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, 2000
--------------------------------------------------
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 October
27, 2000, was 8,373,766.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - September 30, 2000 and
December 31, 1999 1
Consolidated Statements of Operations for the three and nine months
ended September 30, 2000 and 1999 3
Consolidated Statements of Cash Flows for the nine months ended
September 30, 2000 and 1999 4
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
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,
2000 1999
--------------- -------------
Assets (unaudited)
- ------
Current assets:
Cash and cash equivalents $ 2,498 2,242
Current installments of notes receivable 81 74
Receivables:
Trade 16,256 8,603
Less allowance for doubtful accounts (3,966) (1,210)
--------------- -------------
12,290 7,393
Insurance proceeds 259 220
Other 594 798
--------------- -------------
13,143 8,411
--------------- -------------
Inventories 3,155 2,504
Work-in-process on medical interiors and products contracts 464 172
Costs and estimated earnings in excess of billings on
uncompleted contracts 225 772
Prepaid expenses and other 989 1,019
--------------- -------------
Total current assets 20,555 15,194
--------------- -------------
Equipment and leasehold improvements:
Flight and ground support equipment 67,180 61,356
Furniture and office equipment 5,384 3,641
--------------- -------------
72,564 64,997
Less accumulated depreciation and amortization (24,776) (21,289)
--------------- -------------
Net equipment and leasehold improvements 47,788 43,708
--------------- -------------
Excess of cost over the fair value of net assets acquired, net of
accumulated amortization of $889 and $810 at September 30,
2000 and December 31, 1999, respectively 1,882 1,637
Notes receivable, less current installments 473 534
Other assets, net of accumulated amortization of $1,601 and
$1,256 at September 30, 2000 and December 31, 1999,
respectively 1,796 1,643
--------------- -------------
Total assets $ 72,494 62,716
=============== =============
(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,
2000 1999
--------------- -------------
Liabilities and Stockholders' Equity (unaudited)
- ------------------------------------
Current liabilities:
Notes payable $ -- 700
Current installments of long-term debt 3,468 3,073
Current installments of obligations under capital leases 326 424
Accounts payable 1,779 1,378
Accrued overhaul and parts replacement costs 3,962 2,114
Deferred revenue 844 972
Deferred income taxes 209 231
Other accrued liabilities 1,656 1,681
--------------- -------------
Total current liabilities 12,244 10,573
Long-term debt, less current installments 18,435 17,757
Obligations under capital leases, less current installments 3,309 1,931
Accrued overhaul and parts replacement costs 7,628 6,301
Deferred income taxes -- 132
Other liabilities 1,319 882
--------------- -------------
Total liabilities 42,935 37,576
Stockholders' equity (note 4):
Preferred stock, $1 par value. Authorized 5,000,000 shares,
none issued -- --
Common stock, $.06 par value. Authorized 16,000,000 shares;
issued 9,039,515 and 8,378,843 shares at September 30, 2000
and December 31, 1999 542 503
Additional paid-in capital 50,128 50,002
Accumulated deficit (21,072) (25,357)
Treasury stock, 655,749 and 127,822 common shares at
September 30, 2000 and December 31, 1999,
respectively (39) (8)
--------------- -------------
Total stockholders' equity 29,559 25,140
--------------- -------------
Total liabilities and stockholders' equity $ 72,494 62,716
=============== =============
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,
----------------------- ----------------------
2000 1999 2000 1999
----------- ---------- ---------- ----------
Revenue:
Flight revenue $ 19,419 13,571 49,581 37,317
Sales of medical interiors and products 1,855 790 5,083 3,617
Parts and maintenance sales and services 253 533 823 1,291
Gain on disposition of assets, net 342 -- 343 --
Other 27 77 147 152
----------- ---------- ---------- ----------
21,896 14,971 55,977 42,377
----------- ---------- ---------- ----------
Operating expenses:
Flight centers 6,355 4,229 16,314 11,903
