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, 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 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 July 27,
2001, was 8,398,229.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - June 30, 2001 and
December 31, 2000 1
Consolidated Statements of Operations for the
three and six months ended June 30, 2001 and 2000 3
Consolidated Statements of Cash Flows for the
six months ended June 30, 2001 and 2000 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 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
PART I: FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
AIR METHODS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
JUNE 30, DECEMBER 31,
2001 2000
---------- -------------
Assets
- ------
Current assets:
Cash and cash equivalents $ 993 4,107
Current installments of notes receivable 114 108
Receivables:
Trade 21,112 17,980
Less allowance for doubtful accounts (5,348) (4,231)
---------- -------------
15,764 13,749
Insurance proceeds 523 499
Other 515 862
---------- -------------
16,802 15,110
---------- -------------
Inventories 3,188 3,142
Work-in-process on medical interiors and products contracts 162 193
Costs and estimated earnings in excess of billings on
uncompleted contracts 363 --
Prepaid expenses and other 1,091 1,024
---------- -------------
Total current assets 22,713 23,684
---------- -------------
Equipment and leasehold improvements:
Flight and ground support equipment 69,127 67,819
Furniture and office equipment 5,730 5,541
---------- -------------
74,857 73,360
Less accumulated depreciation and amortization (28,160) (26,001)
---------- -------------
Net equipment and leasehold improvements 46,697 47,359
---------- -------------
Excess of cost over the fair value of net assets acquired, net of
accumulated amortization of $1,000 and $922 at June
30, 2001 and December 31, 2000, respectively 3,068 1,921
Notes receivable, less current installments 561 618
Other assets, net of accumulated amortization of $751 and $1,721
at June 30, 2001 and December 31, 2000, respectively 1,717 1,668
---------- -------------
Total assets $ 74,756 75,250
========== =============
(Continued)
See accompanying notes to consolidated financial statements.
1
AIR METHODS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
JUNE 30, DECEMBER 31,
2001 2000
---------- ------------
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Notes payable $ 1,418 1,000
Current installments of long-term debt 3,585 3,571
Current installments of obligations under capital leases 341 331
Accounts payable 1,223 2,065
Accrued overhaul and parts replacement costs 3,279 4,143
Deferred revenue 994 1,071
Billings in excess of costs and estimated earnings on uncompleted contracts -- 1,011
Deferred income taxes -- 55
Other accrued liabilities 3,077 2,702
---------- ------------
Total current liabilities 13,917 15,949
Long-term debt, less current installments 15,736 17,504
Obligations under capital leases, less current installments 3,070 3,235
Accrued overhaul and parts replacement costs 8,759 7,901
Other liabilities 1,615 1,245
---------- ------------
Total liabilities 43,097 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 9,084,962 and 9,084,515 shares at
June 30, 2001 and December 31, 2000, respectively 545 545
Additional paid-in capital 50,144 50,113
Accumulated deficit (18,988) (21,200)
Treasury stock at par, 701,576 common shares at June
30, 2001 and December 31, 2000 (42) (42)
---------- ------------
Total stockholders' equity 31,659 29,416
---------- ------------
Total liabilities and stockholders' equity $ 74,756 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)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-----------------------------------------------
2001 2000 2001 2000
----------- ---------- ---------- ----------
Revenue:
Flight revenue $ 21,009 17,419 38,745 30,283
Sales of medical interiors and products 2,168 1,753 3,986 3,228
Parts and maintenance sales and services 353 318 703 570
Gain on disposition of assets, net 3 -- 113 --
----------- ---------- ---------- ----------
23,533 19,490 43,547 34,081
----------- ---------- ---------- ----------
Operating expenses:
