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, 2001
-------------------------------------------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-16079
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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 Identification Number)
Incorporation or Organization)
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
26, 2001, was 8,419,881.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - September 30, 2001
and December 31, 2000 1
Consolidated Statements of Operations for the three
and nine months ended September 30, 2001 and 2000 3
Consolidated Statements of Cash Flows for the
nine months ended September 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 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
2
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)
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------------------------
Assets
- ------
Current assets:
Cash and cash equivalents $ 527 4,107
Current installments of notes receivable 117 108
Receivables:
Trade 20,689 17,980
Less allowance for doubtful accounts (5,800) (4,231)
------------------------------
14,889 13,749
Insurance proceeds 218 499
Other 628 862
------------------------------
15,735 15,110
------------------------------
Inventories 3,326 3,142
Work-in-process on medical interiors and products contracts 441 193
Costs and estimated earnings in excess of billings on
uncompleted contracts 866 --
Prepaid expenses and other 2,437 1,024
------------------------------
Total current assets 23,449 23,684
------------------------------
Equipment and leasehold improvements:
Flight and ground support equipment 71,215 67,819
Furniture and office equipment 5,811 5,541
------------------------------
77,026 73,360
Less accumulated depreciation and amortization (29,355) (26,001)
------------------------------
Net equipment and leasehold improvements 47,671 47,359
------------------------------
Excess of cost over the fair value of net assets acquired, net of
accumulated amortization of $1,048 and $922 at September 30,
2001 and December 31, 2000, respectively 3,021 1,921
Notes receivable, less current installments 550 618
Other assets, net of accumulated amortization of $797 and $1,721
at September 30, 2001 and December 31, 2000, respectively 1,772 1,668
------------------------------
Total assets $ 76,463 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)
SEPTEMBER 30, DECEMBER 31,
2001 2000
-------------------------------
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Notes payable $ 364 1,000
Current installments of long-term debt 3,433 3,571
Current installments of obligations under capital leases 346 331
Accounts payable 1,552 2,065
Accrued overhaul and parts replacement costs 3,112 4,143
Deferred revenue 1,018 1,071
Billings in excess of costs and estimated earnings on
uncompleted contracts -- 1,011
Deferred income taxes -- 55
Other accrued liabilities 2,916 2,702
-------------------------------
Total current liabilities 12,741 15,949
Long-term debt, less current installments 14,989 17,504
Obligations under capital leases, less current installments 2,963 3,235
Accrued overhaul and parts replacement costs 10,345 7,901
Other liabilities 1,451 1,245
-------------------------------
Total liabilities 42,489 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 9,195,387 and 9,084,515 shares at
September 30, 2001 and December 31, 2000 552 545
Additional paid-in capital 50,234 50,113
Accumulated deficit (16,766) (21,200)
Treasury stock, 780,556 and 701,576 common shares at
September 30, 2001 and December 31, 2000,
respectively (46) (42)
-------------------------------
Total stockholders' equity 33,974 29,416
-------------------------------
Total liabilities and stockholders' equity $ 76,463 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------------------
2001 2000 2001 2000
------------------------------------------------
Revenue:
Flight revenue $ 21,734 19,446 60,479 49,728
Sales of medical interiors and products 1,623 1,855 5,609 5,083
Parts and maintenance sales and services 588 253 1,291 823
Gain on disposition of assets, net -- 342 110 343
------------------------------------------------
23,945 21,896 67,489 55,977
------------------------------------------------
Operating expenses:
Flight centers 7,355 6,355 20,818 16,314
Aircraft operations 5,227 5,174 14,958 12,554
Aircraft rental 951 877 2,892 2,163
Medical interiors and products sold 1,163 1,338 4,042 3,565
Cost of parts and maintenance sales and services 533 222 1,148 707
Depreciation and amortization 1,291 1,377 3,936 4,106
Bad debt expense 2,493 2,237 6,913 5,177
General and administrative 2,265 1,969 6,999 5,694
------------------------------------------------
21,278 19,549 61,706 50,280
------------------------------------------------
Operating income 2,667 2,347 5,783 5,697
Other income (expense):
Interest expense (475) (560) (1,498) (1,611)
Interest and dividend income 11 49 93 146
Other, net 19 17 56 53
------------------------------------------------
Net income $ 2,222 1,853 4,434 4,285
================================================
Basic income per common share (note 2) $ .26 .22 .53 .52
================================================
Diluted income per common share (note 2) $ .26 .22 .52 .50
================================================
Weighted average number of common shares outstanding 8,409,297 8,367,698 8,391,852 8,319,778
- - basic ================================================
Weighted average number of common shares outstanding 8,693,832 8,580,505 8,605,986 8,565,682
- - diluted ================================================
See accompanying notes to consolidated financial statements.