Aircraft operations 5,174 3,276 12,554 9,790
Aircraft rental 877 495 2,163 1,460
Medical interiors and products sold 1,338 738 3,565 2,802
Cost of parts and maintenance sales and services 222 404 707 1,037
Depreciation and amortization 1,377 1,327 4,106 3,804
Bad debt expense 2,237 1,173 5,177 2,712
Loss on disposition of assets, net -- -- -- 62
General and administrative 1,969 1,545 5,694 4,644
----------- ---------- ---------- ----------
19,549 13,187 50,280 38,214
----------- ---------- ---------- ----------
Operating income 2,347 1,784 5,697 4,163
Other income (expense):
Interest expense (560) (524) (1,611) (1,623)
Interest and dividend income 49 35 146 112
Other, net 17 15 53 43
----------- ---------- ---------- ----------
Income before income taxes 1,853 1,310 4,285 2,695
Income tax benefit -- -- -- 96
----------- ---------- ---------- ----------
Net income $ 1,853 1,310 4,285 2,791
=========== ========== ========== ==========
Basic income per common share $ .22 .16 .52 .34
=========== ========== ========== ==========
Diluted income per common share $ .22 .16 .50 .34
=========== ========== ========== ==========
Weighted average number of common shares outstanding
- - basic 8,367,698 8,203,070 8,319,778 8,216,515
=========== ========== ========== ==========
Weighted average number of common shares outstanding
- - diluted 8,580,505 8,223,247 8,565,682 8,229,479
=========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
3
AIR METHODS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2000 1999
---------------- -------------
Cash flows from operating activities:
Net income $ 4,285 2,791
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization expense 4,106 3,804
Vesting of common stock options issued for services 46 45
Bad debt expense 5,177 2,712
Loss (gain) on retirement and sale of equipment, net (343) 62
Changes in assets and liabilities:
Decrease (increase) in prepaid expenses and other current assets 63 (35)
Increase in receivables (9,909) (4,623)
Decrease (increase) in parts inventories 83 (216)
Decrease (increase) in work-in-process on medical interiors and costs in
excess of billings 255 (319)
Increase in accounts payable, other accrued liabilities, and deferred income
taxes 106 330
Increase in deferred revenue and other liabilities 309 497
Increase in accrued overhaul and parts replacement costs 709 313
--------- -------
Net cash provided by operating activities 4,887 5,361
--------- -------
Cash flows from investing activities:
Acquisition of net assets of Area Rescue Consortium of Hospitals and SkyLife
Aviation LLC:
Inventory (734) --
Equipment and leasehold improvements (12,349) --
Liabilities assumed 116 --
Acquisition of equipment and leasehold improvements (3,432) (2,500)
Proceeds from retirement and sale of equipment 12,396 --
Increase in notes receivable and other assets (768) (813)
--------- -------
Net cash used by investing activities (4,771) (3,313)
--------- -------
(Continued)
See accompanying notes to consolidated financial statements.
4
AIR METHODS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2000 1999
-------------- ---------------
Cash flows from financing activities:
Proceeds from issuance of common stock, net $ 2,295 --
Payments for purchases of common stock (2,207) (73)
Net payments under short-term notes payable (700) (425)
Proceeds from issuance of debt 3,773 1,150
Payments of long-term debt (2,733) (2,094)
Payments of capital lease obligations (288) (459)
-------------- ---------------
Net cash provided (used) by financing activities 140 (1,901)
-------------- ---------------
Increase in cash and cash equivalents 256 147
Cash and cash equivalents at beginning of period 2,242 2,407
-------------- ---------------
Cash and cash equivalents at end of period $ 2,498 2,554
============== ===============
Non-cash investing and financing activities:
In the nine months ended September 30, 2000, the Company assumed a capital lease
obligation of $1,568 to finance the buyout of a helicopter. The Company also
issued notes payable of $33 to finance insurance policies.
See accompanying notes to consolidated financial statements.
5
AIR METHODS CORPORATION AND SUBSIDIARY
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, 1999.
