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 June 30, 1998
OR
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 0-16079
AIR METHODS CORPORATION
(Exact name of Registrant as Specified in Its Charter)
Delaware 84-0915893
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification 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 August 5, 1998, was 8,261,756.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - June 30, 1998
and December 31, 1997 1
Consolidated Statements of Operations for the three and six
months ended June 30, 1998 and 1997 3
Consolidated Statements of Cash Flows for the six months
ended June 30, 1998 and 1997 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 9
Item 2. Changes in Securities 9
Item 3. Defaults upon Senior Securities 9
Item 4. Submission of Matters to a Vote of Security Holders 9
Item 5. Other Information 9
Item 6. Exhibits and Reports on Form 8-K 9
SIGNATURES 10
PART I: FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Air Methods Corporation and Subsidiary
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share amounts)
June 30, December 31,
1998 1997
Assets (unaudited)
Current assets:
Cash and cash equivalents $ 3,398 3,396
Current installments of notes receivable 62 58
Receivables, net:
Trade 6,615 6,766
Less allowance for doubtful accounts (1,030) (2,528)
---------- ---------
5,585 4,238
International franchise fee 121 145
Insurance 262 --
Other 143 681
---------- ---------
6,111 5,064
---------- ---------
Inventories 2,272 2,082
Work-in-process on medical interiors and product contracts 237 212
Costs and estimated earnings in excess of billings on
uncompleted contracts -- 1,120
Prepaid expenses and other 1,079 620
---------- ---------
Total current assets 13,159 12,552
---------- ---------
Equipment and leasehold improvements:
Flight and ground support equipment 56,147 54,540
Furniture and office equipment 2,405 2,287
---------- ---------
58,552 56,827
Less accumulated depreciation and amortization (14,706) (13,143)
---------- ---------
Net equipment and leasehold improvements 43,846 43,684
---------- ---------
Excess of cost over the fair value of net assets acquired, net
of accumulated amortization of $653 and $601 at June 30, 1998
and December 31, 1997, respectively 1,928 1,957
Notes receivable, less current installments 653 673
Patent application costs and other assets, net of accumulated
amortization of $793 and $717 at June 30, 1998 and December
31, 1997, respectively 1,118 1,003
---------- ---------
$ 60,704 59,869
========== =========
(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)
June 30, December 31,
1998 1997
Liabilities and Stockholders' Equity (unaudited)
Current liabilities:
Notes payable $ 21 729
Current installments of long-term debt 2,778 2,655
Current installments of obligations under capital leases 682 659
Accounts payable 1,314 1,050
Income taxes payable -- 156
Accrued overhaul and parts replacement costs 2,395 2,008
Deferred revenue 763 942
Billings in excess of costs and estimated earnings on uncompleted
contracts 312 --
Deferred income taxes 255 159
Other accrued liabilities 1,560 1,285
--------- --------
Total current liabilities 10,080 9,643
Long-term debt, less current installments 19,423 19,680
Obligations under capital leases, less current installments 2,479 2,816
Accrued overhaul and parts replacement costs 4,528 4,837
Deferred income taxes 692 944
Other liabilities 892 736
--------- --------
Total liabilities 38,094 38,656
--------- --------
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 8,251,021 and 8,173,705 shares at June 30, 1998 and
December 31, 1997, respectively 494 489
Additional paid-in capital 49,975 49,783
Accumulated deficit (27,859) (29,059)
--------- --------
Total stockholders' equity 22,610 21,213
--------- --------
$ 60,704 59,869
========= ========
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 Six Months Ended
June 30, June 30,
------------------------- ----------------------------
1998 1997 1998 1997
------------------------- ----------------------------
Revenue:
Flight revenue $ 11,047 7,021 20,836 13,698