Flight centers 6,753 5,366 13,463 9,959
Aircraft operations 5,050 4,108 9,734 7,380
Aircraft rental 1,005 736 1,941 1,286
Medical interiors and products sold 1,650 1,153 2,879 2,227
Cost of parts and maintenance sales and services 303 266 615 485
Depreciation and amortization 1,318 1,384 2,645 2,729
Bad debt expense 2,850 1,996 4,420 2,940
General and administrative 2,477 2,007 4,734 3,725
----------- ---------- ---------- ----------
21,406 17,016 40,431 30,731
----------- ---------- ---------- ----------
Operating income 2,127 2,474 3,116 3,350
Other income (expense):
Interest expense (495) (528) (1,023) (1,051)
Interest income 30 53 82 97
Other, net 18 16 37 36
----------- ---------- ---------- ----------
Net income $ 1,680 2,015 2,212 2,432
=========== ========== ========== ==========
Basic income per common share $ .20 .24 .26 .29
=========== ========== ========== ==========
Diluted income per common share $ .20 .24 .26 .28
=========== ========== ========== ==========
Weighted average number of common shares outstanding
- - basic 8,383,265 8,309,855 8,383,130 8,295,818
=========== ========== ========== ==========
Weighted average number of common shares outstanding
- - diluted 8,590,513 8,544,571 8,605,098 8,586,995
=========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
3
AIR METHODS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
-------------------------
2001 2000
-------- -------
Cash flows from operating activities:
Net income $ 2,212 2,432
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense 2,645 2,729
Vesting of common stock options issued for services 30 30
Bad debt expense 4,420 2,940
Gain on retirement and sale of equipment, net (113) --
Changes in assets and liabilities:
Decrease (increase) in prepaid expenses and other current assets (67) 86
Increase in receivables (6,112) (5,796)
Decrease (increase) in parts inventories (46) 137
Increase in work-in-process on medical interiors and costs in excess of billings (332) (184)
Decrease in accounts payable, other accrued liabilities, and deferred income taxes (1,544) (81)
Increase (decrease) in deferred revenue, billings in excess of cost, and other liabilities (735) 925
Increase (decrease) in accrued overhaul and parts replacement costs (32) 242
-------- -------
Net cash provided by operating activities 326 3,460
-------- -------
Cash flows from investing activities:
Acquisition of net assets of Area Rescue Consortium of Hospitals and SkyLife
Aviation LLC -- (2,367)
Acquisition of equipment and leasehold improvements (1,898) (1,742)
Proceeds from disposition and sale of equipment 207 --
Increase in notes receivable and other assets (259) (231)
-------- -------
Net cash used by investing activities (1,950) (4,340)
-------- -------
(Continued)
See accompanying notes to consolidated financial statements.
4
AIR METHODS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
-------------------------
2001 2000
-------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock, net $ 1 981
Payments for purchases of common stock -- (927)
Net borrowings (payments) under short-term notes payable 418 300
Proceeds from issuance of debt -- 3,350
Payments of long-term debt (1,754) (1,565)
Payments of capital lease obligations (155) (191)
-------- -------
Net cash provided (used) by financing activities (1,490) 1,948
-------- -------
Increase (decrease) in cash and cash equivalents (3,114) 1,068
Cash and cash equivalents at beginning of period 4,107 2,242
-------- -------
Cash and cash equivalents at end of period $ 993 3,310
======== =======
Non-cash investing and financing activities:
In the six months ended June 30, 2000, the Company assumed a capital lease
obligation of $1,568 to finance the buyout of a helicopter.
In the six months ended June 30, 2001, the Company recognized a total liability
of $1,500 as additional consideration for the purchase of ARCH Air Medical
Service, Inc. (ARCH). During the second quarter of 2001, the Company determined
that the payment of this consideration, which was based on the cash flows of
post-acquisition ARCH operations, was reasonably assured based on receivable
collection trends to date.
See accompanying notes to consolidated financial statements.
