SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 2002
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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
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(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
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (303) 792-7400
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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
26, 2002, was 8,936,633.
TABLE OF CONTENTS
Form 10-Q
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - March 31, 2002 and December 31, 2001 1
Consolidated Statements of Operations for the three months
ended March 31, 2002 and 2001 3
Consolidated Statements of Cash Flows for the three months ended
March 31, 2002 and 2001 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
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)
MARCH 31, DECEMBER 31,
2002 2001
--------------------------
Assets
- ------
Current assets:
Cash and cash equivalents $ 1,556 2,838
Current installments of notes receivable 124 120
Receivables:
Trade 26,591 22,555
Less allowance for doubtful accounts (6,061) (5,673)
--------------------------
20,530 16,882
Insurance proceeds 407 471
Other 802 851
--------------------------
21,739 18,204
--------------------------
Inventories 3,609 3,427
Work-in-process on medical interiors and products contracts 349 253
Costs and estimated earnings in excess of billings on
uncompleted contracts 382 797
Deferred tax asset 3,397 3,397
Prepaid expenses and other 1,204 1,083
--------------------------
Total current assets 32,360 30,119
--------------------------
Equipment and leasehold improvements:
Flight and ground support equipment 71,784 71,392
Buildings and office equipment 5,909 5,841
--------------------------
77,693 77,233
Less accumulated depreciation and amortization (31,777) (30,561)
--------------------------
Net equipment and leasehold improvements 45,916 46,672
--------------------------
Excess of cost over the fair value of net assets acquired 2,974 2,974
Notes receivable, less current installments 460 472
Other assets, net of accumulated amortization of $600 and $447
at March 31, 2002 and December 31, 2001, respectively 5,229 5,320
--------------------------
Total assets $ 86,939 85,557
==========================
(Continued)
1
AIR METHODS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
(Amounts in thousands, except share and per share amounts)
(unaudited)
MARCH 31, DECEMBER 31,
2002 2001
--------------------------
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Current installments of long-term debt $ 3,465 3,737
Current installments of obligations under capital leases 357 351
Accounts payable 1,725 1,925
Accrued overhaul and parts replacement costs 4,292 3,407
Deferred revenue 995 1,158
Accrued wages and compensated absences 1,324 2,037
Other accrued liabilities 1,529 2,189
--------------------------
Total current liabilities 13,687 14,804
Long-term debt, less current installments 16,167 17,335
Obligations under capital leases, less current installments 2,816 2,882
Accrued overhaul and parts replacement costs 10,202 10,377
Deferred income taxes 3,266 2,178
Other liabilities 1,948 1,438
--------------------------
Total liabilities 48,086 49,014
--------------------------
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 9,047,550 and 8,619,026 shares at
March 31, 2002 and December 31, 2001, 543 517
respectively
Additional paid-in capital 51,252 50,665
Accumulated deficit (12,934) (14,637)
Treasury stock at par, 141,421 and 37,005 common
shares at March 31, 2002 and December 31, 2001 (8) (2)
--------------------------
Total stockholders' equity 38,853 36,543
--------------------------
Total liabilities and stockholders' equity $ 86,939 85,557
==========================
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 MARCH 31,
---------------------------------
2002 2001
---------------------------------
Revenue:
Flight revenue $ 24,524 17,736
Sales of medical interiors and products 1,462 1,818
Parts and maintenance sales and services 343 350
Gain on disposition of assets, net 14 110
---------------------------------
26,343 20,014
---------------------------------
Operating expenses:
Flight centers 7,860 6,710
Aircraft operations 5,461 4,684
Aircraft rental 1,135 936
Cost of medical interiors and products sold 938 1,229
Cost of parts and maintenance sales and services 322 312
Depreciation and amortization 1,371 1,327
Bad debt expense 3,484 1,570
General and administrative 2,587 2,257
---------------------------------
23,158 19,025
---------------------------------
Operating income 3,185 989
Other income (expense):
Interest expense (445) (528)
Interest and dividend income 6 52
Other, net 45 19
---------------------------------
Income before income taxes 2,791 532
Deferred income tax expense (1,088) --
---------------------------------
Net income $ 1,703 532
=================================
Basic and diluted income per common share (note 2) $ .19 .06
=================================
Weighted average number of common shares outstanding - basic 8,808,228 8,382,995
=================================
Weighted average number of common shares outstanding - diluted 9,137,307 8,562,097
=================================
See accompanying notes to consolidated financial statements.