Sales of medical interiors and products 588 824 1,570 1,535
Parts sales 194 25 448 71
Maintenance services 68 50 248 75
International franchise revenue 72 115 146 214
Gain on disposition of assets, net -- -- 897 --
---------- ---------- ---------- ----------
11,969 8,035 24,145 15,593
---------- ---------- ---------- ----------
Operating expenses:
Flight centers 3,316 1,763 6,564 3,854
Aircraft operations 3,357 2,662 6,201 4,627
Aircraft rental 444 444 874 768
Medical interiors and products sold 700 611 1,574 1,644
Cost of parts sales 166 2 391 38
Cost of maintenance services 51 43 151 77
Depreciation and amortization 1,041 846 2,082 1,667
Bad debt expense 451 -- 918 --
Loss on disposition of assets, net 37 1 -- 1
General and administrative 1,613 1,021 3,156 2,013
---------- ---------- ---------- ----------
11,176 7,393 21,911 14,689
---------- ---------- ---------- ----------
Operating income 793 642 2,234 904
Other income (expense):
Interest expense (570) (309) (1,167) (626)
Interest and dividend income 65 65 99 174
Other, net 12 6 34 6
---------- ---------- ---------- ----------
Net income $ 300 404 1,200 458
========== ========== ========== ==========
Basic income per common share $ .04 .05 .15 .06
========== ========== ========== ==========
Diluted income per common share $ .04 .05 .14 .06
========== ========== ========== ==========
Weighted average number of common shares
outstanding - basic 8,197,464 8,110,795 8,177,977 8,110,512
========== ========== ========== ==========
Weighted average number of common shares
outstanding - diluted 8,567,033 8,147,541 8,437,848 8,148,738
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
3
Air Methods Corporation and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Six Months Ended June 30,
1998 1997
(unaudited) (unaudited)
Cash flow from operating activities:
Net income $ 1,200 458
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization expense 2,082 1,667
Vesting of common stock options issued for services 30 5
Bad debt expense 918 --
Loss (gain) on retirement and sale of equipment, net (897) 1
Changes in assets and liabilities:
Decrease (increase) in prepaid and other current assets (459) 109
Increase in receivables (1,965) (132)
Increase in parts inventories (190) (59)
Decrease in work-in-process on medical interiors and costs
in excess of billings 1,095 375
Increase (decrease) in accounts payable, other accrued
liabilities, and income taxes payable 227 (62)
Increase in deferred revenue, billings in excess of costs,
and other liabilities 289 422
Increase (decrease) in accrued overhaul and parts
replacement costs 78 (564)
-------- --------
Net cash flow provided by operating activities 2,408 2,220
-------- --------
Cash flows from investing activities:
Acquisition of equipment and leasehold improvements (4,185) (1,433)
Proceeds from retirement and sale of equipment 2,966 --
Decrease (increase) in notes receivable, patent development
costs and other assets (198) 207
-------- --------
Net cash used by investing activities (1,417) (1,226)
-------- --------
Cash flows from financing activities:
Issuance of common stock for cash 167 --
Net payments under short-term notes payable (708) (344)
Proceeds from issuance of debt 1,188 1,571
Payments of long-term debt (1,322) (879)
Payments of capital lease obligations (314) (761)
-------- --------
Net cash used by financing activities (989) (413)
-------- --------
Increase in cash and cash equivalents 2 581
Cash and cash equivalents at beginning of period 3,396 2,058
-------- --------
Cash and cash equivalents at end of period $ 3,398 2,639
======== ========
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 consolidated 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, 1997.
(2) Income per Share
Basic earnings per share is computed by dividing income
available to common stockholders by the weighted average
number of common shares outstanding during the period. Diluted
earnings per share is computed by dividing income available to
common stockholders by all dilutive potential common shares
outstanding during the period.