5
AIR METHODS CORPORATION AND SUBSIDIARIES
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, 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:
2001 2000
--------- ---------
FOR QUARTER ENDED JUNE 30:
Weighted average number of common shares outstanding - basic 8,383,265 8,309,855
Dilutive effect of:
Common stock options 185,296 209,953
Common stock warrants 21,952 24,763
--------- ---------
Weighted average number of common shares outstanding - diluted 8,590,513 8,544,571
========= =========
FOR SIX MONTHS ENDED JUNE 30:
Weighted average number of common shares outstanding - basic 8,383,130 8,295,818
Dilutive effect of:
Common stock options 200,545 261,255
Common stock warrants 21,423 29,922
--------- ---------
Weighted average number of common shares outstanding - diluted 8,605,098 8,586,995
========= =========
Common stock options totaling 173,825 and 104,414 were not included in the
diluted income per share calculation for the quarters ended June 30, 2001
and 2000, respectively, because their effect would have been anti-dilutive.
Common stock options totaling 173,825 and 18,988 were not included in the
diluted income per share calculation for the six months ended June 30, 2001
and 2000, respectively, because their effect would have been anti-dilutive.
6
(3) STOCKHOLDERS' EQUITY
---------------------
Changes in stockholders' equity for the six months ended June 30, 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 & warrants exercised 447 1
Vesting of common stock options for services rendered -- 30
Net income 2,212
----------- -------
Balance at June 30, 2001 8,383,386 $31,659
=========== =======
(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. 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 in southern
California and Nevada, and in Missouri and Illinois through its wholly
owned subsidiary ARCH, to the general population as an independent
community-based service. 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
Services Mercy Products Corporate Intersegment
FOR QUARTER ENDED JUNE 30: Division Air Division Activities Eliminations Consolidated
- ------------------------------ ---------- ------- -------- ----------- ------------- -------------
2001
External revenue $ 9,777 12,148 1,608 -- -- 23,533
Intersegment revenue 12 -- 629 -- (641) --
---------- ------- -------- ----------- ------------- -------------
Total revenue 9,789 12,148 2,237 -- (641) 23,533
---------- ------- -------- ----------- ------------- -------------
Operating expenses 8,063 7,105 1,825 771 (544) 17,220
Depreciation & amortization 736 456 50 76 -- 1,318
Bad debt expense -- 2,850 -- -- -- 2,850
Interest expense 215 279 -- 1 -- 495
Interest income (18) (2) -- (10) -- (30)
---------- ------- -------- ----------- ------------- -------------
Segment net income (loss) $ 793 1,460 362 (838) (97) 1,680
========== ======= ======== =========== ============= =============
Total assets N/A 29,495 N/A 45,261 N/A 74,756
========== ======= ======== =========== ============= =============
2000
External revenue $ 8,390 9,233 1,760 107 -- 19,490
Intersegment revenue 3 -- 382 -- (385) --
---------- ------- -------- ----------- ------------- -------------
Total revenue 8,393 9,233 2,142 107 (385) 19,490
---------- ------- -------- ----------- ------------- -------------
Operating expenses 6,651 4,981 1,577 733 (322) 13,620
Depreciation & amortization 873 380 54 77 -- 1,384
Bad debt expense -- 1,996 -- -- -- 1,996
Interest expense 247 275 -- 6 -- 528
Interest income (17) (2) -- (34) -- (53)
---------- ------- -------- ----------- ------------- -------------
Segment net income (loss) $ 639 1,603 511 (675) (63) 2,015
========== ======= ======== =========== ============= =============
Total assets N/A 27,283 N/A 45,076 N/A 72,359
========== ======= ======== =========== ============= =============
FOR SIX MONTHS ENDED JUNE 30:
2001
External revenue $ 18,419 21,699 3,429 -- -- 43,547
Intersegment revenue 13 -- 1,385 -- (1,398) --
---------- ------- -------- ----------- ------------- -------------
Total revenue 18,432 21,699 4,814 -- (1,398) 43,547
---------- ------- -------- ----------- ------------- -------------
Operating expenses 15,122 14,031 3,754 1,620 (1,198) 33,329
Depreciation & amortization 1,476 917 98 154 -- 2,645
Bad debt expense -- 4,420 -- -- -- 4,420
Interest expense 441 577 -- 5 -- 1,023
Interest income (37) (3) -- (42) -- (82)
---------- ------- -------- ----------- ------------- -------------
Segment net income (loss) $ 1,430 1,757 962 (1,737) (200) 2,212
========== ======= ======== =========== ============= =============
Total assets N/A 29,495 N/A 45,261 N/A 74,756
========== ======= ======== =========== ============= =============
