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 March 31, 2001
--------------------------------------------
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
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AIR METHODS CORPORATION
-----------------------
(Exact name of Registrant as Specified in Its Charter)
Delaware 84-0915893
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(State or Other Jurisdiction (I.R.S. Employer
of 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 April
27, 2001, was 8,393,023.
TABLE OF CONTENTS
Form 10-Q
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - March 31, 2001 and December 31, 2000 1
Consolidated Statements of Operations for the three months ended
March 31, 2001 and 2000 3
Consolidated Statements of Cash Flows for the three months ended
March 31, 2001 and 2000 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures about Market Risk 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
PART I: FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
AIR METHODS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share amounts)
MARCH 31, DECEMBER 31,
2001 2000
-------------- -------------
Assets (unaudited)
- ------
Current assets:
Cash and cash equivalents $ 1,582 4,107
Current installments of notes receivable 111 108
Receivables:
Trade 19,380 17,980
Less allowance for doubtful accounts (5,451) (4,231)
-------------- -------------
13,929 13,749
Insurance proceeds 934 499
Other 662 862
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15,525 15,110
-------------- -------------
Inventories 3,219 3,142
Work-in-process on medical interiors and products contracts 428 193
Costs and estimated earnings in excess of billings on
uncompleted contracts 506 --
Prepaid expenses and other 826 1,024
-------------- -------------
Total current assets 22,197 23,684
-------------- -------------
Equipment and leasehold improvements:
Flight and ground support equipment 68,190 67,819
Furniture and office equipment 5,648 5,541
-------------- -------------
73,838 73,360
Less accumulated depreciation and amortization (27,046) (26,001)
-------------- -------------
Net equipment and leasehold improvements 46,792 47,359
-------------- -------------
Excess of cost over the fair value of net assets acquired, net of
accumulated amortization of $870 and $922 at March 31,
2001 and December 31, 2000, respectively 1,886 1,921
Notes receivable, less current installments 590 618
Other assets, net of accumulated amortization of $1,453 and
$1,721 at March 31, 2001 and December 31, 2000,
respectively 1,699 1,668
-------------- -------------
Total assets $ 73,164 75,250
============== =============
(Continued)
1
AIR METHODS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
(Amounts in thousands, except share and per share amounts)
MARCH 31, DECEMBER 31,
2001 2000
Liabilities and Stockholders' Equity -------------- -------------
- ------------------------------------ (unaudited)
Current liabilities:
Notes payable $ 500 1,000
Current installments of long-term debt 3,629 3,571
Current installments of obligations under capital leases 280 331
Accounts payable 1,959 2,065
Accrued overhaul and parts replacement costs 3,752 4,143
Deferred revenue 1,701 1,071
Billings in excess of costs and estimated earnings on
uncompleted contracts -- 1,011
Deferred income taxes -- 55
Other accrued liabilities 1,827 2,702
-------------- -------------
Total current liabilities 13,648 15,949
Long-term debt, less current installments 16,576 17,504
Obligations under capital leases, less current installments 3,231 3,235
Accrued overhaul and parts replacement costs 8,508 7,901
Other liabilities 1,238 1,245
-------------- -------------
Total liabilities 43,201 45,834
-------------- -------------
Stockholders' equity (note 3):
Preferred stock, $1 par value. Authorized 5,000,000
shares, none issued -- --
Common stock, $.06 par value. Authorized 16,000,000
shares; issued 9,084,599 and 9,084,515 shares at
March 31, 2001 and December 31, 2000,
respectively 545 545
Additional paid-in capital 50,128 50,113
Accumulated deficit (20,668) (21,200)
Treasury stock at par, 701,576 common shares at
March 31, 2001 and December 31, 2000,
respectively (42) (42)
-------------- -------------
Total stockholders' equity 29,963 29,416
-------------- -------------
Total liabilities and stockholders' equity $ 73,164 75,250
============== =============
See accompanying notes to consolidated financial statements.