(3) Stockholders' Equity
Changes in the stockholders' equity for the six months ended
June 30, 1998, consisted of the following (amounts in
thousands except share amounts):
Six Months Ended
June 30, 1998
Shares Amount
Balance at January 1, 1998 8,148,099 $ 21,213
Issuance of common shares for
options exercised 77,316 184
Vesting of common stock options for
services rendered -- 30
Retirement of common shares (5,000) (17)
Net income -- 1,200
---------- ---------
Balance at June 30, 1998 8,220,415 $ 22,610
========== =========
As of June 30, 1998, the Company's total accumulated deficit was
$27,859,000. Of that amount, $20,467,000 relates to Cell
Technology, a predecessor company, which was involved in the
research and development of a biological response modifier.
5
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E
of the Securities Exchange Act of 1934, as amended. For this purpose,
statements contained herein that are not statements of historical fact
may be deemed to be forward-looking statements. Without limiting the
foregoing, the words "believes", "expects", "anticipates", "plans",
"estimates", and similar words and expressions are intended to
identify such statements. These forward-looking statements include
statements concerning the size, structure and growth of the Company's
flight services and products markets, the continuation and/or renewal
of flight service contracts, the acquisition of new and profitable
Products Division contracts, the expansion of Mercy Air Service, Inc.
("Mercy") operations, continued royalty revenue from Unimed Air, and
other matters. The actual results that the Company achieves may differ
materially from those discussed in such forward-looking statements due
to the risks and uncertainties described below, as well as in the
Company's annual report on Form 10-K.
Results of Operations
The Company reported net income of $300,000 and $1,200,000 for the
three and six months ended June 30, 1998, respectively, compared to
net income of $404,000 and $458,000 for the three and six months ended
June 30, 1997, respectively. The improvement in operating results for
the six-month period is primarily attributable to the purchase of
Mercy in July 1997 and gains from the disposition of aircraft. The
operating results for the three months ended June 30, 1998, reflect
the cost of re-manufacturing electrical system components for the U.
S. Air Force HH-60G helicopter in order to comply with a customer
request.
Flight revenue increased $4,026,000, or 57.3%, and $7,138,000, or
52.1%, for the three and six months ended June 30, 1998, respectively,
compared to 1997. The increase is due to flight revenue of $3.8
million and $6.9 million generated by Mercy's operations in the three
and six months ended June 30, 1998, respectively. Flight revenue from
the Company's hospital agreements remained relatively constant as
compared with the six months ended June 30, 1997, due to annual price
increases in the contracts and the addition of two new contracts since
June 30, 1997, offset in part by a reduction in flight volume during
1998 and by the expiration of a contract in May 1998.
Sales of medical interiors and products decreased $236,000, or 28.6%,
for the quarter ended June 30, 1998, but increased $35,000, or 2.3%,
for the six months ended June 30, 1998, in comparison to the
comparable periods in 1997. In the second quarter of 1998 the Company
recognized revenue of $184,000 from the production of electrical
system components for the U. S. Air Force HH-60G helicopter, $110,000
from the manufacture and installation of a medical interior for a Bell
407 helicopter, and $154,000 from the design and integration of
avionics and communications systems for a special-use police
helicopter. Revenue from these same three projects totaled $1,251,000
for the six months ended June 30, 1998. The amount of revenue
recognized in the second quarter from the electrical system component
production was decreased by the estimated cost to complete the re-
manufacturing requirements described below. Revenue recorded in the
comparable six-month period in 1997 consisted primarily of $1.4
million from the design and manufacture of four multi-mission medical
interior systems for the U.S. Army UH-60Q helicopter.
The cost of medical interiors increased 14.6% for the quarter ended
June 30, 1998, but decreased 4.3% for the six months ended June 30,
1998, as compared to the previous year. In the second quarter of 1998,
the Company incurred approximately $123,000 in costs to re-manufacture
electrical system components for the HH-60G Pave Hawk helicopter
pursuant to modifications directed by the customer. The components
requiring rework were originally produced by a subcontractor to the
Company. The decrease in cost of medical interiors for the six-month
period in 1998 reflects the completion of the developmental phase of
the multi-mission interior for the UH-60Q helicopter in 1997.