2000
External revenue $ 16,486 14,245 3,235 115 -- 34,081
Intersegment revenue 3 -- 789 -- (792) --
---------- ------- -------- ----------- ------------- -------------
Total revenue 16,489 14,245 4,024 115 (792) 34,081
---------- ------- -------- ----------- ------------- -------------
Operating expenses 12,971 8,195 3,081 1,438 (659) 25,026
Depreciation & amortization 1,752 715 107 155 -- 2,729
Bad debt expense -- 2,940 -- -- -- 2,940
Interest expense 488 531 -- 32 -- 1,051
Interest income (34) (3) -- (60) -- (97)
---------- ------- -------- ----------- ------------- -------------
Segment net income (loss) $ 1,312 1,867 836 (1,450) (133) 2,432
========== ======= ======== =========== ============= =============
Total assets N/A 27,283 N/A 45,076 N/A 72,359
========== ======= ======== =========== ============= =============
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,
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 air medical 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 $1,680,000 and $2,212,000 for the three and
six months ended June 30, 2001, respectively, compared to net income of
$2,015,000 and $2,432,000 for the three and six months ended June 30, 2000,
respectively.
Flight revenue increased $3,590,000, or 20.6%, and $8,462,000, or 27.9%, for the
three and six months ended June 30, 2001, respectively, compared to 2000. Flight
revenue for Mercy Air increased 32.3% and 54.9% in the three and six months
ended June 30, 2001, respectively, compared to 2000, primarily due to the
acquisition of ARCH in April 2000. Flight revenue for ARCH for the three and six
months ended June 30, 2001, totaled $5,247,000 and $9,233,000, respectively,
compared to $3,096,000 from the acquisition date through June 30, 2000. Absent
the impact of the ARCH acquisition, flight revenue for Mercy Air increased 12.6%
and 13.1% for the quarter and six months, respectively, due to the addition of
two new bases during the second quarter of 2000 and one new base in the second
quarter of 2001. Revenue related to these three new bases for the quarter and
six months ended June 30, 2001, was $610,000 and $1,225,000, respectively,
compared to $178,000 generated in the second quarter of 2000. Transport volume
for Mercy Air's other bases was consistent with the prior year. Flight revenue
for the Air Medical Services Division increased 9.6% and 6.4% for the three and
six months ended June 30, 2001, primarily due to annual price increases in
contracts with hospital clients. Flight volume for continuing contracts also
increased 12.8% and 6.9% in the three- and six-month periods of 2001 compared to
the prior year. A decrease in revenue from the discontinuation of one contract
in 2000 was offset during the three and six months ended June 30, 2001, by the
expansion of two existing contracts to new satellite locations.
Sales of medical interiors and products increased $415,000, or 23.7%, and
$758,000, or 23.5%, for the three and six months ended June 30, 2001, compared
to 2000. 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 six commercial customers.
Revenue by product line for the quarter and six months ended June 30, 2001,
respectively, was as follows:
- - $804,000 and $1,679,000 - design and manufacture of multi-mission interiors
- - $1,256,000 and $2,068,000 - manufacture and installation of modular,
multi-functional interiors
- - $108,000 and $239,000 - design and manufacture of other aerospace products
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. During the second
quarter of 2000, the Company also began manufacture of medical interiors or
multi-functional interior components for six commercial customers. Revenue by
product line for the quarter and six months ended June 30, 2000, respectively,
was as follows:
- - $757,000 and $2,008,000 - design and manufacture of multi-mission interiors
- - $622,000 and $622,000 - manufacture and installation of modular,
multi-functional interiors
- - $374,000 and $598,000 - design and manufacture of other aerospace products
9
Cost of medical interiors and products increased by 43.1% and 29.3% for the
three and six months ended June 30, 2001, as compared to the previous year,
reflecting the increase in volume of sales during the three and six-month
periods. Projects during the second quarter of 2001 included the manufacture and
installation of a multi-functional medical interior for an Air Medical Services
Division customer. The margin earned on this project, which accounted for
approximately 25% of the revenue during the second quarter, was 40% below the
average margin for other projects in process during the six months ended June
30, 2001.
