SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-16079
AIR METHODS CORPORATION
(Exact name of Registrant as Specified in Its Charter)
DELAWARE 84-0915893
(State or Other Jurisdiction of (I.R.S. Employer Identification
Incorporation or Organization) Number)
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
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
The number of shares of Common Stock, par value $.06, outstanding as of November
7, 1997, was 8,139,671.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - September 30,
1997 and December 31, 1996 1
Consolidated Statements of Operations for
the three and nine months ended September
30, 1997 and 1996 3
Consolidated Statements of Cash Flows for
the nine months ended September 30, 1997
and 1996 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 2. Changes in Securities 10
Item 3. Defaults upon Senior Securities 10
Item 4. Submission of Matters to a Vote of Security
Holders 10
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
SIGNATURES 11
PART I: FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
AIR METHODS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
SEPTEMBER 30 DECEMBER 31
1997 1996
--------------------------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 2,837 2,058
Current installments of notes receivable 8 392
Receivables:
Trade, net of allowance for
doubtful accounts of $2,161 and
$24 at September 30, 1997 and
December 31, 1996, respectively 4,334 1,165
Insurance proceeds 16 270
Other 562 213
------------------------
4,912 1,648
------------------------
Inventories 1,911 1,583
Work-in-process on medical interiors
and product contracts 484 192
Costs and estimated earnings in
excess of billings on uncompleted
contracts 604 682
Prepaid expenses and other 615 554
------------------------
Total current assets 11,371 7,109
------------------------
Equipment and leasehold improvements:
Flight and ground support equipment 56,681 42,448
Furniture and office equipment 2,302 1,494
------------------------
58,983 43,942
Less accumulated depreciation and
amortization (12,463) (10,013)
------------------------
Net equipment and leasehold
improvements 46,520 33,929
------------------------
Excess of cost over the fair value of
net assets acquired, net of
accumulated amortization of $576 and
$502 at September 30, 1997 and
December 31, 1996, respectively 1,976 1,925
Notes receivable, less current installments 63 1,454
Patent application costs and other
assets, net of accumulated
amortization of $755 and $588 at
September 30, 1997 and December 31,
1996, respectively 905 972
------------------------
$ 60,835 45,389
========================
(Continued)
See accompanying notes to consolidated financial statements.
1
AIR METHODS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS, CONTINUED
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
SEPTEMBER 30, DECEMBER 31,
1997 1996
-----------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (unaudited)
Current liabilities:
Notes payable $ 741 352
Current installments of long-term debt 2,258 1,780
Current installments of obligations
under capital leases 864 819
Accounts payable 717 614
Accrued overhaul and parts replacement costs 1,726 1,582
Deferred revenue 888 629
Deferred income taxes 315 --
Other accrued liabilities 1,360 831
------------------------
Total current liabilities 8,869 6,607
------------------------
Long-term debt, less current installments 21,953 10,642
Obligations under capital leases, less
current installments 2,755 3,732
Accrued overhaul and parts replacement costs 5,060 4,157
Deferred income taxes 944 --
Other liabilities 738 823
------------------------
Total liabilities 40,319 25,961
------------------------
Stockholders' equity:
Preferred stock, $1 par value. Authorized
5,000,000 shares, none issued -- --
Common stock, $.06 par value. Authorized
16,000,000 shares; issued 8,155,442 and
8,135,836 shares at September 30, 1997 and
December 31, 1996, respectively 488 487
Additional paid-in capital 49,742 49,696
Accumulated deficit (29,714) (30,755)
------------------------
Total stockholders' equity 20,516 19,428
------------------------
$ 60,835 45,389
========================
See accompanying notes to consolidated financial statements.
2
AIR METHODS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------------
1997 1996 1997 1996
------------------------------------------
Revenue:
Flight revenue $ 9,809 6,816 23,507 19,829
Sales of medical interiors and 834 785 2,370 2,425
products
Parts sales 69 25 140 48
Maintenance sales 165 49 239 165
International franchise revenue 112 -- 326 150
------------------------------------------
10,989 7,675 26,582 22,617
------------------------------------------
Operating expenses:
Flight centers 2,742 2,025 6,596 5,965
Aircraft operations 2,897 2,071 7,524 6,363
Aircraft rental 285 366 1,053 1,128
Medical interiors and products 833 1,199 2,505 3,116
sold
Cost of parts sales 45 12 83 18
Cost of maintenance sales 113 2 162 82
Depreciation and amortization 995 714 2,662 2,131
Bad debt expense 688 -- 688 --
Loss on disposition of assets, net 40 -- 41 18
General and administrative 1,224 904 3,237 2,894
------------------------------------------
9,862 7,293 24,551 21,715
------------------------------------------
Operating income 1,127 382 2,031 902
Other income (expense):
Interest expense (556) (320) (1,182) (982)
Interest and dividend income 48 94 222 282
Other, net (36) 2 (30) 3
------------------------------------------
Net income $ 583 158 1,041 205
==========================================
Income per common share $ .07 .02 .13 .03
==========================================
Weighted average number of common
shares outstanding 8,119,735 8,110,730 8,113,587 8,096,094
==========================================
See accompanying notes to consolidated financial statements.