(2) ACQUISITION
-----------
On April 25, 2000, Mercy Air Service, Inc. (Mercy Air), a wholly owned
subsidiary of the Company, acquired through a newly formed company substantially
all of the business assets of Area Rescue Consortium of Hospitals, a Missouri
non-profit organization, for $11,268,000. The newly formed company, ARCH Air
Medical Service, Inc. (ARCH), provides air medical transportation services as a
Missouri corporation and wholly owned subsidiary of Mercy Air. The purchase
agreement includes a provision under which the sellers will receive 50% of all
collections greater than 50% of standard billing rates for transports older than
six months, up to a maximum of $1,500,000. Also on April 25, 2000, ARCH acquired
two fixed wing aircraft and related equipment and inventory from SkyLife
Aviation, LLC, a Missouri limited liability company, for $1,699,000. Funding for
the acquisitions was provided primarily by the sale of five helicopters and two
fixed wing aircraft to a leasing company for $10,600,000. The aircraft have been
leased back under an operating lease with monthly lease payments due over ten
years. ARCH also entered into a $1,350,000 note payable to a bank with interest
at 8.01% and monthly principal and interest payments over seven years. The
remainder of the purchase price was funded from Company treasuries. The
allocation of the purchase price was as follows (amounts in thousands):
Assets purchased:
Aircraft $10,600
Equipment 1,749
Inventory 734
13,083
--------
Liabilities assumed (116)
Purchase price 12,967
========
(3) 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. The reconciliation of basic to diluted weighted average
common shares outstanding is as follows (amounts in thousands except share and
per share amounts):
2000 1999
--------- ---------
FOR QUARTER ENDED SEPTEMBER 30:
Weighted average number of common shares outstanding - basic 8,367,698 8,203,070
Dilutive effect of:
Common stock options 188,293 20,177
Common stock warrants 24,514 --
--------- ---------
Weighted average number of common shares outstanding - diluted 8,580,505 8,223,247
========= =========
6
(3) INCOME PER SHARE, (CONTINUED)
--------------------------------
2000 1999
--------- ---------
FOR NINE MONTHS ENDED SEPTEMBER 30:
Weighted average number of common shares outstanding - basic 8,319,778 8,216,515
Dilutive effect of:
Common stock options 217,561 12,964
Common stock warrants 28,343 --
--------- ---------
Weighted average number of common shares outstanding - diluted 8,565,682 8,229,479
========= =========
Common stock options totaling 103,265 and 2,024,843 and common stock
warrants of -0- and 275,000 were not included in the diluted income per share
calculation for the quarters ended September 30, 2000 and 1999, respectively,
because their effect would have been anti-dilutive. Common stock options
totaling 18,265 and 2,066,365 and common stock warrants of -0- and 275,000 were
not included in the diluted income per share calculation for the nine months
ended September 30, 2000 and 1999, respectively, because their effect would have
been anti-dilutive.
(4) STOCKHOLDERS' EQUITY
---------------------
Changes in the stockholders' equity for the nine months ended September 30,
2000, consisted of the following (amounts in thousands except share amounts):
Shares
Outstanding Amount
------------ --------
Balances at January 1, 2000 8,251,021 $25,140
Issuance of common shares for options & warrants exercised 660,672 2,295
Vesting of common stock options for services rendered -- 46
Purchase of treasury shares (527,927) (2,207)
Net income -- 4,285
------------ --------
Balances at September 30, 2000 8,383,766 $29,559
============ ========
As of September 30, 2000, the Company's total accumulated deficit was
$21,072,000. 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) BUSINESS SEGMENT INFORMATION
------------------------------
Summarized financial information for the Company's operating segments is
shown in the following table (amounts in thousands). Amounts in the "Corporate
Activities" column represent corporate headquarters expenses and results of
insignificant operations. The Company does not allocate assets between Air
Medical Services, Products, and Corporate Activities for internal reporting and
performance evaluation purposes. Operating segments and their principal products
or services are as follows:
- - Air Medical Services Division - provides air medical transportation
services to hospitals throughout the U.S. under exclusive operating agreements.
Services include aircraft operation and maintenance.
- - Mercy Air - provides air medical transportation services to the general
population as an independent community-based service in southern California and
Nevada and in Missouri and Illinois through its wholly owned subsidiary ARCH.
Services include aircraft operation and maintenance, medical care, dispatch and
communications, and medical billing and collection.
- - Products Division - designs, manufactures, and installs aircraft medical
interiors and other aerospace products for domestic and international customers.