2
AIR METHODS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except share and per share amounts)
THREE MONTHS ENDED MARCH 31,
-----------------------------
2001 2000
-------------- -------------
(unaudited) (unaudited)
Revenue:
Flight revenue $ 17,736 12,864
Sales of medical interiors and products 1,818 1,475
Parts and maintenance sales and services 350 252
Gain on disposition of assets, net 110 --
-------------- -------------
20,014 14,591
-------------- -------------
Operating expenses:
Flight centers 6,710 4,593
Aircraft operations 4,684 3,272
Aircraft rental 936 550
Cost of medical interiors and products sold 1,229 1,074
Cost of parts and maintenance sales and services 312 219
Depreciation and amortization 1,327 1,345
Bad debt expense 1,570 944
General and administrative 2,257 1,718
-------------- -------------
19,025 13,715
-------------- -------------
Operating income 989 876
Other income (expense):
Interest expense (528) (523)
Interest and dividend income 52 44
Other, net 19 20
-------------- -------------
Net income $ 532 417
============== =============
Basic and diluted income per common share (note 2) $ .06 .05
============== =============
Weighted average number of common shares outstanding - basic 8,382,995 8,281,782
============== =============
Weighted average number of common shares outstanding - diluted 8,562,097 8,624,674
============== =============
See accompanying notes to consolidated financial statements.
3
AIR METHODS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
THREE MONTHS ENDED MARCH 31,
-----------------------------
2001 2000
-------------- -------------
(unaudited) (unaudited)
Cash flows from operating activities:
Net income $ 532 417
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization expense 1,327 1,345
Bad debt expense 1,570 944
Loss (gain) on retirement and sale of equipment, net (110) --
Vesting of common stock options issued for services 15 15
Changes in assets and liabilities:
Decrease in prepaid and other current assets 198 185
Increase in receivables (1,985) (499)
Decrease (increase) in parts inventories (77) 110
Increase in work-in-process on medical interiors and costs in excess of
billings (741) (488)
Decrease in accounts payable, other accrued liabilities, and income tax
liabilities (1,036) (748)
Increase (decrease) in deferred revenue, billings in excess of cost and
other liabilities (388) 449
Increase in accrued overhaul and parts replacement costs 190 45
-------------- -------------
Net cash provided (used) by operating activities (505) 1,775
-------------- -------------
Cash flows from investing activities:
Acquisition of equipment and leasehold improvements (701) (1,068)
Proceeds from disposition and sale of equipment 197 --
Net decrease (increase) in notes receivable and other assets (91) 14
-------------- -------------
Net cash used by investing activities (595) (1,054)
-------------- -------------
Cash flows from financing activities:
Net payments under short-term notes payable (500) (700)
Proceeds from issuance of debt -- 2,000
Payments of long-term debt (870) (745)
Payments of capital lease obligations (55) (77)
Payments for purchases of common stock -- (590)
Proceeds from issuance of common stock, net -- 611
-------------- -------------
Net cash provided (used) by financing activities (1,425) 499
-------------- -------------
Increase (decrease) in cash and cash equivalents (2,525) 1,220
Cash and cash equivalents at beginning of period 4,107 2,242
-------------- -------------
Cash and cash equivalents at end of period $ 1,582 3,462
============== =============
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 fiscal year
ended December 31, 2000.
(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.
The reconciliation of basic to diluted weighted average common shares
outstanding is as follows for the quarters ended March 31 (amounts in
thousands except share and per share amounts):
2001 2000
--------- ---------
Weighted average number of common shares outstanding - basic 8,382,995 8,281,782
Dilutive effect of:
Common stock options 157,946 308,383
Common stock warrants 21,156 34,509
--------- ---------
Weighted average number of common shares outstanding - diluted 8,562,097 8,624,674
========= =========
Common stock options totaling 176,873 and 18,120 and common stock warrants
of -0- and 75,000 were not included in the diluted income per share
calculation for the quarters ended March 31, 2001 and 2000, respectively,
because their effect would have been anti-dilutive.
(3) STOCKHOLDERS' EQUITY
---------------------
Changes in stockholders' equity for the three months ended March 31, 2001,
consisted of the following (amounts in thousands except share amounts):
Shares
Outstanding Amount
----------- -------
Balance at January 1, 2001 8,382,939 $29,416
Issuance of common shares for options exercised 84 --
Vesting of common stock options for services rendered -- 15
Net income -- 532
----------- -------
Balance at March 31, 2001 8,383,023 $29,963
=========== =======
As of March 31, 2001, the Company's total accumulated deficit was
$20,668,000. 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
(4) 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.