3
AIR METHODS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1997 1996
-------------------------------
(unaudited) (unaudited)
Cash flow from operating activities:
Net income $ 1,041 205
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization expense 2,662 2,131
Bad debt expense 688 --
Vesting of common stock and options issued for
services and in connection with employee stock
compensation agreements, net of forfeitures -- 25
Loss on retirement and sale of equipment 41 18
Changes in assets and liabilities:
Decrease in prepaid and other current assets 111 27
Decrease (increase) in receivables (825) 310
Increase in parts inventories (133) (166)
Increase in work-in-process on medical
interiors and costs in excess of billings (207) (383)
Net increase in accounts payable, deferred income
taxes, and other accrued liabilities 2 50
Net increase (decrease) in deferred revenue and
other liabilities 175 (466)
Increase (decrease) in accrued overhaul and parts
replacement costs (642) 472
--------------------------
Net cash flow provided by operating activities 2,913 2,223
--------------------------
Cash flows from investing activities:
Acquisition of net assets of Mercy Air Service, Inc.
and Helicopter Services, Inc.:
Receivables (3,154) --
Equipment and leasehold improvements (12,090) --
Debt assumed 10,853 --
Accrued liabilities assumed 1,477 --
Excess of cost over fair value of net assets acquired (125) --
Other, net (125) --
Acquisition of equipment and leasehold improvements (1,395) (3,400)
Proceeds from retirement and sale of equipment 48 1
Net decrease in notes receivable, patent development
costs and other assets 1,937 131
--------------------------
Net cash used by investing activities (2,574) (3,268)
--------------------------
Cash flows from financing activities:
Issuance of common stock and warrants for cash 47 46
Net payments under short-term notes payable (311) (119)
Proceeds from issuance of debt 2,877 3,540
Payments of long-term debt (1,241) (1,232)
Payments of capital lease obligations (932) (569)
--------------------------
Net cash provided by financing activities 440 1,666
--------------------------
Increase in cash and cash equivalents 779 621
Cash and cash equivalents at beginning of period 2,058 2,699
--------------------------
Cash and cash equivalents at end of period $ 2,837 3,320
==========================
See accompanying notes to consolidated financial statements.
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial statements
for the respective periods. Interim results are not necessarily indicative
of results for a full year. The consolidated financial statements should
be read in conjunction with the Company's audited consolidated financial
statements and notes thereto for the year ended December 31, 1996.
(2) INCOME PER SHARE
Per-share information is based on the weighted-average number of shares of
common stock outstanding during each of the periods. Shares issuable upon
the exercise of warrants and stock options are not included in the
calculations, since their inclusion would be anti-dilutive.
(3) STOCKHOLDERS' EQUITY
Changes in the stockholders' equity for the nine months ended September
30, 1997, consisted of the following (amounts in thousands except share
amounts):
Nine Months Ended
September 30, 1997
---------------------
Shares Amount
---------------------
Balance at January 1, 1997 8,135,836 $19,428
Issuance of common shares for
options exercised and
services rendered 19,606 47
Net income -- 1,041
---------------------
Balance at September 30, 1997 8,155,442 $20,516
=====================
(4) ACQUISITION
On July 31, 1997, 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"), for $5.9 million after certain purchase price
adjustments. The purchase price was negotiated between the Company and the
sellers and is subject to working capital post-closing audit adjustments
which are scheduled to be finalized in December 1997. Approximately $4.6
million was paid in cash at closing, with the remaining balance financed
by the sellers over five years at 9% interest. Most of the funding for the
cash payment was 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. Mercy has operated as an independent
provider of air medical transportation services throughout southern
California since 1988. Operations include medical care, aircraft operation
and maintenance, communications and dispatch, and medical billing and
collections.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) ACQUISITION (CONTINUED)
The acquisition has been accounted for using the purchase method of
accounting and the results of Mercy's operations have been included with
those of the Company since July 30, 1997. The pro forma revenue, net
income, and income per common share for the nine months ended September
30, 1997 and 1996, assuming the acquisition occurred at the beginning of
the periods presented, are as follows (amounts in thousands except per
share amounts):
Nine Months Ended
September 30
-------------------------
1997 1996
-------------------------
Revenue $35,590 34,385
=========================
Net income 1,737 805
=========================
Income per common share $ .21 .10
=========================
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company reported net income of $583,000 and $1,041,000 for the
three and nine months ended September 30, 1997, respectively, compared
to $158,000 and $205,000 for the three and nine months ended September
30, 1996, respectively. The improvement in operating results is
primarily attributable to the acquisition of Mercy on July 30, 1997.