3
AIR METHODS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2001 2000
-------------------------------
Cash flows from operating activities:
Net income $ 4,434 $ 4,285
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization expense 3,936 4,106
Vesting of common stock options issued for services 45 46
Bad debt expense 6,913 5,177
Gain on retirement and sale of equipment, net (110) (343)
Changes in assets and liabilities:
Decrease (increase) in prepaid expenses and other current assets (1,413) 63
Increase in receivables (7,538) (9,909)
Decrease (increase) in parts inventories (184) 83
Decrease (increase) in work-in-process on medical interiors and costs in
excess of billings (1,114) 255
Increase (decrease) in accounts payable, other accrued liabilities, and
deferred income taxes (1,376) 106
Increase (decrease) in deferred revenue, billings in excess of cost, and
other liabilities (875) 309
Increase in accrued overhaul and parts replacement costs 276 709
-------------------------------
Net cash provided by operating activities 2,994 4,887
-------------------------------
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 (2,960) (3,432)
Proceeds from retirement and sale of equipment 207 1,796
Increase in notes receivable and other assets (354) (768)
-------------------------------
Net cash used by investing activities (3,107) (4,771)
-------------------------------
(Continued)
See accompanying notes to consolidated financial statements.
4
AIR METHODS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2001 2000
-------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock, net $ 371 $ 2,295
Payments for purchases of common stock (292) (2,207)
Net payments under short-term notes payable (636) (700)
Proceeds from issuance of debt -- 3,773
Payments of long-term debt (2,653) (2,733)
Payments of capital lease obligations (257) (288)
-------------------------------
Net cash provided (used) by financing activities (3,467) 140
-------------------------------
Increase (decrease) in cash and cash equivalents (3,580) 256
Cash and cash equivalents at beginning of period 4,107 2,242
-------------------------------
Cash and cash equivalents at end of period $ 527 $ 2,498
===============================
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.
In the nine months ended September 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 income per share is computed by dividing income available to
common stockholders by the weighted average number of common shares
outstanding during the period. Diluted income 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 SEPTEMBER 30:
Weighted average number of common shares outstanding - basic 8,409,297 8,367,698
Dilutive effect of:
Common stock options 249,397 188,293
Common stock warrants 35,138 24,514
---------------------
Weighted average number of common shares outstanding - diluted 8,693,832 8,580,505
=====================
FOR NINE MONTHS ENDED SEPTEMBER 30:
Weighted average number of common shares outstanding - basic 8,391,852 8,319,778
Dilutive effect of:
Common stock options 187,666 217,561
Common stock warrants 26,468 28,343
---------------------
Weighted average number of common shares outstanding - diluted 8,605,986 8,565,682
=====================
Common stock options totaling 14,987 and 103,265 were not included in
the diluted income per share calculation for the quarters ended
September 30, 2001 and 2000, respectively, because their effect would
have been anti-dilutive. Common stock options totaling 49,987 and
18,265 were not included in the diluted income per share calculation
for the nine months ended September 30, 2001 and 2000, respectively,
because their effect would have been anti-dilutive.
6
(3) STOCKHOLDERS' EQUITY
---------------------
Changes in the stockholders' equity for the nine months ended
September 30, 2001, consisted of the following (amounts in thousands
except share amounts):
Shares
Outstanding Amount
--------------------------
Balances at January 1, 2001 8,382,939 $ 29,416
Issuance of common shares for options & warrants exercised 110,872 371
Vesting of common stock options for services rendered -- 45
Purchase of treasury shares (78,980) (292)
Net income -- 4,434
--------------------------
Balances at September 30, 2001 8,414,831 $ 33,974
==========================
(4) NEW ACCOUNTING STANDARDS
--------------------------
In June 2001 the Financial Accounting Standards Board (FASB) issued
FASB Statement No. 141, Accounting for Business Combinations
(Statement 141), and FASB Statement No. 142, Accounting for Goodwill
and Intangible Assets (Statement 142). Statement 141 mandates the use
of the purchase method of accounting for all business combinations and
provides guidance for disclosure of intangible assets acquired in a
business combination. Statement 141 is effective for all business
combinations initiated after June 30, 2001. The Company does not
anticipate a material impact on its financial condition or results of
operations as a result of implementing this standard. Statement 142
addresses accounting for goodwill and other intangible assets in and
subsequent to a business combination. Under Statement 142, goodwill
and certain identifiable intangible assets will not be amortized, but
instead will be reviewed for impairment at least annually in
accordance with the provisions of this statement. Statement 142 is
effective for fiscal years beginning after December 15, 2001. The
Company has not yet assessed the impact, if any, that Statement 142
might have on its financial condition or results of operations.