3
AIR METHODS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(unaudited)
THREE MONTHS ENDED MARCH 31,
---------------------------------
2002 2001
---------------------------------
Cash flows from operating activities:
Net income $ 1,703 532
Adjustments to reconcile net income to net cash provided (used) by operating
activities:
Depreciation and amortization expense 1,371 1,327
Bad debt expense 3,484 1,570
Deferred income tax expense 1,088 --
Gain on retirement and sale of equipment, net (14) (110)
Vesting of common stock options issued for services 15 15
Changes in assets and liabilities:
Decrease (increase) in prepaid and other current assets (121) 198
Increase in receivables (7,019) (1,985)
Increase in parts inventories (182) (77)
Decrease (increase) in work-in-process on medical interiors and costs in
excess of billings 319 (741)
Decrease in accounts payable and other accrued liabilities (1,573) (1,036)
Increase (decrease) in deferred revenue and other liabilities 347 (388)
Increase in accrued overhaul and parts replacement costs 715 190
---------------------------------
Net cash provided (used) by operating activities 133 (505)
---------------------------------
Cash flows from investing activities:
Acquisition of equipment and leasehold improvements (1,215) (701)
Proceeds from disposition and sale of equipment 764 197
Net increase in notes receivable and other assets (56) (91)
---------------------------------
Net cash used by investing activities (507) (595)
---------------------------------
Cash flows from financing activities:
Net payments under short-term notes payable -- (500)
Payments of long-term debt (1,440) (870)
Payments of capital lease obligations (60) (55)
Payments for purchases of common stock (678) --
Proceeds from issuance of common stock, net 1,270 --
---------------------------------
Net cash used by financing activities (908) (1,425)
---------------------------------
Decrease in cash and cash equivalents (1,282) (2,525)
Cash and cash equivalents at beginning of period 2,838 4,107
---------------------------------
Cash and cash equivalents at end of period $ 1,556 1,582
=================================
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, 2001.
(2) INCOME PER SHARE
------------------
Basic earnings per share is computed by dividing net income by the weighted
average number of common shares outstanding during the period. Diluted
earnings per share is computed by dividing net income by all outstanding
and dilutive potential common shares 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):
2002 2001
--------- ---------
Weighted average number of common shares outstanding - basic 8,808,228 8,382,995
Dilutive effect of:
Common stock options 315,473 157,946
Common stock warrants 13,606 21,156
--------------------
Weighted average number of common shares outstanding - diluted 9,137,307 8,562,097
====================
Common stock options totaling 50,000 and 176,873 were not included in the
diluted income per share calculation for the quarters ended March 31, 2002
and 2001, respectively, because their effect would have been anti-dilutive.
(3) STOCKHOLDERS' EQUITY
---------------------
Changes in stockholders' equity for the three months ended March 31, 2002,
consisted of the following (amounts in thousands except share amounts):
Shares
Outstanding Amount
----------------------
Balances at January 1, 2002 8,582,021 $36,543
Issuance of common shares for options exercised 428,524 1,270
Purchase of treasury shares (104,416) (678)
Vesting of common stock options for services rendered -- 15
Net income -- 1,703
---------------------
Balances at March 31, 2002 8,906,129 $38,853
=====================
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(4) INCOME TAXES
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The Company recorded deferred income tax expense of $1,088,000 at an
effective rate of 39% in the first quarter of 2002, and no tax provision in
the quarter ended March 31, 2001. During the first quarter of 2001, income
tax expense, as calculated at the statutory rate including estimated state
income tax effect, was offset by recognition of deferred tax assets for
which a valuation allowance had previously been provided. As of March 31,
2002, a valuation allowance has been provided for net operating loss
carryforwards which are not expected to be realized prior to expiration.