7
Air
Medical Mercy
Services Air Products Corporate Intersegment
FOR QUARTER ENDED SEPTEMBER 30: Division Service Division Activities Eliminations Consolidated
- ------------------------------------ ---------- -------- -------- ----------- ------------- -------------
2000
External revenue $ 8,941 11,068 1,858 29 -- 21,896
Intersegment revenue 19 -- 455 -- (474) --
---------- -------- -------- ----------- ------------- -------------
Total revenue 8,960 11,068 2,313 29 (474) 21,896
---------- -------- -------- ----------- ------------- -------------
Operating expenses 7,006 6,835 1,789 684 (396) 15,918
Depreciation & amortization 795 451 52 79 -- 1,377
Bad debt expense -- 2,237 -- -- -- 2,237
Interest expense 248 300 -- 12 -- 560
Interest income (17) (1) -- (31) -- (49)
---------- -------- -------- ----------- ------------- -------------
Segment net income (loss) $ 928 1,246 472 (715) (78) 1,853
========== ======== ======== =========== ============= =============
Total assets N/A 27,811 N/A 44,683 N/A 72,494
========== ======== ======== =========== ============= =============
1999
External revenue $ 8,242 5,909 794 26 -- 14,971
Intersegment revenue -- -- 907 -- (907) --
---------- -------- -------- ----------- ------------- -------------
Total revenue 8,242 5,909 1,701 26 (907) 14,971
---------- -------- -------- ----------- ------------- -------------
Operating expenses 6,136 3,133 1,550 591 (738) 10,672
Depreciation & amortization 886 317 25 99 -- 1,327
Bad debt expense -- 1,173 -- -- -- 1,173
Interest expense 262 256 -- 6 -- 524
Interest income (18) (1) -- (16) -- (35)
---------- -------- -------- ----------- ------------- -------------
Segment net income (loss) $ 976 1,031 126 (654) (169) 1,310
========== ======== ======== =========== ============= =============
Total assets N/A 20,220 N/A 42,974 N/A 63,194
========== ======== ======== =========== ============= =============
FOR NINE MONTHS ENDED SEPTEMBER 30:
2000
External revenue $ 25,427 25,313 5,093 144 -- 55,977
Intersegment revenue 22 -- 1,244 -- (1,266) --
---------- -------- -------- ----------- ------------- -------------
Total revenue 25,449 25,313 6,337 144 (1,266) 55,977
---------- -------- -------- ----------- ------------- -------------
Operating expenses 19,977 15,030 4,870 2,122 (1,055) 40,944
Depreciation & amortization 2,547 1,166 159 234 -- 4,106
Bad debt expense -- 5,177 -- -- -- 5,177
Interest expense 736 831 -- 44 -- 1,611
Interest income (51) (4) -- (91) -- (146)
---------- -------- -------- ----------- ------------- -------------
Segment net income (loss) $ 2,240 3,113 1,308 (2,165) (211) 4,285
========== ======== ======== =========== ============= =============
Total assets N/A 27,811 N/A 44,683 N/A 72,494
========== ======== ======== =========== ============= =============
1999
External revenue $ 23,267 15,314 3,628 168 -- 42,377
Intersegment revenue 41 -- 1,991 -- (2,032) --
---------- -------- -------- ----------- ------------- -------------
Total revenue 23,308 15,314 5,619 168 (2,032) 42,377
---------- -------- -------- ----------- ------------- -------------
Operating expenses 17,561 9,212 4,654 1,917 (1,689) 31,655
Depreciation & amortization 2,565 892 127 220 -- 3,804
Bad debt expense -- 2,712 -- -- -- 2,712
Interest expense 792 791 -- 40 -- 1,623
Interest income (56) (5) -- (51) -- (112)
Income tax benefit -- (96) -- -- -- (96)
---------- -------- -------- ----------- ------------- -------------
Segment net income (loss) $ 2,446 1,808 838 (1,958) (343) 2,791
========== ======== ======== =========== ============= =============
Total assets N/A 20,220 N/A 42,974 N/A 63,194
========== ======== ======== =========== ============= =============
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the results of operations and financial condition
should be read in conjunction with the Company's consolidated financial
statements and notes thereto included in Item 1 of this report. 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 air
medical transportation services and products markets, the continuation and/or
renewal of flight service contracts, the acquisition of new and profitable
Products Division contracts, the volume of Mercy Air's operations, the
successful integration of ARCH, 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. The Company undertakes
no obligation to update any forward-looking statements.
RESULTS OF OPERATIONS
The Company reported net income of $1,853,000 and $4,285,000 for the three and
nine months ended September 30, 2000, respectively, compared to net income of
$1,310,000 and $2,791,000 for the three and nine months ended September 30,
1999, respectively. The improvement in operating results in 2000 is attributable
to strong flight volume for Air Medical Services and Mercy Air, the acquisition
of ARCH, and increased revenue from Products Division.
