
Intangible and other assets, net 900 128 (75)(10) 953
Excess of cost over fair value of
net assets acquired, net 1,876 165 201)(12) 2,077
(165)(10)
Notes receivable and deposits 1,246 3,528 (3,402)(2) 126
(1,246)(7)
-------------------------------------------------------------------------------
Total assets $ 45,235 18,517 (2,849) 60,903
===============================================================================
See accompanying notes to unaudited pro forma combined financial statements. (Continued)
F-19
AIR METHODS CORPORATION
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
JUNE 30, 1997
(AMOUNTS IN THOUSANDS)
HISTORICAL
----------------------------------
AIR METHODS PRO FORMA PRO FORMA
CORPORATION MERCY ADJUSTMENTS COMBINED
---------------------------------------------------------------------------
LIABILITIES & STOCKHOLDERS' EQUITY
Notes payable $ 8 13 21
Current installments of long-term debt 1,786 1,739 (295)(2) 3,135
(334)(7)
649 (8)
(410)(7)
Current installments of obligations under
capital leases 843 - 843
Accounts payable 489 157 646
Deferred revenue 1,132 - 1,132
Accrued overhaul and parts replacement costs 1,130 475 1,605
Other accrued liabilities 894 374 (79)(2) 1,189
---------------------------------------------------------------------------
Total current liabilities 6,282 2,758 (469) 8,571
Long-term debt, less current installments 11,328 5,778 (1,639)(2) 22,298
(2,893)(7)
10,970 (8)
(1,246)(7)
Obligations under capital leases, less current
installments 2,947 - 2,947
Accrued overhaul and parts replacement costs 4,045 1,150 5,195
Deferred income taxes - - 1,259 (9) 1,259
Other liabilities 742 46 (46)(7) 742
---------------------------------------------------------------------------
Total liabilities 25,344 9,732 5,936 41,012
Total stockholders' equity 19,891 8,785 (8,785)(3) 19,891
---------------------------------------------------------------------------
$ 45,235 18,517 (2,849) 60,903
===========================================================================
See accompanying notes to unaudited pro forma combined financial statements.
F-20
AIR METHODS CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
HISTORICAL
---------------------------------
AIR METHODS PRO FORMA PRO FORMA
CORPORATION MERCY ADJUSTMENTS COMBINED
------------------------------------------------------------------------------
Revenue:
Flight revenue $ 13,698 6,738 20,436
Sales of medical interiors and products 1,681 - 1,681
Parts sales - 376 376
Maintenance sales - 504 504
International franchise revenue 214 - 214
Other - 34 34
---------------------------------------------------------------------------
Total revenue 15,593 7,652 0 23,245
---------------------------------------------------------------------------
Operating expenses:
Flight centers 3,854 1,809 (8)(13) 5,655
Bad debt expense - 1,496 1,496
Aircraft operations 4,627 1,116 (12)(14) 5,731
Medical interiors and products sold 1,759 - 1,759
Cost of parts sales - 302 302
Cost of maintenance sales - 429 429
Aircraft rental 768 304 (268)(16) 804
Depreciation and amortization 1,667 317 73 (6) 2,053
(4)(10)
Other 1 21 22
General and administrative 2,013 1,136 3,149
---------------------------------------------------------------------------
Total operating expenses 14,689 6,930 (219) 21,400
---------------------------------------------------------------------------
Operating income 904 722 219 1,845
Other income (expense):
Interest income 174 147 (84)(7) 97
(140)(2)
Interest expense (626) (343) 84 (7) (1,263)
55 (2)
124 (7)
(557)(8)
Aircraft lease income - 379 (268)(16) 111
Other, net 6 58 64
---------------------------------------------------------------------------
Net income $ 458 963 (567) 854
===========================================================================
Income per common share $ 0.06 $ 0.11
=============== ================
Weighted average number of common 8,110,512 8,110,512
shares outstanding
=============== ================
See accompanying notes to unaudited pro forma combined financial statements.
F-21
AIR METHODS CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
HISTORICAL
-------------------------------
AIR METHODS PRO FORMA PRO FORMA
CORPORATION MERCY ADJUSTMENTS COMBINED
-----------------------------------------------------------------------------
Revenue:
Flight revenue $ 26,517 14,150 40,667
Sales of medical interiors and products 3,478 - 3,478
Parts sales - 1,075 1,075
Maintenance sales - 274 274
International franchise revenue 262 - 262
Other - 91 91
-----------------------------------------------------------------------------
Total revenue 30,257 15,590 45,847
-----------------------------------------------------------------------------
Operating expenses:
Flight centers 8,086 3,709 (144)(13) 11,651
Bad debt expense - 3,630 3,630
Aircraft operations 8,383 3,227 (247)(14) 11,111
(252)(15)
Medical interiors and products sold 4,045 - 4,045
Cost of parts sales - 884 884
Cost of maintenance sales - 239 239
Aircraft rental 1,465 572 (536)(16) 1,501
Depreciation and amortization 3,056 640 149 (6) 3,857
(8)(10)
20 (12)
Other 17 36 53
General and administrative 3,845 1,987 5,832
-----------------------------------------------------------------------------
Total operating expenses 28,897 14,924 (1,018) 42,803
-----------------------------------------------------------------------------
Operating income 1,360 666 1,018 3,044
Other income (expense):
Interest income 357 300 (194)(7) 163
(300)(2)
Interest expense (1,297) (778) 194 (7) (2,381)
212 (2)
324 (7)
(1,036)(8)
Aircraft lease income - 758 (536)(16) 222
Other, net (112) 137 25
-----------------------------------------------------------------------------
Net income $ 308 1,083 (318) 1,073
=============================================================================
Income per common share $ 0.04 $ 0.13
================ ================
Weighted average number of common 8,100,545 8,100,545
shares outstanding
================ ================
See accompanying notes to unaudited pro forma combined financial statements.