In June 2001, the FASB also issued FASB Statement No. 143, Accounting
for Asset Retirement Obligations (Statement 143), which addresses
accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset
retirement costs. In October 2001, the FASB issued FASB Statement No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets
(Statement 144), which addresses financial accounting and reporting
for the impairment or disposal of long-lived assets. Although
Statement 144 supersedes FASB Statement 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of, it retains many of the fundamental provisions of that
statement. The Company does not expect the impact of adopting either
Statement 143 or Statement 144 to be significant.
(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
- --------------------------------------------------------------------------------------------------------------
2001
External revenue $ 10,078 12,303 1,564 -- -- 23,945
Intersegment revenue 3 -- 780 -- (783) --
------------------------------------------------------------------------------
Total revenue 10,081 12,303 2,344 -- (783) 23,945
------------------------------------------------------------------------------
Operating expenses 8,341 7,253 1,849 723 (691) 17,475
Depreciation & amortization 709 453 50 79 -- 1,291
Bad debt expense -- 2,493 -- -- -- 2,493
Interest expense 196 275 -- 4 -- 475
Interest income (4) -- -- (7) -- (11)
-----------------------------------------------------------------------------
Segment net income (loss) $ 839 1,829 445 (799) (92) 2,222
============================================================================
Total assets N/A 31,146 N/A 45,317 N/A 76,463
============================================================================
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
============================================================================
FOR NINE MONTHS ENDED SEPTEMBER 30:
2001
External revenue $ 28,494 34,002 4,993 -- -- 67,489
Intersegment revenue 16 -- 2,165 -- (2,181) --
-----------------------------------------------------------------------------
Total revenue 28,510 34,002 7,158 -- (2,181) 67,489
-----------------------------------------------------------------------------
Operating expenses 23,460 21,284 5,603 2,343 (1,889) 50,801
Depreciation & amortization 2,185 1,370 148 233 -- 3,936
Bad debt expense -- 6,913 -- -- -- 6,913
Interest expense 637 852 -- 9 -- 1,498
Interest income (41) (3) -- (49) -- (93)
-----------------------------------------------------------------------------
Segment net income (loss) $ 2,269 3,586 1,407 (2,536) (292) 4,434
============================================================================
Total assets N/A 31,146 N/A 45,317 N/A 76,463
============================================================================
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
============================================================================
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 $2,222,000 and $4,434,000 for the three and
nine months ended September 30, 2001, respectively, compared to net income of
$1,853,000 and $4,285,000 for the three and nine months ended September 30,
2000, respectively.
Flight revenue increased $2,288,000, or 11.8%, and $10,751,000, or 21.6%, for
the three and nine months ended September 30, 2001, respectively, compared to
2000. Flight revenue is generated by Mercy Air and the Air Medical Services
Division.
- - Mercy Air - Flight revenue increased 11.1% and 35.6% in the three and nine
months ended September 30, 2001, respectively, compared to 2000, for the
following reasons:
- Acquisition of ARCH in April 2000. Flight revenue for ARCH for the
three and nine months ended September 30, 2001, totaled $5,187,000 and
$14,421,000, respectively, compared to $4,811,000 for the third
quarter of 2000 and $7,907,000 from the acquisition date through
September 30, 2000. ARCH also expanded operations to one new location
in the second quarter of 2001.
- Increase of approximately 3% in the minimum transport charge for Mercy
Air's California operations effective September 2000.
- Increase of 9.8% and 7.6% in transport volume for Mercy Air's
California and Nevada operations for the three and nine months ended
September 30, 2001, respectively.
- - Air Medical Services Division - Flight revenue increased 13.0% and 8.6% for
the three and nine months ended September 30, 2001, respectively, for the
following reasons:
- Revenue of approximately $920,000 and $1,566,000 for the three and
nine months ended September 30, 2001, respectively, generated by the
addition of a new contract in August 2001 and the expansion of two
existing contracts to new satellite locations earlier in 2001. The
resulting increase in revenue was offset in part during the three and
nine months ended September 30, 2001, by the discontinuation of one
contract in July 2000.
- Annual price increases in the majority of contracts with hospital
clients based on changes in hull insurance rates and in the Consumer
Price Index.
- Relatively unchanged flight volume for continuing contracts in the
three- and nine-month periods of 2001 compared to the prior year.