Flight revenue increased $5,848,000, or 43.1%, and $12,264,000, or 32.9%, for
the three and nine months ended September 30, 2000, respectively, compared to
1999. Flight revenue for the Air Medical Services Division increased 6.9% and
8.8% for the three and nine months ended September 30, 2000, primarily due to
revenue of $457,000 and $1,413,000, respectively, from 3 new contracts added
during or after the third quarter of 1999. Flight volume for continuing
contracts also increased 11.9% and 12.1% in the three- and nine-month periods of
2000. Flight revenue for Mercy Air increased 96.0% and 71.6% in the three and
nine months ended September 30, 2000, respectively, compared to 1999, primarily
due to the acquisition of ARCH in April 2000. Flight revenue for ARCH totaled
$4,811,000 for the third quarter of 2000 and $7,907,000 from the acquisition
date through September 30, 2000. Absent the impact of the ARCH acquisition,
flight revenue for Mercy Air increased 8.8% and 16.3% for the quarter and nine
months, respectively, due to revenue of $485,000 and $663,000, respectively,
from 2 new locations opened in 2000 and to increased transport volume during
2000.
Sales of medical interiors and products increased $1,065,000, or 134.8%, and
$1,466,000, or 40.5%, for the three and nine months ended September 30, 2000.
Significant projects in 2000 included continued manufacture of six UH-60Q
Multi-Mission Medevac Systems for the U.S. Army and design work on a Spinal Cord
Injury Transport System (SCITS) for the U.S. Air Force, as well as manufacture
of medical interiors or multi-functional interior components for seven
commercial customers. Revenue by product line for the quarter and nine months
ended September 30, 2000, respectively, was as follows:
- - $1,563,000 and $2,185,000 - manufacture and installation of modular,
multi-functional interiors
- - $47,000 and $2,055,000 - design and manufacture of multi-mission interiors
- - $245,000 and $843,000 - design and manufacture of other aerospace products
Significant projects in 1999 included design work on SCITS and the manufacture
of multi-functional interiors for six Bell helicopters and one MD902 helicopter.
Revenue by product line for the quarter and nine months ended September 30,
1999, respectively, was as follows:
- - $291,000 and $2,329,000 - manufacture and installation of modular,
multi-functional interiors
- - $112,000 and $112,000 - design and manufacture of multi-mission interiors
- - $387,000 and $1,176,000 - design and manufacture of other aerospace
products
9
Cost of medical interiors and products increased by 81.3% and 27.2% for the
three and nine months ended September 30, 2000, as compared to the previous
year, reflecting the increase in volume of sales offset in part by lower unit
costs due to the maturity of product lines manufactured in 2000.
Parts and maintenance sales and services decreased 52.5% and 36.3% for the
quarter and nine months ended September 30, 2000, respectively, compared to the
prior year, due to a decrease in volume of sales. Parts sales to the Company's
Brazilian franchisee also decreased by approximately $144,000 for the nine
months ended September 30, 2000, compared to 1999, due to the financial
condition of the franchisee. Cost of parts and maintenance sales and services
for the quarter and nine months also decreased accordingly.
In the quarter ended September 30, 2000, the Company recognized net gains
totaling $342,000 on the disposition of assets, including $330,000 from an
insurance settlement for one of the Company's helicopters damaged in an
accident.
Flight center costs (consisting primarily of pilot, mechanic, and medical staff
salaries and benefits) increased 50.3% and 37.1% for the three and nine months
ended September 30, 2000, respectively, compared to 1999. Flight center costs
for the Air Medical Services Division increased 15.3% and 17.4% for the three
and nine months, respectively, primarily due to the addition of 3 new hospital
contracts and increases in salaries for merit pay raises. The Company also
increased matching and supplemental contributions to the employee defined
contribution retirement plan in July 1999 and again in January 2000. Flight
center costs for Mercy Air increased 117.8% and 74.0% in the three and nine
months ended September 30, 2000. Flight center costs related to ARCH totaled
$1,482,000 for the third quarter and $2,301,000 from the acquisition date
through September 30, 2000. Without the effect of the ARCH acquisition, Mercy
Air's flight center costs increased 16.1% and 17.9% for the three and nine
months ended September 30, 2000, respectively, due to the addition of personnel
to staff two new base locations opened during the second quarter, merit pay
raises, and changes to retirement plan contributions.
Aircraft operating expenses increased by 57.9% and 28.2% for the three and nine
months ended September 30, 2000, respectively, in comparison to the three and
nine months ended September 30, 1999. 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 13 aircraft to its fleet since September 30, 1999, including 5
helicopters and 2 fixed wing aircraft added as a result of the ARCH acquisition.