Parts and maintenance sales and services increased 11.0% and 23.3% for the
quarter and six months ended June 30, 2001, respectively, compared to 2000.
Parts sales in 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 and six months also increased accordingly.
In the six months ended June 30, 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 25.8% and 35.2% for the three and six
months ended June 30, 2001, respectively, compared to 2000. Flight center costs
for Mercy Air increased 32.3% and 69.0% in the three and six months ended June
30, 2001. Flight center costs related to ARCH for the three and six months ended
June 30, 2001, totaled $1,416,000 and $2,704,000, compared to $819,000 from the
acquisition date through June 30, 2000. Without the effect of the ARCH
acquisition, Mercy Air's flight center costs increased 19.5% and 27.0% for the
three and six months ended June 30, 2001, respectively, due to the addition of
personnel to staff the new base locations described above. Flight center costs
for the Air Medical Services Division increased 16.2% and 12.9% for the three
and six months, respectively, 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 by 22.9% and 31.9% for the three and six
months ended June 30, 2001, respectively, in comparison to the three and six
months ended June 30, 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
second 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 $839,000 and $1,857,000 in the three and six months ended
June 30, 2001, compared to $417,000 from the acquisition date through June 30,
2000. Excluding the effect of the ARCH aircraft, expenses increased 14.1% and
13.1% in three and six months ended June 30, 2001, respectively. The change
reflected an increase in the Company's hull and liability insurance rates
effective July 2000, due to overall insurance market conditions and an increase
in expenditures for on-condition aircraft parts for Mercy Air's fleet.
Aircraft rental expense increased 36.5% and 50.9% for the three and six months
ended June 30, 2001, respectively, in comparison to the three and six months
ended June 30, 2000. Lease expense for ARCH aircraft totaled $311,000 and
$621,000 for the three and six months ended June 30, 2001, respectively,
compared to $179,000 from the acquisition date through June 30, 2000. Lease
expense for the remainder of the fleet was relatively unchanged in 2001 compared
to 2000.
Depreciation and amortization expense decreased 4.8% and 3.1% for the three and
six months ended June 30, 2001, respectively. The increase in depreciation for
the addition of ARCH's buildings and equipment was offset in the quarter and six
months 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 six months ended June 30, 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 six months in 2000.
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 42.8% and 50.3% for the three and six months ended
June 30, 2001, respectively, compared to 2000 reflect the acquisition of ARCH in
April 2000. Bad debt expense related to ARCH flight revenue totaled
approximately $1,188,000 and $1,792,000 for the three and six months ended June
30, 2001, respectively, compared to $1,177,000 from the acquisition date through
June 30, 2000. Bad debt expense as a percentage of Mercy Air's consolidated
10
flight revenue increased 1.8% for the quarter ended June 30, 2001, compared to
the second quarter of 2000, and decreased 0.6% for the six months ended June 30,
2001, compared to the prior year. Bad debt expense related to the Air Medical
Services or Products Divisions was not significant in either 2001 or 2000.
General and administrative expenses increased 23.4% and 27.1% for the quarter
and six months ended June 30, 2001, compared to 2000, reflecting the impact of
the ARCH transaction. Excluding ARCH expenses, general and administrative
expenses increased 9.1% and 10.3% for the three and six months, respectively.