Sales of medical interiors and products decreased $232,000, or 12.5%, for the
third quarter of 2001 but increased $526,000, or 10.3%, for the nine months
ended September 30, 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 ten commercial
customers. In the third quarter of 2001, the Company also began production of
five HH-60L (formerly known as UH-60Q) Multi-Mission Medevac Systems for the
U.S. Army. Revenue by product line for the quarter and nine months ended
September 30, 2001, respectively, was as follows:
9
- - $620,000 and $2,688,000 - manufacture and installation of modular,
multi-functional interiors
- - $962,000 and $2,641,000 - design and manufacture of multi-mission
interiors
- - $41,000 and $280,000 - 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, 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
Cost of medical interiors and products decreased by 13.1% for the three months
ended September 30, 2001, but increased 13.4% for the nine months ended
September 30, 2001, as compared to the previous year, reflecting the change in
the volume of sales for each period.
Parts and maintenance sales and services increased 132.4% and 56.9% for the
quarter and nine months ended September 30, 2001, respectively, compared to the
prior year. The increases are due primarily to the sale of aircraft spare parts
by the Air Medical Services Division to one customer. Cost of parts and
maintenance sales and services for the quarter and nine months also increased
accordingly.
In the nine months ended September 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. 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 15.7% and 27.6% for the three and nine months
ended September 30, 2001, respectively, compared to 2000. Changes by business
segment are as follows:
- - Mercy Air - Flight center costs increased 17.9% and 46.3% in the three and
nine months ended September 30, 2001, primarily due to the following:
- Acquisition of ARCH in April 2000. Flight center costs related to ARCH
for the three and nine months ended September 30, 2001, totaled
$1,468,000 and $4,172,000, compared to $1,482,000 for the third
quarter of 2000 and $2,301,000 from the acquisition date through
September 30, 2000.
- Addition of personnel to staff one base location opened during the
second quarter of 2000 and one during the second quarter of 2001.
- Increases in salaries for merit pay raises.
- - Air Medical Services Division - Flight center costs increased 13.5% and
13.1% for the three and nine months, respectively, primarily due to the
following:
- Addition of personnel to staff the new base locations described above.
- Increases in supplemental contributions to the employee defined
contribution retirement plan effective July 2000 and January 2001.
- Increase in the cost of employee health insurance coverage paid by the
Company.
Aircraft operating expenses increased by 1.0% and 19.1% for the three and nine
months ended September 30, 2001, respectively, in comparison to the three and
nine months ended September 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. The
increase for the nine months reflects the impact of the ARCH fleet for three
quarters in 2001 compared to approximately five months in 2000. Aircraft
operating expenses for the ARCH fleet totaled $2,575,000 in the nine months
ended September 30, 2001, compared to $1,326,000 from the acquisition date
through September 30, 2000. The remainder of the change for the nine months
ended September 30, 2001, resulted primarily from increases in the Company's
hull and liability insurance rates effective July 2000 and September 2001, due
to overall insurance market conditions and from an increase in the cost of spare
parts from Bell Helicopter effective December 2000. These increases were offset
in the third quarter of 2001 by lower on-condition maintenance costs for Mercy
Air's fleet.
10
Aircraft rental expense increased 8.4% and 33.7% for the three and nine months
ended September 30, 2001, respectively, in comparison to the three and nine
months ended September 30, 2000. Lease expense for ARCH aircraft totaled
$282,000 and $903,000 for the three and nine months ended September 30, 2001,
respectively, compared to $277,000 for the third quarter of 2000 and $456,000
from the acquisition date through September 30, 2000. In addition, two other
leased aircraft were added to the Air Medical Services Division's fleet in the
fourth quarter of 2000.
Depreciation and amortization expense decreased 6.2% and 4.1% for the three and
nine months ended September 30, 2001. The increase in depreciation for the
addition of ARCH's buildings and equipment was offset in the quarter and nine
months by the disposition of a Bell 222 helicopter during the third quarter of
2000 and the elimination of depreciation on aircraft medical interiors, rotable
equipment, and other assets which are fully depreciated. In addition, expenses
in the nine months ended September 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 nine months in 2000. The agreement
became fully amortized in the first quarter of 2001.
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. Bad debt expense increased 11.4% and 33.5% for the three and nine
months ended September 30, 2001, respectively, compared to 2000, consistent with
the increase in flight revenue for Mercy Air's operations. The nine months ended
September 30, 2001, also included $2,664,000 for bad debt related to ARCH
operations compared to $2,240,000 recorded from the acquisition date through
September 30, 2000. Bad debt expense related to the Air Medical Services and
Products Divisions was not significant in either 2001 or 2000.