Flight revenue increased $2,993,000, or 43.9%, and $3,678,000, or
18.5%, for the three and nine months ended September 30, 1997,
respectively, compared to 1996. The increases are primarily due to
flight revenue of $2.7 million generated by Mercy during August and
September 1997. Revenue from the Company's other flight operations
increased 5.0% for the nine months ended September 30, 1997,
reflecting increases in the majority of the Company's hospital
contracts based on changes in the Consumer Price Index and a 5.2%
increase in revenue flight hours compared to 1996.
Sales of medical interiors and products increased $49,000, or 6.2%, for
the third quarter of 1997 compared to 1996, but decreased $55,000, or
2.3%, over the nine-month period ended September 30, 1997. In the third
quarter of 1997 the Company recognized revenue of $344,000 from the
manufacture of wiring harnesses for the U.S. Air Force HH-60G
helicopter and $116,000 from the installation of a Bell 407 interior.
Third quarter revenue also included $167,000 from the design and
manufacture of four multi-mission medical interior systems for the U.S.
Army UH-60Q helicopter, for a total of $1.4 million in revenue from
this project in the nine months ended September 30, 1997. The revenue
recorded in the comparable nine-month period in 1996 consisted
primarily of $1,036,000 from the design of a medical interior for a
Lockheed L-1011 aircraft, $391,000 from the design and installation of
medical interiors for two MD900 Explorer helicopters, and $786,000 from
the manufacture of an interior for a Bell 412 helicopter. The cost of
medical interiors decreased 30.5% and 19.6% for the three and nine
months ended September 30, 1997, respectively, compared to the previous
year. The decrease over the nine-month period reflects the decrease in
developmental costs incurred on the UH-60Q helicopter system compared
to the developmental costs incurred on the modular medical interior in
1996. Most of the developmental costs on UH-60Q were incurred in 1996
and the first quarter of 1997. Cost of medical interiors in the nine
months ended September 30, 1997, also included the reduction of
previously established warranty reserves based on the Company's
historical warranty claims experience.
The increases in parts and maintenance sales in the three and nine
months ended September 30, 1997, as compared with 1996, are due to the
acquisition of Mercy in July 1997. Mercy provides helicopter
maintenance services and parts to customers in Southern California.
Cost of parts and maintenance sales also increased correspondingly in
1997.
The Company recognized revenue of $112,000 and $326,000 from its
Brazilian franchise during the three and nine months ended September
30, 1997, respectively, compared to $150,000 in the nine months ended
September 30, 1996. Revenue recognized in 1997 represents royalties
earned on franchise operations while revenue in 1996 was the second
minimum installment of the 10-year franchise agreement. Under the
exclusive franchise agreement, the Brazilian company purchased the
right to use the trademarks and expertise of the Company in providing
air medical services in Brazil in exchange for a minimum acquisition
price plus annual royalties based on gross revenues. The franchise
commenced air medical operations in January 1996.
7
Flight center costs, consisting primarily of pilot and mechanics
salaries and fringe benefits, increased 35.4% and 10.6% for the three
and nine months ended September 30, 1997, respectively, compared to
1996. The acquisition of Mercy caused an increase of $570,000 in the
third quarter. Without the effect of the Mercy transaction, flight
center costs remained relatively unchanged in the nine months ended
September 30, 1997, compared to 1996, but increased 7.1% in the third
quarter as a result of increases in pilot and mechanic salaries for
merit pay raises.