Air
Medical
Services Mercy Air Products Corporate Intersegment
FOR QUARTER ENDED MARCH 31: Division Division Activities Eliminations Consolidated
- ---------------------------- ---------- ---------- --------- ------------- ------------- -------------
2001
External revenue $ 8,642 9,551 1,821 -- -- 20,014
Intersegment revenue 1 -- 756 -- (757) --
---------- ---------- --------- ------------- ------------- -------------
Total revenue 8,643 9,551 2,577 -- (757) 20,014
---------- ---------- --------- ------------- ------------- -------------
Operating expenses 7,059 6,926 1,929 849 (654) 16,109
Depreciation & amortization 740 461 48 78 -- 1,327
Bad debt expense -- 1,570 -- -- -- 1,570
Interest expense 226 298 -- 4 -- 528
Interest income (19) (1) -- (32) -- (52)
---------- ---------- --------- ------------- ------------- -------------
Segment net income (loss) $ 637 297 600 (899) (103) 532
========== ========== ========= ============= ============= =============
Total assets N/A 28,413 N/A 44,751 N/A 73,164
2000
External revenue $ 8,096 5,012 1,475 8 -- 14,591
Intersegment revenue -- -- 407 -- (407) --
---------- ---------- --------- ------------- ------------- -------------
Total revenue 8,096 5,012 1,882 8 (407) 14,591
---------- ---------- --------- ------------- ------------- -------------
Operating expenses 6,320 3,214 1,504 705 (337) 11,406
Depreciation & amortization 879 335 53 78 -- 1,345
Bad debt expense -- 944 -- -- -- 944
Interest expense 241 256 -- 26 -- 523
Interest income (17) (1) -- (26) -- (44)
---------- ---------- --------- ------------- ------------- -------------
Segment net income (loss) $ 673 264 325 (775) (70) 417
========== ========== ========= ============= ============= =============
Total assets N/A 20,632 N/A 42,979 N/A 63,611
========== ========== ========= ============= ============= =============
6
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,
including the information incorporated by reference herein, 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 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, 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 $532,000 for the three months ended March 31,
2001, compared to net income of $417,000 for the quarter ended March 31, 2000.
The increase in net income is attributed to the factors discussed below.
Flight revenue increased $4,872,000, or 37.9%, from $12,864,000 for the three
months ended March 31, 2000, to $17,736,000 for the three months ended March 31,
2001. Flight revenue for Mercy Air increased 97.3% in the first quarter of 2001
compared to the first quarter of 2000, primarily due to the acquisition of ARCH
Air Medical Service, Inc. (ARCH) in April 2000. For the first quarter of 2001,
flight revenue for ARCH totaled $3,986,000. Without the ARCH acquisition, Mercy
Air's flight revenue increased 13.6%, due to the addition of two new bases
during the second quarter of 2000. Revenue related to these two new bases for
the quarter ended March 31, 2001, was $615,000. Transport volume for Mercy Air's
other base operations was consistent with the prior year. Flight revenue for the
Air Medical Services Division increased 3.1% due to annual price increases in
contracts with hospital clients. Flight volume for Air Medical Services Division
contracts was consistent with the prior year.
Sales of medical interiors and products increased $343,000, or 23.3%, from
$1,475,000 for the three months ended March 31, 2000, to $1,818,000 for the
first quarter of 2001. Significant projects in 2001 included manufacture of two
Multi-Mission Medevac Systems for a public service customer and manufacture of
medical interiors or multi-functional interior components for five commercial
customers. Revenue by product line was as follows:
- - $812,000 -manufacture and installation of modular, multi-functional
interiors
- - $875,000 - manufacture of multi-mission interiors
- - $131,000 - design and manufacture of other aerospace products
Significant projects in 2000 included 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. Revenue by product line was as
follows:
- - $1,251,000 - design and manufacture of multi-mission interiors
- - $224,000 - design and manufacture of other aerospace products
Cost of medical interiors and products increased by 14.4% for the three months
ended March 31, 2001, as compared to the previous year. The increase is
consistent with the increase in related product revenue over the same period. In
addition, the average net margin earned on projects during the first quarter of
2001 was 31% compared to 26% in 2000, primarily due to the maturity of product
lines presently being manufactured.