This increase is primarily due to 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 three and six months ended June 30,
2001, primarily due to recognition of deferred tax assets for which a valuation
allowance had previously been provided. The remaining deferred tax asset at June
30, 2001, for which a valuation allowance has been recorded, will be recognized
in the financial statements when its realization is more likely than not.
FINANCIAL CONDITION
Net working capital increased from $7,735,000 at December 31, 2000, to
$8,796,000 at June 30, 2001, primarily due to an increase in receivables and a
decrease in billings in excess of costs during the first six months of 2001. In
December 2000, the Company had received a downpayment to begin work on a $1.9
million contract. By the end of June 2001, the Company had completed over 90% of
this project, resulting in the decrease in billings in excess of costs. The
increase in receivables is attributable to increased revenues for all three
divisions. Cash and cash equivalents decreased $3,114,000 from $4,107,000 to
$993,000 over the same period, for the reasons discussed below.
Cash generated from operations decreased to $326,000 in 2001 from $3,460,000 in
2000. The decrease is due in part to the decrease in billings in excess of costs
described above and to a reduction in other accrued liabilities and accounts
payable. The decrease in other accrued liabilities and accounts payable at June
30, 2001, compared to December 31, 2000, is related to the timing of the final
check run at the end of 2000.
Cash used for investing activities totaled $1,950,000 in 2001, compared to
$4,340,000 in 2000. Investment activities in 2000 included the acquisition of
ARCH assets. Equipment acquisitions during the first six months of 2001
consisted primarily of rotable equipment purchases and upgrades to existing
equipment.
Financing activities used $1,490,000 in cash in 2001, compared to generating
$1,948,000 in 2000. The primary uses of cash in 2001 were regularly scheduled
payments of long-term debt and capital lease obligations. 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. In July
2001 the Company renewed a third contract for an additional five-year term and
expanded services under the contract to a third base in Iowa with operations
scheduled to begin during the fourth quarter of 2001. Renewals on the other
three contracts are still pending. Also in July 2001, the Company entered into a
five-year contract to maintain and operate four medically equipped Beech King
Air E-90 fixed-wing aircraft for a customer in Arizona effective August 1, 2001.
The Company expects 2001 flight activity for current hospital contracts to
remain consistent with historical levels.
Mercy Air Service
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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 opened a second base in Illinois within
the ARCH system and began fixed wing operations out of its Mercy Air
headquarters in California during the second quarter of 2001.
Products Division
During the second quarter of 2001, the Company was awarded a contract for five
HH-60L (formerly known as UH-60Q) Multi-Mission Medevac Systems. Production 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) was
completed early in the third quarter of 2001. During the third quarter, the
Company received notification that the USAF does not intend to exercise its
option on a production contract for SCITS at this time.
As of the end of the second quarter of 2001, the Products Division had work in
process under eight contracts, including the HH-60L contract described above, to
manufacture medical interior systems for multiple types of aircraft. Work is
expected to continue through the first quarter of 2002. Revenue remaining to be
recognized on all contracts totals approximately $4,000,000.
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, 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
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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 - One of the significant projects in process
for the Products Division, HH-60L, is dependent upon Department of Defense
funding. Failure of the U.S. Congress to approve funding for the production
of additional HH-60L 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 June 30, 2001, the annual
impact of a 1% change in interest rates would be approximately $14,000. Interest
rates on these instruments approximate current market rates as of June 30, 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
The 2001 Annual Meeting of Stockholders was held on June 27, 2001. At
the meeting, Messrs. George W. Belsey, Major General Carl H. McNair,
Jr. (Retired), and Donald R. Segner were elected to Class III
directorships. Voting results were as follows:
Total Vote
Total Vote For Withheld From
Each Director Each Director
-------------- -------------
George W. Belsey 7,742,588 24,197
MG Carl H. McNair, Jr. (Ret.) 7,741,939 24,846
Donald R. Segner 7,742,939 23,846
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: August 14, 2001 By /s/ Aaron D. Todd
------------------------------------------
Aaron D. Todd
On behalf of the Company, and as
Principal Financial and Accounting Officer
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