The increase in parts and maintenance sales and services in the three
and six months ended June 30, 1998, compared to the comparable periods
of 1997 is due to the acquisition of Mercy. Mercy provides helicopter
maintenance services and parts to customers primarily in Southern
California. Cost of parts and maintenance sales and services also
increased correspondingly in 1998.
International franchise fees decreased $43,000, or 37.4%, and $68,000,
or 31.8%, for the three and six months ended June 30, 1998, compared
to the three and six months ended June 30, 1997. The decrease is due
to a decline in the number of subscribers to the Brazilian franchise
since 1997.
6
In the six months ended June 30, 1998, the Company recognized net
gains totaling $897,000 on the disposition of assets. Gains included
$870,000 from the insurance settlement for one of the Company's
helicopters destroyed in an accident in January 1998.
Flight center costs, consisting primarily of pilot and mechanics
salaries and fringe benefits, increased 88.1% and 70.3% for the three
and six months ended June 30, 1998, respectively, compared to 1997.
Flight center costs related to Mercy's operations totaled $971,000 and
$1,840,000 for the three and six months ended June 30, 1998. Without
the effect of the Mercy acquisition, flight center costs increased
33.0% and 22.6% for the three and six months, respectively, as a
result of the addition of two new hospital contracts since June 1997
and increases in salaries for merit pay raises. The change in flight
center costs also reflects an increase in workers compensation expense
due to the expected impact of the helicopter accident on the Company's
workers compensation insurance rates.
Aircraft operating expenses increased by 26.1% and 34.0% for the three
and six months ended June 30, 1998, respectively, in comparison to the
three and six months ended June 30, 1997. 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 12 aircraft to its fleet
since June 30, 1997, including 7 helicopters added as a result of the
Mercy acquisition. Absent the impact of the Mercy transaction,
aircraft operating expenses decreased 15.1% and 8.2% in the three and
six months ended June 30, 1998, reflecting a reduction in hull and
liability insurance rates effective July 1, 1997.
Aircraft rental expense remained unchanged in the second quarter of
1998 compared to the second quarter of 1997 and increased 13.8% for
the six months ended June 30, 1998, compared to 1997. The impact of
adding of 4 aircraft under operating leases was offset in the second
quarter by the elimination of rental expense for a helicopter
previously leased from Mercy. The second quarter of 1997 also included
$103,000 for a short-term lease of a backup helicopter while one of
the Company's aircraft was undergoing a scheduled engine overhaul.
Depreciation and amortization expense increased 23.0% and 24.9% for
the three and six months ended June 30, 1998, respectively. The
addition of Mercy's aircraft and equipment increased depreciation by
$192,000 and $382,000 during the three and six months, respectively.
Excluding the impact of the Mercy acquisition, depreciation and
amortization expense remained relatively unchanged during 1998.
Bad debt expense is estimated during the period the related services
are performed based on historical experience for Mercy's operations.
The provision is adjusted as required based on actual collections in
subsequent periods. Bad debt expense increased in 1998 compared to an
immaterial amount in 1997 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
six months ended June 30, 1998, compared to the three and six months
ended June 30, 1997, reflect the impact of the Mercy transaction.
Excluding Mercy's expenses, general and administrative expenses would
have increased 13.8% and 12.9% for the three and six months,
respectively. This increase is primarily due to changes in
administrative and human resources staffing to manage the expanded
employee base with the acquisition of Mercy and the addition of two
new hospital contracts.
Interest expense increased 84.5% and 86.4% for the three and six
months ended June 30, 1998, compared with the same periods in 1997.
Interest expense related to new debt incurred in the acquisition of
Mercy totaled approximately $267,000 for the second quarter of 1998
and $555,000 for the six-month period ended June 30, 1998.