7
Parts and maintenance sales and services increased 38.9% for the quarter ended
March 31, 2001, compared to the quarter ended March 31, 2000. Parts sales in the
first quarter of 2001 included $183,000 for the sale of an autopilot system to
an Air Medical Services Division customer. Cost of parts and maintenance sales
and services for the quarter also increased accordingly.
In the quarter ended March 31, 2001, the Company recognized a gain of $110,000
on the sale of a fixed wing aircraft which was no longer utilized in the fleet.
Flight center costs (consisting primarily of pilot, mechanic, and medical staff
salaries and fringe benefits) increased 46.1% for the three months ended March
31, 2001, compared to 2000. Flight center costs related to Mercy Air's
operations increased 120.9% in the first quarter of 2001, primarily due to the
acquisition of ARCH in April 2000. Flight center costs for ARCH in the first
quarter of 2001 totaled $1,288,000. Excluding the impact of the ARCH
transaction, Mercy Air's flight center costs increased 35.1%, primarily the
result of adding two new bases in 2000 and hiring staff for a third new base to
open in the second quarter of 2001. Flight center costs for the Air Medical
Services Division increased 9.8% primarily due to increases in salaries for
merit pay raises, in the cost of employee health insurance coverages paid by the
Company, and in supplemental contributions to the employee defined contribution
retirement plan effective July 2000.
Aircraft operating expenses increased 43.2% for the three months ended March 31,
2001, in comparison to the three months ended March 31, 2000. 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. Since the first quarter of 2000, the Company has added twelve
aircraft to its fleet, including eight as part of the ARCH acquisition. Aircraft
operating expenses for the ARCH fleet totaled $1,018,000 in the first quarter of
2001. Excluding the effect of the ARCH aircraft, expenses increased 12.0% in
2001. The change reflected an increase in the Company's hull and liability
insurance rates effective July 2000, due to general insurance market conditions.
Depreciation and amortization expense decreased 1.3% for the three months ended
March 31, 2001, compared to 2000. The increase in depreciation for the addition
of ARCH's buildings and equipment was offset in the qurater by the disposition
of a Bell 222 helicopter during 2000 and the elimination of depreciation on
assets which are fully depreciated. In addition, expenses in the first quarter
of 2001 included two months of amortization of a non-compete agreement related
to the buyout of another air ambulance service provider in San Diego, compared
to three months in the first quarter of 2000. All of the aircraft added to the
fleet since March 2000 are under operating lease arrangements.
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 increase of 66.3% in 2001 compared to 2000 reflects the acquisition
of ARCH in April 2000. Bad debt expense related to ARCH flight revenue totaled
approximately $604,000 for the first quarter of 2001. The increase in bad debt
expense related to Mercy Air's California and Nevada operations was consistent
with the increase in transport volume. Bad debt expense related to the Air
Medical Services Division was not significant in either 2001 or 2000.
General and administrative expenses increased 31.4% for the quarter ended March
31, 2001, compared to the quarter ended March 31, 2000, reflecting the impact of
the ARCH transaction. Excluding ARCH expenses, general and administrative
expenses increased 11.5%, primarily due to merit pay increases and changes in
administrative staffing to manage the expanded employee base with the
acquisition of ARCH and addition of new bases.
The Company recorded no tax provision in the quarter ended March 31, 2001,
primarily due to recognition of deferred tax assets for which a valuation
allowance had previously been provided. The remaining deferred tax asset at
March 31, 2001, for which a valuation allowance has been recorded, will be
recognized in the financial statements when its realization is more likely than
not.
8
FINANCIAL CONDITION
Net working capital increased from $7,735,000 at December 31, 2000, to
$8,549,000 at March 31, 2001, primarily due to a shift in contract billings from
billings in excess of cost to costs in excess of billings during the first
quarter. In December 2000, the Company had received a downpayment to begin work
on a $1.9 million contract. By the end of March 2001, the Company had completed
approximately 45% of this project. Cash and cash equivalents decreased
$2,525,000 from $4,107,000 to $1,582,000 over the same period, for the reasons
discussed below.
Cash used by operations totaled $505,000 compared to $1,775,000 generated by
operations in 2000. The change is attributable to a decrease in accrued
liabilities and to the shift in contract billings discussed above. The decrease
in other accrued liabilities is the result of a reduction in accrued salaries
and wages due to the timing of the last payroll date prior to the end of the
quarter.