Based on management's assessment, realization of net deferred tax assets
through future taxable earnings is considered more likely than not, except
to the extent valuation allowances are provided.
(5) NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
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 use of the purchase method of
accounting for all business combinations initiated after June 30, 2001, and
provides guidance for recording intangible assets acquired in a business
combination. Under Statement 142, goodwill and certain identifiable
intangible assets are not amortized, but instead are reviewed for
impairment at least annually in accordance with the provisions of the
statement. The Company adopted Statement 142 effective January 1, 2002.
Adoption of this accounting standard resulted in a reduction in
amortization expense of approximately $47,000 per quarter beginning with
the first quarter of 2002. The Company has not yet completed its
transitional impairment analysis but does not expect any impairment to
result from this analysis.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(6) 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,
corporate income tax expense, and results of insignificant operations. The
Company does not allocate assets between HBM, Products, and Corporate
Activities for internal reporting and performance evaluation purposes.
Operating segments and their principal products or services are as follows:
- Community-Based Model (CBM) - provides air medical transportation
services to the general population as an independent service in
southern California, Nevada, Missouri, and Illinois. Services include
aircraft operation and maintenance, medical care, dispatch and
communications, and medical billing and collection.
- Hospital-Based Model (HBM) - provides air medical transportation
services to hospitals throughout the U.S. under exclusive operating
agreements. Services include aircraft operation and maintenance.
- Products Division - designs, manufactures, and installs aircraft
medical interiors and other aerospace products for domestic and
international customers.
Products Corporate Intersegment
FOR QUARTER ENDED MARCH 31: CBM HBM Division Activities Eliminations Consolidated
- ---------------------------- -------- ------- -------- ----------- ------------- -------------
2002
External revenue $14,788 10,093 1,462 -- -- 26,343
Intersegment revenue -- -- 189 -- (189) --
----------------------------------------------------------------------
Total revenue 14,788 10,093 1,651 -- (189) 26,343
----------------------------------------------------------------------
Operating expenses 8,285 7,987 1,234 930 (178) 18,258
Depreciation & amortization 584 701 40 46 -- 1,371
Bad debt expense 3,484 -- -- -- -- 3,484
Interest expense 253 192 -- -- -- 445
Interest income (1) (1) -- (4) -- (6)
Income tax expense -- -- -- 1,088 -- 1,088
----------------------------------------------------------------------
Segment net income (loss) $ 2,183 1,214 377 (2,060) (11) 1,703
======================================================================
Total assets $37,722 N/A N/A 51,381 (2,164) 86,939
======================================================================
2001
External revenue $ 9,551 8,642 1,821 -- -- 20,014
Intersegment revenue -- 1 756 -- (757) --
----------------------------------------------------------------------
Total revenue 9,551 8,643 2,577 -- (757) 20,014
----------------------------------------------------------------------
Operating expenses 6,926 7,059 1,929 849 (654) 16,109
Depreciation & amortization 461 740 48 78 -- 1,327
Bad debt expense 1,570 -- -- -- -- 1,570
Interest expense 298 226 -- 4 -- 528
Interest income (1) (19) -- (32) -- (52)
----------------------------------------------------------------------
Segment net income (loss) $ 297 637 600 (899) (103) 532
======================================================================
Total assets $28,413 N/A N/A 44,751 N/A 73,164
======================================================================
7
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
CBM 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 $1,703,000 for the three months ended March
31, 2002, compared to net income of $532,000 for the quarter ended March 31,
2001. The increase in net income is attributed to the factors discussed below.
Flight revenue increased $6,788,000, or 38.3%, from $17,736,000 to $24,524,000
for the three months ended March 31, 2002, compared to 2001. Flight revenue is
generated by both HBM and CBM operations and is recorded net of contractual
allowances under agreements with third-party payers and Medicare/Medicaid
discounts.