Interest income decreased 43.1% in the six months ended June 30, 1998,
compared to the same period in 1997, primarily due to the settlement
at the acquisition date of notes receivable to the Company from Mercy.
7
Financial Condition
Cash and cash equivalents remained relatively unchanged from December
31, 1997, to June 30, 1998, at $3,398,000. Net working capital
improved from $2,909,000 to $3,079,000 over the same period. The
improvement in the working capital position in 1998 is due primarily
to cash flow generated from operations. Cash received from the
disposition of fixed assets in the first quarter was offset by
investment in aircraft and other equipment in 1998.
Outlook 1998
During the first quarter of 1998, the Company renewed three of its
hospital operating agreements and elected not to pursue renewal of the
fourth contract expiring in 1998. The helicopter assigned to that
contract was redeployed as part of Mercy's operations in the second
quarter of 1998. Flight volume for the Company's existing contracts is
expected to remain consistent with historical levels. In July 1998 the
Company signed a three-year operating agreement with a new hospital
customer, increasing the number of its programs to 22 across the
United States; operations under the new contract are expected to begin
in the fourth quarter. Operating royalties generated by Unimed Air,
the Company's Brazilian franchise, are expected to remain consistent
with those earned in the first half of 1998.
In the second quarter of 1998 the Company expanded Mercy's operations
to include the Las Vegas, as well as the Los Angeles and San Diego,
air ambulance market. The Company expects further geographical
expansion of Mercy's operations to other contiguous regions during the
last half of 1998.
In the third and fourth quarters of 1998, the Company expects to
manufacture and install medical interior systems for two Bell 214ST
helicopters to be operated in the Persian Gulf. The Company has also
been awarded a cost-plus contract by a branch of the U. S. Department
of Defense to develop and manufacture a medical-related emergency
transportation system. Work is expected to begin on the developmental
phase of the contract in the third quarter of 1998 and continue
through the end of 1999. The Company also expects to deliver multi-
functional floors for two Boeing MD902 helicopters during the third
quarter of 1998. Authorization to produce and deliver seven medical
interior systems for the U.S. Army UH-60Q helicopter is expected in
late 1998. Final orders for these units have not yet been received,
and there is no assurance that the work will be performed or units
delivered in 1998 or in future periods.
The Company expects to complete the re-manufacturing of electrical
systems components for the U.S. Air Force HH-60G helicopter in the
third and fourth quarters of 1998. Revenue remaining to be recognized
on the project is expected to be equal to the estimated cost to
complete the re-manufacturing process. The Company is evaluating legal
alternatives in pursuing cost recovery from its subcontractor for the
project. In addition, the Company is negotiating with its customer to
resolve reimbursement issues associated with costs incurred by both
parties in the rework process.
There can be no assurance that the Company will continue to renew
operating agreements for the Flight Services Division, generate new
profitable contracts for the Products Division, or successfully expand
Mercy's operations. In addition, there can be no assurance that Unimed
Air will continue to generate royalties from operations. However,
based on the backlog of projects for the Products Division,
anticipated level of flight activity for its hospital customers, and
expected growth in Mercy's operations, the Company expects to generate
sufficient cash flow to meet its operational needs throughout 1998.
8
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
The 1998 Annual Meeting of Stockholders was held on June 11,
1998. At the meeting, Messrs. George W. Belsey, Liam F.
Dalton, Major General Carl H. McNair, Jr. (Ret.), and Donald
R. Segner were elected to Class I directorships. Voting
results were as follows:
Total Vote
Total Vote For Withheld From
Each Director Each Director
George W. Belsey 6,983,240 55,536
Liam F. Dalton 6,984,263 54,513
MG Carl H. McNair 6,984,430 54,346
Donald R. Segner 6,984,430 54,346
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
None
9
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: August 11, 1998 By \s\ Aaron D. Todd
On behalf of the Company, and as
Principal Financial and Accounting
Officer