F-22
AIR METHODS CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
JUNE 30, 1997
(A) BASIS OF PRESENTATION
The accompanying unaudited pro forma combined balance sheet as of June 30,
1997 includes historical balances, adjusted for the pro forma effects of the
Mercy acquisition completed subsequent to June 30, 1997 and assumes that the
acquisition occurred on June 30, 1997. The unaudited pro forma combined
statements of operations for the six months ended June 30, 1997 and the year
ended December 31, 1996 include historical results of operations of Air Methods
Corporation and Mercy, adjusted for the pro forma effects of the acquisition and
assumes that the acquisition occurred on January 1, 1996.
(B) PRO FORMA ADJUSTMENTS
(1) To eliminate Mercy cash balances not acquired in the acquisition.
(2) To eliminate receivables from and debt owed to Mercy's stockholders
which were settled prior to the acquisition and to eliminate related
interest income and expense.
(3) To eliminate Mercy equity balances.
(4) To increase trade accounts receivable related to Mercy's flight
operations to $3.1 million by reducing the allowance for doubtful
accounts. The sellers of Mercy have guaranteed collection of $3.1
million in net trade accounts receivable outstanding as of the
purchase date.
(5) To adjust Mercy's fixed assets to net book value by eliminating
accumulated depreciation.
(6) To adjust aircraft to fair market value based on appraised value for
the fleet. Also, to adjust depreciation to reflect the change in
aircraft basis. Aircraft are depreciated over an average life of 16
years with a 25% residual value.
(7) To record payoff of all Mercy debt, including notes payable to the
Company, except for $700,000 line of credit balance, and to eliminate
related interest expense.
(8) To record note payable to an equipment finance company in the amount
of $10,152,000 and notes payable to the sellers in the aggregate
amount of $1,467,000 to finance the acquisition of Mercy and record
related interest expense. The note to the equipment finance company
provides for equal monthly installments of principal and interest
based on 9.52% interest with a 28% balloon payment at the end of ten
years. The notes payable to the sellers provide for equal installments
of principal and interest based on 9% interest over five years.
(9) To record estimated deferred tax liability relating to conversion from
cash method to accrual method of accounting for $3.1 million of trade
receivables at 40.6% tax rate.
(10) To write off goodwill and organization costs and related amortization
expense related to previous acquisition of Helicopter Services, Inc.
by Mercy Air Service, Inc.
(11) To reflect additional cash paid for acquisition by the Company at
closing.
(12) To record allocation of excess cost over fair value of net assets
acquired, and record amortization expense based on a 25-year estimated
useful life.
(13) To eliminate training costs incurred by Mercy to a third party
training center. All flight crew training to be provided by the
Company's in-house training department subsequent to the acquisition.
F-23
AIR METHODS CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
JUNE 30, 1997 (CONTINUED)
(14) To adjust hull and liability insurance expense for Mercy's aircraft
fleet to the Company's hull and liability rates based on the fair
market value of the fleet.
(15) To eliminate maintenance subsidy provided by Mercy in 1996 to a
related party, which will not continue subsequent to the acquisition.
(16) To eliminate intercompany aircraft lease income and expense relating
to a lease between the Company and Mercy.
F-24
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND STOCKHOLDERS
AIR METHODS CORPORATION:
We consent to incorporation by reference in the registration statements on Form
S-8 (Nos. 33-24980, 33-46691, 33-55750, 33-65370 and 33-75742) and Form S-3
(Nos. 33-59690 and 33-75744) of Air Methods Corporation of our report dated June
5, 1997 relating to the combined balance sheets of Mercy Air Service, Inc. and
Helicopter Services, Inc. as of December 31, 1996 and 1995, and the related
combined statements of operations, stockholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 1996, which report
appears in the Current Report on Form 8-K of Air Methods Corporation.
KPMG PEAT MARWICK LLP
KPMG PEAT MARWICK LLP
Denver, Colorado
October 13, 1997
Exhibit
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AIR METHODS CORPORATION
Date: October 14, 1997 By Aaron D. Todd
--------------------------------------
On behalf of the Company, and as
Principal Financial and Accounting
Officer
-4-