Excluding the effect of the ARCH fleet, aircraft operating expenses increased
30.2% and 14.7% in the three and nine months ended September 30, 2000. Aircraft
maintenance costs increased due to additions to the fleet and to growth in
flight volume, as well as to the expiration of the warranty period for most of
the Company's Bell 407 helicopters and to increased expenditures for
on-condition aircraft parts. In addition, the Company's hull and liability
insurance rates increased approximately 20% effective July 1, 2000, due to
generally hardening insurance market conditions.
Aircraft rental expense increased 77.2% and 48.2% for the three and nine months
ended September 30, 2000, respectively, in comparison to the three and nine
months ended September 30, 1999. Lease expense for ARCH aircraft totaled
$277,000 for the third quarter and $456,000 from the acquisition date through
September 30, 2000. Lease expense related to four other new aircraft totaled
$160,000 and $427,000 for the three- and nine-month periods of 2000,
respectively. The impact of adding new aircraft was offset in part during the
periods by the refinance of two helicopter leases and expiration of two other
lease agreements during 1999.
Depreciation and amortization expense increased 3.8% and 7.9% for the three and
nine months ended September 30, 2000, respectively, reflecting the addition of
ARCH's buildings and equipment, a Bell 222 helicopter to Mercy Air's fleet, and
one Bell 407 autopilot, as well as new medical interiors, to the Air Medical
Services Division's fleet of owned aircraft.
Bad debt expense is estimated during the period the related services are
performed based on historical experience for Mercy Air's operations. The
provision is adjusted as required based on actual collections in subsequent
periods. The increases of 90.7% and 90.9% for the three and nine months ended
September 30, 2000, respectively, compared to 1999 reflect the acquisition of
ARCH in April 2000. Bad debt expense related to ARCH flight revenue totaled
approximately $1,063,000 in the third quarter and $2,240,000 from the
acquisition date through September 30, 2000. Bad debt expense related to Mercy
Air's California and Nevada operations increased 8.3% for the nine months ended
September 30, 2000, due to the increase in flight volume. In the third quarter
of 2000 bad debt expense for Mercy Air's operations remained unchanged as
improved collection rates offset the increase in flight volume.
10
General and administrative expenses increased 27.4% and 22.6% for the three and
nine months ended September 30, 2000, compared to the three and nine months
ended September 30, 1999, reflecting the impact of the ARCH transaction.
Excluding ARCH expenses, general and administrative expenses increased 8.2% and
12.7% for the three and nine months, respectively. This increase is primarily
due to merit pay salary increases and changes in administrative staffing to
manage the expanded employee base with the acquisition of ARCH and addition of
new bases.
In the nine months ended September 30, 1999, the Company recorded an income tax
benefit of $96,000 from the recognition of a portion of its deferred tax asset
as a result of current period taxable losses. A deferred tax liability was
generated by a change in tax accounting method for Mercy Air's trade receivables
from cash to accrual basis when the Company acquired Mercy Air in 1997. The
taxable income created by this change was unable to be offset by the Company's
net operating loss carryforwards but could be offset by current period losses.
FINANCIAL CONDITION
Net working capital increased from $4,621,000 at December 31, 1999, to
$8,311,000 at September 30, 2000, primarily due to an increase in receivables
resulting from the ARCH acquisition and increased revenue for all three
operating segments. Cash and cash equivalents increased $256,000 from $2,242,000
to $2,498,000 over the same period, due to cash generated by operations and
proceeds from the issuance of five notes, offset by the purchase of ARCH assets.
Cash generated by operations decreased to $4,887,000 in 2000 from $5,361,000 in
1999. The decrease is primarily due to the net increase in trade receivables
related to ARCH operations. Collections on receivables for medical services
typically lag approximately three to six months from the date of service.
Cash used for investing activities totaled $4,771,000 in 2000, compared to
$3,313,000 in 1999. The increase was driven primarily by the purchase of ARCH
assets. Other significant equipment acquisitions included a Bell 222 helicopter
for Mercy Air's fleet.