- - CBM - Flight revenue increased $5,068,000, or 53.9%, in the three months
ended March 30, 2002, compared to 2001, for the following reasons:
- Purchase of the operating rights of another air ambulance service
provider in the Las Vegas metropolitan area in December 2001,
resulting in the expansion of operations to a third base in the
region. Transport volume for CBM operations in the Las Vegas region
increased 223.4% in the first quarter of 2002 compared to the first
quarter of 2001.
- Increase of 24.7% in transport volume for CBM operations in California
for the three months ended March 31, 2002, attributable primarily to
favorable weather conditions in 2002.
- Expansion of CBM operations in the St. Louis metropolitan region to
one new location in the second quarter of 2001. Transport volume for
the remainder of the St. Louis area remained relatively unchanged in
the first quarter of 2002 compared to 2001.
- - HBM - Flight revenue increased $1,720,000, or 20.6%, for the quarter ended
March 31, 2002, for the following reasons:
- Revenue of approximately $1,140,000 generated by the addition of a new
contract in August 2001 and the expansion of two contracts to new
satellite locations in 2001. The resulting increase in revenue was
offset in part by the discontinuation of one contract in October 2001.
- Annual price increases in the majority of contracts with hospital
clients based on changes in hull insurance rates and in the Consumer
Price Index.
- Increase of 14.2% in flight volume for continuing contracts in the
three months ended March 31, 2002, compared to the prior year.
8
Sales of medical interiors and products decreased $356,000, or 19.6%, from
$1,818,000 for the three months ended March 31, 2001, to $1,462,000 for the
first quarter of 2002. Significant projects in the first quarter of 2002
included manufacture of five HH-60L Multi-Mission Medevac Systems for the U.S.
Army and manufacture of medical interiors or multi-functional interior
components for four commercial customers. Revenue by product line was as
follows:
- - $481,000 - manufacture and installation of modular, multi-functional
interiors
- - $768,000 - manufacture of multi-mission interiors
- - $213,000 - design and manufacture of other aerospace products
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
Cost of medical interiors and products decreased by 23.7% for the three months
ended March 31, 2002, as compared to the previous year. The decrease is
consistent with the decrease in related product revenue over the same period.
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 benefits) increased 17.1% to $7,860,000 for the quarter ended March
31, 2002, compared to 2001. Changes by business segment are as follows:
- - CBM - Flight center costs increased 22.0% to $4,044,000 for the following
reasons:
- Addition of personnel to staff additional locations described above.
- Increase in the cost of employee health insurance coverage paid by the
Company.
- Increases in salaries for merit pay raises.
- - HBM - Flight center costs increased 12.4% to $3,816,000 primarily due to
the following:
- Addition of personnel to staff new base locations described above.
- Increases in salaries for merit pay raises.
Aircraft operating expenses increased 16.6% for the quarter ended March 31,
2002, in comparison to the quarter ended March 31, 2001. Aircraft operating
expenses consist of fuel, insurance, and maintenance costs and generally are a
function of the size of the fleet, type of aircraft flown, and number of hours
flown. The increase in costs is due to the following:
- - Addition of two BK117 helicopters and one MD902 helicopter for CBM
operations at the beginning of 2002.
- - Addition of five fixed wing aircraft and one Bell 407 helicopter for HBM
operations during 2001 and one MD902 helicopter at the beginning of 2002.
- - Increase of approximately 8% in hull and liability insurance rates
effective July 2001, due to overall insurance market conditions.
- - Increase of approximately $26,000 per month in insurance premiums for war
risk coverage effective October 1, 2001, as a result of the events
surrounding September 11, 2001.
Aircraft rental expense increased 21.3% for the first quarter of 2002 compared
to the first quarter of 2001. Four of the aircraft added to the Company's fleet
at the beginning of 2002 under operating leases accounted for $281,000 in lease
expense. The increase for new aircraft was offset in part during the first
quarter by the discontinuation of a short-term lease for an aircraft used in the
Company's backup fleet during 2001.