Aircraft operating expenses increased by 39.9% and 18.2% for the three
and nine months ended September 30, 1997, respectively, in comparison
to the three and nine months ended September 30, 1996. Aircraft
operating expenses consist of fuel, insurance, and maintenance costs
and generally are a function of the size of the fleet, the type of
aircraft flown, and the number of hours flown. The Company has added
11 helicopters to its fleet since September 30, 1997, including 7
acquired in the Mercy transaction. Absent the impact of the Mercy
transaction, aircraft operating expenses increased 19.2% and 11.5% for
the three and nine months, respectively. Higher repair and maintenance
costs for the fleet in 1997 were driven in part by a 4.6% increase in
total flight hours over the nine-month period.
Aircraft rental expense decreased 22.1% and 6.6% for the three and
nine months ended September 30, 1997, respectively, as compared to
1996. The decreases reflect the elimination of rental expense for a
helicopter previously leased from Mercy.
Depreciation and amortization expense increased 39.4% and 24.9% for
the three and nine months ended September 30, 1997, respectively. The
addition of Mercy's fixed assets increased depreciation by $125,000 in
the third quarter. The remaining increases are primarily the result of
adding one Bell 222 helicopter, two Bell 407 helicopters, and one new
medical interior to the fleet since September 30, 1996. The Company
has also increased its rotable and office equipment inventories by
$888,000 since September 30, 1996.
Bad debt expense is estimated during the period the related services
are rendered based on historical experience for Mercy's operations.
The provision is adjusted as required in subsequent periods. Bad debt
expense increased in 1997 compared to an immaterial amount in 1996
because Mercy bills patients and their insurers directly for services
rendered rather than billing hospital customers.
The increases in general and administrative expenses for the three and
nine months ended September 30, 1997, compared to the corresponding
periods in 1996 reflect the impact of the acquisition of Mercy.
Without the acquisition, general and administrative expenses would
have increased 5.2% and 2.4% for the three and nine-month periods,
respectively. Synergies in administrative costs from the consolidation
of the Company's operations with Mercy are not expected to be realized
until 1998.
FINANCIAL CONDITION
Cash and cash equivalents increased $779,000 from $2,058,000 at
December 31, 1996, to $2,837,000 as of September 30, 1997; net working
capital also improved from $502,000 to $2,502,000 over the same
period. The increase in cash and cash equivalents in the nine months
ended September 30, 1997, is primarily due to positive cash flow
generated by the Company's operations. Mercy's operations during the
third quarter of 1997 generated net cash flow of approximately
$350,000. An increase in deferred revenue on hospital contracts also
contributed to the improvement in cash flow from operations.
The Company has renewed all three of its hospital-based contracts
expiring in 1997 for terms ranging from one to five years and has
renewed two contracts due to expire in 1998 for five-year terms. In
June 1997 the Company signed a ten-year operating agreement with a new
hospital customer, increasing the number of its programs to 20 across
the United States;
8
operations under the new contract are expected to begin in the fourth
quarter. Continued steady growth is also expected in revenue from the
Brazilian franchise operations in the last quarter of 1997.
During the fourth quarter of 1997 the Company expects to complete the
production of the two UH-60Q medical interior units and a significant
percentage of the HH-60G wiring harnesses currently in process, as
well as the installation of a Bell 407 medical interior for one of the
Company's hospital customers. The authorization to produce four
additional UH-60Q units is not expected until the first quarter of
1998. In October 1997 the Company received an order to manufacture and
install a multi-functional floor in an MD900 helicopter during the
fourth quarter for a nonmedical customer.
There can be no assurance that the Company will generate new
profitable contracts for the Products Division or that expected growth
from the Mercy transaction will be realized. However, based on the
acquisition of Mercy and its performance in the third quarter as well
as the other events described above, the Company anticipates
sufficient cash flow to meet its operational needs throughout the
remainder of 1997. The Company also has an unused $2 million line of
credit to supplement other working capital sources, if necessary.
All statements except those which refer to historical operations for
the Company constitute forward-looking information. Although these
estimates are based on reliable information and past experience,
operating results are affected by a wide variety of factors, many of
which are beyond the control of the Company. These factors include the
timing and pricing of orders for the Products Division, funding
approval for the governmental contracts, competitive pressures in the
air medical market, and realization of synergies from the
consolidation of operations with Mercy.
9
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 2. CHANGES IN SECURITIES
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
(1) Current Report on Form 8-K, dated July 31, 1997, regarding
the Company's acquisition of Mercy Air Service, Inc.
(2) Current Report on Form 8-K/A-1, dated July 31, 1997,
including historical and pro forma financial statements in
connection with the Company's acquisition of Mercy Air
Service, Inc.
10
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: November 14, 1997 By AARON D. TODD
-----------------------------------------
On behalf of the Company, and as
Principal Financial and Accounting
Officer
11