Financing activities generated $140,000 in cash in 2000, compared to using
$1,901,000 in 1999. Uses of cash in both years consisted of regular payments for
long-term debt and capital lease obligations and purchases of common stock into
treasury. In 2000 these payments were offset by proceeds from the issuance of
common stock and new note agreements. In February 2000 the Company entered into
a $1.1 million note payable to a company with interest at 8.99% to finance the
acquisition of the Bell 222 helicopter which collateralizes the note. In March
2000 the Company entered into a $900,000 note payable to a company with interest
at 8.67% to finance the acquisition of the assets of Area Rescue Consortium of
Hospitals. The note is collateralized by a Bell 222 helicopter. In April 2000
the Company entered into a $1,350,000 note payable to a bank related to the ARCH
acquisition, with interest at 8.01%. The note is collateralized by two buildings
and various equipment. In the third quarter of 2000, the Company entered into
two notes payable totaling $423,000 with interest at 10.5% to finance the
acquisition of two Bell 407 autopilot installations.
OUTLOOK FOR 2000
The statements contained in this Outlook are based on current expectations.
These statements are forward looking, and actual results may differ materially.
The Company undertakes no obligation to update any forward-looking statements.
11
Air Medical Services Division
In the third quarter of 2000, the Air Medical Services Division extended an
operating agreement due for renewal for an additional 5 years. Also in the third
quarter the division deployed a Bell 206 helicopter to expand operations under
its contract in Salt Lake City, Utah and discontinued services to one hospital
customer which did not renew its operating agreement with the Company. No
contracts are due for renewal during the fourth quarter of 2000. Flight activity
for continuing hospital contracts is expected to remain consistent with
historical levels during the remainder of 2000.
Mercy Air Service
In July 2000 Mercy Air acquired an air medical service program in Cape
Girardeau, Missouri, which is operated within ARCH using a Eurocopter BO-105
helicopter. The Company expects flight volume for Mercy Air's and ARCH's
operations to be consistent with historical levels during the remainder of 2000,
with increases for the new locations opened during the year.
Products Division
In early July 2000, the Company completed production of six UH-60Q Multi-Mission
Medevac Systems. The current contract for the UH-60Q program includes an option
for five additional units which has not yet been exercised. The Army Program
Objective Memorandum (POM) includes funding for 357 units in total over the next
10 to 20 years. There can be no assurance that the current contract option will
be exercised or orders for additional units will be received in 2000 or in
future periods.
The testing and evaluation phase of the SCITS program for the U.S. Air Force was
completed in the third quarter of 2000. Food and Drug Administration (FDA)
approval, which allows the division to market the unit in the commercial market,
was also received in the third quarter of 2000. The Company expects to begin
manufacture of ten units for operational evaluation during the fourth quarter of
2000, with operational testing to be completed during the first half 2001. The
long-range Air Force plan includes between 75 and 250 SCITS units over the next
5 years. The production contract for SCITS has not yet been awarded and there is
no assurance that the contract will be awarded in 2000 or in future periods.
In the fourth quarter of 2000, the Products Division was awarded four new
contracts valued at approximately $3,400,000 to manufacture medical interior
systems for three types of aircraft. Work on all four contracts is expected to
begin in the fourth quarter of the current year and continue through the second
quarter of 2001. Remaining revenue on Products contracts already in process at
the end of the third quarter of 2000 is estimated at approximately $2,500,000.
There can be no assurance that the Company will continue to renew operating
agreements for the Air Medical Services Division, generate new profitable
contracts for the Products Division, expand flight volume for Mercy Air, or
successfully integrate the ARCH acquisition. However, based on the anticipated
level of flight activity for its hospital customers and Mercy Air and the
projects in process for the Products Division, the Company expects to generate
sufficient cash flow to meet its operational needs throughout 2000.
RISK FACTORS
Actual results achieved by the Company may differ materially from those
described in forward-looking statements as a result of various factors,
including but not limited to, those discussed above in "Outlook for 2000" and
those described below.
- - Flight volume - All of Mercy Air's revenue and approximately 30% of the
Air Medical Services Division's revenue is dependent upon flight volume.
Approximately 22% of the Company's operating expenses also vary with number of
hours flown. Poor visibility, high winds, and heavy precipitation can affect the
safe operation of helicopters and therefore result in a reduced number of flight
hours due to the inability to fly during these conditions. Prolonged periods of
adverse weather conditions, especially in southern California and Missouri where
Mercy Air's operations are concentrated, could have an adverse impact on the
Company's operating results. In southern California and the St. Louis region,
the months from November through February tend to have lower flight volume due
to weather conditions and other factors, resulting in lower operating revenue
for Mercy Air during these months. Flight volume for Mercy Air's operations can
also be affected by the distribution of calls among competitors by local
government agencies and the entrance of new competitors into a market.