Depreciation and amortization expense increased 3.3% for the three months ended
March 31, 2002, compared to 2001. The first quarter of 2002 included $125,000 of
amortization on a non-compete agreement related to the purchase of the operating
rights of another air ambulance provider in the Las Vegas region in December
2001. 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. Amortization of this agreement was completed in
February 2001. In addition, expenses in the first quarter of 2001 included
$35,000 of amortization of goodwill compared to none in 2002, in accordance with
the adoption of Statement 142 effective January 1, 2002.
9
Bad debt expense is estimated during the period the related services are
performed based on historical experience for CBM operations. The provision is
adjusted as required based on actual collections in subsequent periods. The
Company responds to calls for air medical transports without pre-screening the
credit worthiness of the patient. Bad debt expense increased 121.9% for the
quarter ended March 31, 2002, compared to 2001, due to the increase in flight
revenue for CBM operations and to a decrease in the collection rate for CBM
operations in California and Nevada. For CBM operations in California and
Nevada, bad debt as a percentage of related net flight revenue increased from
17.9% in 2001 to 23.9% in 2002. The Company believes the decrease in the
collection rate for western CBM operations is due to general recessionary trends
in the economy and to changes in previous collectibility estimates. Bad debt
expense related to HBM operations and Products Divisions was not significant in
either 2002 or 2001.
General and administrative expenses increased 14.6% for the quarter ended March
31, 2002, compared to the quarter ended March 31, 2001. The change reflects an
expanded marketing effort for CBM operations in both the Los Angeles and St.
Louis metropolitan areas designed to increase transport volume. Other factors
contributing to the increase are merit pay increases and increases in
administrative staffing to manage the expanded employee base with the addition
of new bases.
The Company recorded deferred income tax expense of $1,088,000 at an effective
rate of 39% in the first quarter of 2002, compared to no tax provision in the
quarter ended March 31, 2001. During the first quarter of 2001, income tax
expense, as calculated at the statutory rate including estimated state income
tax effect, was offset by recognition of deferred tax assets for which a
valuation allowance had previously been provided. As of March 31, 2002, a
valuation allowance has been provided for net operating loss carryforwards which
are not expected to be realized prior to expiration. Based on management's
assessment, realization of net deferred tax assets through future taxable
earnings is considered more likely than not, except to the extent valuation
allowances are provided.
FINANCIAL CONDITION
Net working capital increased from $15,315,000 at December 31, 2001, to
$18,673,000 at March 31, 2002, primarily due to an increase in receivables
consistent with increased revenue for CBM and HBM operations and to a decrease
in accrued wages and compensated absences. Because of timing of the last payroll
date prior to the end of the quarter, approximately one week of wages was
accrued as of March 31, 2002, compared with two and a half weeks as of December
31, 2001. Cash and cash equivalents decreased $1,282,000 from $2,838,000 to
$1,556,000 over the same period, for the reasons discussed below.
Cash generated by operations in the first quarter of 2002 totaled $133,000
compared to $505,000 used in 2001. Significant uses of cash in 2002 included the
increase in receivables and decrease in accrued wages and compensated absences
discussed above. Costs in excess of billings decreased during the first quarter
of 2002 as significant Products Division projects, including the HH60L, neared
completion at the end of the first quarter and the Company generated progress
billings for amounts delivered. Other liabilities also increased as the Company
received advance funding for the installation of a medical interior and avionics
equipment in an aircraft to be leased for CBM operations.
Cash used by investing activities totaled $507,000 in 2002 compared to $595,000
in 2001. Equipment acquisitions in the first quarter of 2002 consisted primarily
of medical interior and avionics installations or upgrades for existing
equipment. During the first quarter of 2002, the Company also received proceeds
from a sale-leaseback transaction for a BK117 helicopter. 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.
10
Financing activities used $908,000 in 2002 compared with $1,425,000 in 2001. The
primary uses of cash in the first quarter of 2002 were regularly scheduled
payments of long-term debt and purchases of Company common stock into treasury.