General and administrative expenses increased 15.0% and 22.9% for the three and
nine months ended September 30, 2001, compared to the three and nine months
ended September 30, 2000, reflecting the impact of the ARCH transaction.
Excluding ARCH expenses, general and administrative expenses increased 8.7% and
9.7% for the three and nine 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 nine months ended
September 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 September 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
$10,708,000 at September 30, 2001, primarily due to a decrease in billings in
excess of costs and an increase in prepaid and other current assets during the
first nine 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 September
2001, the Company had completed this project. In addition, during the third
quarter the Company began production of five HH-60L Multi-Mission Medevac
Systems; the first progress billing will be processed in the fourth quarter of
2001. In the third quarter of 2001, the Company paid a short-term deposit of
$1,000,000 for the purchase of a BK117 helicopter. The deposit will be refunded
in the fourth quarter when permanent financing for the aircraft purchase is
finalized. Cash and cash equivalents decreased $3,580,000 from $4,107,000 to
$527,000 over the first nine months of 2001, for the reasons discussed below. In
addition, as of September 30, 2001, the Company had unused capacity totaling
$3,636,000 on its $4 million line of credit.
Cash generated by operations decreased to $2,994,000 in 2001 from $4,887,000 in
2000. The decrease is due in part to the decrease in billings in excess of costs
and increase in prepaid and other current assets described above and to a
reduction in other accrued liabilities and accounts payable. The decrease in
other accrued liabilities and accounts payable at September 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 $3,107,000 in 2001, compared to
$4,771,000 in 2000. In 2000, the purchase of ARCH assets was partially offset by
proceeds from the disposition of a Bell 222 helicopter. Significant acquisitions
during 2001 included rotable equipment and upgrades to existing avionics
equipment and aircraft interiors.
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Financing activities used $3,467,000 in cash in 2001, compared to generating
$140,000 in 2000. 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.
OUTLOOK FOR 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 were due for renewal in 2001. Through the end of the
third quarter, three of the contracts had been renewed for additional five-year
terms and one for an additional one-year term. The Company expanded services
under one of these contract to a third base in Iowa with operations scheduled to
begin during the fourth quarter of 2001. At the end of the third quarter, the
Company discontinued operations under an expiring contract when the customer
opted for a different delivery model for its air medical transportation
services. Renewal of the sixth contract is still pending. During the third
quarter, the Company also began operations under a five-year contract to
maintain and operate four medically equipped Beech King Air E-90 fixed-wing
aircraft for a customer in Arizona. 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.
Products Division
During the third quarter of 2001, the Company began production of five HH-60L
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 third quarter of 2001, the Products Division had work in
process under five 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 $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, 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.
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- - 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. In addition, a
limited number of hull and liability insurance underwriters provide
coverage for air medical aircraft operators. A significant downturn in
insurance market conditions could have a material adverse effect on the
Company's cost of operations. Approximately 30% of any increases in hull
and liability insurance may be passed through to the Company's customers
according to contract terms.
- - 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.
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NEW ACCOUNTING STANDARDS
In June 2001 the Financial Accounting Standards Board (FASB) issued FASB
Statement No. 141, Accounting for Business Combinations (Statement 141), and
FASB Statement No. 142, Accounting for Goodwill and Intangible Assets (Statement
142). Statement 141 mandates the use of the purchase method of accounting for
all business combinations and provides guidance for disclosure of intangible
assets acquired in a business combination. Statement 141 is effective for all
business combinations initiated after June 30, 2001. The Company does not
anticipate a material impact on its financial condition or results of operations
as a result of implementing this standard. Statement 142 addresses accounting
for goodwill and other intangible assets in and subsequent to a business
combination. Under Statement 142, goodwill and certain identifiable intangible
assets will not be amortized, but instead will be reviewed for impairment at
least annually in accordance with the provisions of this statement. Statement
142 is effective for fiscal years beginning after December 15, 2001. The Company
has not yet assessed the impact, if any, that Statement 142 might have on its
financial condition or results of operations.
In June 2001, the FASB also issued FASB Statement No. 143, Accounting for Asset
Retirement Obligations (Statement 143), which addresses accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. In October 2001, the FASB issued FASB
Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets (Statement 144), which addresses financial accounting and reporting for
the impairment or disposal of long-lived assets. Although Statement 144
supersedes FASB Statement 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, it retains many of the
fundamental provisions of that statement. The Company does not expect the impact
of adopting either Statement 143 or Statement 144 to be significant.
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 September 30, 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
September 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
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: November 9, 2001 By \s\ Aaron D. Todd
------------------------------------------
On behalf of the Company, and as
Principal Financial and Accounting Officer
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