12
- - Collection rates - Mercy Air invoices patients and their insurers directly
for services rendered, and the level of bad debt expense is driven by collection
rates on these accounts. Collectibility is primarily dependent upon the health
of the U.S. economy, especially in southern California and the St. Louis region.
A significant or sustained downturn in the U.S. economy could have an adverse
impact on the Company's bad debt expense.
- - Dependence on third party suppliers - The Company currently obtains a
substantial portion of its helicopter spare parts and components from Bell
Helicopter, Inc. (Bell) and American Eurocopter Corporation (AEC), because its
fleet is composed primarily of Bell and Eurocopter aircraft, and maintains
supply arrangements with other parties for its engine and related dynamic
components. Based upon the manufacturing capabilities and industry contacts of
Bell, AEC, and other suppliers, the Company believes it will not be subject to
material interruptions or delays in obtaining aircraft parts and components but
does not have an alternative source of supply for Bell, AEC, and certain other
aircraft parts. Failure or significant delay by these vendors in providing
necessary parts could, in the absence of alternative sources of supply, have a
material adverse effect on the Company. Because of its dependence upon Bell and
AEC for helicopter parts, the Company could also be subject to adverse impacts
from unusually high price increases which are greater than overall inflationary
trends. Increases in the Company's flight fees billed to its customers are
generally limited to changes in the consumer price index.
- - Department of Defense funding - The two major projects in process for the
Products Division, UH-60Q and SCITS, are both dependent upon Department of
Defense funding. Failure of the U.S. Congress to approve funding for the
production of additional UH-60Q or SCITS units could have a material adverse
impact on Products Division revenue.
- - Governmental regulation - The air medical transportation services and
products industry is subject to extensive regulation by governmental agencies,
including the Federal Aviation Administration, which impose significant
compliance costs on the Company. In addition, reimbursement rates for air
ambulance services established by governmental programs such as Medicare
directly affect Mercy Air's revenue and indirectly affect Air Medical Services
Division's revenue from its hospital customers. Changes in laws or regulations
or reimbursement rates could have a material adverse impact on the Company's
cost of operations or revenue from flight operations.
- - Competition - The Air Medical Services Division faces significant
competition from several national and regional air medical transportation
providers for contracts with hospitals and other healthcare institutions.
Operators generally compete on the basis of price, safety record, accident
prevention and training, and the medical capability of the aircraft offered.
There can be no assurance that the Company will be able to continue to compete
successfully for new or renewing contracts in the future.
NEW ACCOUNTING STANDARDS
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101, Revenue Recognition (SAB 101), which provides
guidance on the recognition, presentation, and disclosure of revenue in
financial statements filed with the SEC. Subsequently, the SEC released SAB 101B
which delayed the implementation date of SAB 101 for registrants with fiscal
years beginning between December 16, 1999, and March 15, 2000. The Company has
not yet assessed the impact, if any, that SAB 101 might have on its financial
condition or results of operations.
13
In March 2000 the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation and Interpretation of APB Opinion No. 25 (FIN 44). This opinion
provides guidance on the accounting for certain stock option transactions and
subsequent amendments to stock option transactions. FIN 44 is effective July 1,
2000, but certain conclusions cover specific events that occur after either
December 15, 1998, or January 12, 2000. To the extent that FIN 44 covers events
occurring during the period from December 15, 1998, and January 12, 2000, but
before July 1, 2000, the effects of applying this Interpretation are to be
recognized on a prospective basis. The Company does not anticipate a material
impact on the results of operations as a result of implementing this standard.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the potential loss arising from adverse changes in market rates
and prices, such as foreign currency exchange and interest rates. The Company
does not use financial instruments to any degree to manage these risks and does
not hold or issue financial instruments for trading purposes. All of the
Company's product sales and related receivables are payable in U.S. dollars. The
Company is subject to interest rate risk on its debt obligations and notes
receivable, most of which have fixed interest rates. Interest rates on these
instruments approximate current market rates as of September 30, 2000.
14
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
None
15
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 13, 2000 By \s\ Aaron D. Todd
------------------------------------------
On behalf of the Company, and as Principal
Financial and Accounting Officer
16