These payments were offset in part by proceeds from the issuance of common stock
for options exercised during the quarter. 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.
OUTLOOK 2002
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.
Community-Based Model
In December 2001, the Company acquired the operating rights of another air
ambulance service provider in the Las Vegas metropolitan area and, consequently,
expanded its services in the region from two helicopters to three. The Company
expects improved utilization for its two previously existing bases as well as
additional flight volume generated by the third aircraft base as a result of the
acquisition in 2002. The Company also anticipates opening two new locations in
the Los Angeles metropolitan area and one in the St. Louis region during the
second quarter of 2002. CBM flight volume at all other locations is expected to
be consistent with historical levels during 2002, subject to seasonal,
weather-related fluctuations. The Company continues to explore opportunities to
expand the CBM model in communities surrounding its hubs in Los Angeles and St.
Louis.
Hospital-Based Model
Six hospital contracts are due for renewal in 2002. Three of these contracts
were renewed during the first quarter of 2002. Renewals on the other three
contracts are still pending. Late in the first quarter of 2002, the Company
expanded its operations for a fixed wing customer in Oregon with the addition of
a third aircraft. During the fourth quarter of 2001, the Company entered into a
multi-year agreement to provide air medical transportation services to a
customer in Florida, and operations commenced in the second quarter of 2002. In
April 2002 the Company also entered into a verbal agreement to provide fixed
wing service for a current rotor wing hospital customer in New Mexico; a final
written contract is still pending. Operations are expected to begin in the third
quarter of 2002. The Company expects 2002 flight activity for current hospital
contracts to remain consistent with historical levels.
Products Division
As of March 31, 2002, the Company was nearing completion of the production of
five HH-60L Multi-Mission Medevac Systems for the U.S. Army and multifunctional
interiors or interior components for five commercial customers. Delivery of
these products is expected to be completed in the second quarter of 2002. Early
in 2002 the Company was awarded a contract for the development and production of
a litter system for the U.S. Army's Medical Evacuation Vehicle (MEV). The
contract calls for the development and production of 27 units in 2002 and
includes options for 91 additional units to be delivered from 2003 to 2007. The
total contract value, including all options, is approximately $5,000,000. There
is no assurance that the contract options will be exercised or orders for
additional units received in 2002 or in future periods.
During the second quarter of 2002, the Company was also awarded contracts
totaling approximately $2,144,000 for multi-functional interiors for three
commercial customers. Work under these contracts is expected to continue through
the third quarter of 2002.
11
The Company expects to be awarded a contract for five to eight additional HH-60L
Multi-Mission Medevac Systems during 2002. Production will commence immediately
upon award. 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 2002 or in future periods.
All Segments
There can be no assurance that the Company will continue to renew operating
agreements for its HBM operations, generate new profitable contracts for the
Products Division, or expand flight volume for CBM operations. However, based on
the anticipated level of HBM and CBM flight activity and the projects in process
for the Products Division, the Company expects to generate sufficient cash flow
to meet its operational needs throughout 2002.
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 2002" and
those described below.
- - Flight volume - All CBM revenue and approximately 35% of HBM revenue is
dependent upon flight volume. Approximately 20% 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 aircraft 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, southern Nevada, and
Missouri where CBM 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 CBM operating revenue during these months. Flight volume for CBM
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 -The Company's CBM division 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. The Company responds to calls for
air medical transports without pre-screening the credit worthiness of the
patient. Collectibility is affected by the number of uninsured or indigent
patients transported and is, therefore, primarily dependent upon the health
of the U.S. economy, especially in southern California, southern Nevada,
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.
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- - 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 may 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 CBM revenue and indirectly affect HBM revenue
from 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 - HBM operations face significant competition from several
national and regional air medical transportation providers for contracts
with hospitals and other healthcare institutions. CBM operations also face
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
medical capability of the aircraft offered. The Company's competition in
the aircraft interior design and manufacturing industry comes primarily
from two companies based in the United States and one in Europe.