Cash used for investing activities totaled $595,000 in 2001, compared to
$1,054,000 in 2000. Equipment acquisitions during the first quarter of 2001
consisted primarily of rotable equipment purchases and upgrades to existing
equipment. The cost of equipment acquisitions was offset in part during the
quarter by proceeds from the sale of one of the Company's airplanes. In the
first quarter of 2000, significant equipment acquisitions included a Bell 222
helicopter for the Mercy Air fleet.
Financing activities used $1,425,000 in cash in 2001, compared to generating
$499,000 in 2000. The primary uses of cash in the first quarter of 2001 were
regularly scheduled payments of long-term debt and reduction of the outstanding
balance on the Company's line of credit. In 2000 payments for long-term debt and
purchases of common stock were offset by proceeds from the issuance of common
stock and new note agreements.
OUTLOOK 2001
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.
Air Medical Services Division
Six hospital contracts are due for renewal in 2001. Two of the contracts were
renewed during the first quarter, both for additional five-year terms; renewals
on the other four contracts are still pending. During the first quarter the
Company entered into two agreements to expand services with current hospital
customers in Texas and Arizona with the deployment of additional aircraft. A
third Bell 412 helicopter was added to the operations in Texas during the first
quarter, and a third Bell 407 helicopter is expected to be added to the
operations in Arizona during the second quarter. The Company expects 2001 flight
activity for current hospital contracts to remain consistent with historical
levels.
Mercy Air Service
The Company expects flight volume for Mercy Air's operations to be consistent
with historical levels during the remainder of 2001, subject to seasonal,
weather-related fluctuations, with increases for a full year of operations
within the ARCH subsidiary. The Company expects to open a second base in
Illinois as part of the ARCH operations during 2001 and to begin fixed wing
operations out of its Mercy Air headquarters in California during the second
quarter of 2001.
Products Division
In the fourth quarter of 2000 and first quarter of 2001, the Products Division
was awarded five new contracts valued at approximately $3,800,000 to manufacture
medical interior systems for multiple types of aircraft. Work on all five
contracts is expected to continue through the first quarter of 2002.
9
The Company has received a verbal commitment and expects to be awarded a
contract for five HH-60L (formerly known as UH-60Q) Multi-Mission Medevac
Systems during the second quarter of 2001. Production will commence immediately
upon award and is expected to be completed in the first quarter of 2002. The
current U.S. Army Aviation Modernization Plan continues to define a requirement
for 357 units in total over the next 20 years. The U.S. Army Program Objective
Memorandum (POM) anticipates funding for this requirement with eight units per
year scheduled in fiscal years 2002 and 2003 and fifteen units per year
scheduled from fiscal year 2004 through the end of the program. There is no
assurance that the current contract option will be exercised or orders for
additional units received in 2001 or in future periods.
The Development Contract of the SCITS program for the U.S. Air Force (USAF) is
expected to be completed in the second quarter of 2001. The long-range USAF plan
defines a requirement for 75 to 250 units over the next five years. Although the
Company expects the Production Contract to be awarded in the third quarter of
2001, there can be no assurance that the contract will be awarded in 2001 or in
future periods.
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, or expand flight volume for Mercy Air.
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 the remainder of 2001.
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 2001" 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 21% 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.
- - Collection rates - Mercy Air invoices patients and their insurers directly
for services rendered and recognizes revenue net of estimated contractual
allowances. 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. Changes in estimated contractual allowances and bad debts are
recognized based on actual collections in subsequent periods. 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.
10
- - Department of Defense funding - Two of the significant projects in process
for the Products Division, HH-60L and SCITS, are both dependent upon
Department of Defense funding. Failure of the U.S. Congress to approve
funding for the production of additional HH-60L 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.
Mercy Air also faces competition from smaller regional carriers and
alternative air ambulance providers such as sheriff departments. 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.
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, international franchise revenue, 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. Based on the amounts outstanding at March 31, 2001, the annual
impact of a 1% change in interest rates would be approximately $5,000. Interest
rates on these instruments approximate current market rates as of March 31,
2001.
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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
None
(b) Reports on Form 8-K
None
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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: May 11, 2001 By \s\ Aaron D. Todd
------------------------------------------
On behalf of the Company, and as Principal
Financial and Accounting Officer
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