Competition is based mainly on product features, performance, price, and
weight. There can be no assurance that the Company will be able to continue
to compete successfully for new or renewing contracts in the future.
- - Insurance - Hazards are inherent in the aviation industry and may result in
loss of life and property, thereby exposing the Company to potentially
substantial liability claims arising out of the operation of aircraft. The
Company may also be sued in connection with medical malpractice claims
arising from events occurring during a medical flight. Under HBM operating
agreements, hospitals customers have agreed to indemnify the Company
against liability arising out of medical malpractice claims and to maintain
insurance covering such liability, but there can be no assurance that a
hospital will not challenge the indemnification rights or will have
sufficient assets or insurance coverage for full indemnity. In CBM
operations, Company personnel perform medical procedures on transported
patients, which may expose the Company to significant direct legal exposure
to medical malpractice claims. The Company maintains general liability
aviation insurance, aviation product liability coverage, and medical
malpractice insurance, and believes that the level of coverage is customary
in the industry and adequate to protect against claims. However, there can
be no assurance that it will be sufficient to cover potential claims or
that present levels of coverage will be available in the future at
reasonable cost. A limited number of hull and liability insurance
underwriters provide coverage for air medical 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. In addition, the loss of
any aircraft as a result of accidents could cause both significant adverse
publicity and significant interruptions of air medical services to client
hospitals, which could adversely affect our relationship with such
hospitals.
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CRITICAL ACCOUNTING POLICIES
The Company's consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States. The
preparation of these financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period.
On an on-going basis, management evaluates its estimates and judgments,
including those related to revenue recognition, uncollectible receivables,
deferred income taxes, and aircraft overhaul costs. Management bases its
estimates and judgments on historical experience and on various other factors
that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.
Management believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements.
Revenue Recognition
Fixed flight fee revenue under the Company's operating agreements with hospitals
is recognized monthly over the terms of the agreements. Flight revenue relating
to patient transports is recognized upon completion of the services. Revenue and
accounts receivable are recorded net of estimated contractual allowances under
agreements with third-party payers. Estimates of contractual allowances are
initially determined based on historical discount percentages for Medicare and
Medicaid patients and adjusted periodically based on actual discounts. If actual
future discounts are less favorable than those projected by management,
additional contractual allowances may be required.
Revenue related to fixed fee medical interior and products contracts is recorded
as costs are incurred using the percentage of completion method of accounting.
The Company estimates the percentage of completion based on costs incurred to
date as a percentage of an estimate of the total costs to complete the project.
Certain products contracts provide for reimbursement of all costs plus an
incremental amount. Revenue on these contracts is also recorded as costs are
incurred. Losses on contracts in process are recognized when determined. If
total costs to complete a project are greater than estimated, the gross margin
on the project may be less than originally recorded under the percentage of
completion method.
Uncollectible Receivables
The Company responds to calls for air medical transports without pre-screening
the credit worthiness of the patient. Uncollectible trade receivables are
charged to operations using the allowance method. Estimates of uncollectible
receivables are determined monthly based on historical collection rates and
adjusted monthly thereafter based on actual collections. If actual future
collections are less favorable than those projected by management, additional
allowances for uncollectible accounts may be required. While bad debt expenses
have historically been within expectations and the allowances established, there
can be no guarantee that the Company will continue to experience the same
collection rates that it has in the past.
Deferred Income Taxes
In preparation of the consolidated financial statements, the Company is required
to estimate income taxes in each of the jurisdictions in which it operates. This
process involves estimating actual current tax exposure together with assessing
temporary differences resulting from differing treatment of items, such as
depreciable assets and maintenance reserves, for tax and accounting purposes.
These differences result in deferred tax assets and liabilities, which are
included in the consolidated balance sheets. The Company then assesses the
likelihood that deferred tax assets will be recoverable from future taxable
income and records a valuation allowance for those amounts it believes are not
likely to be realized. Establishing or increasing a valuation allowance in a
period results in income tax expense in the statement of operations. The Company
considers estimated future taxable income, tax planning strategies, and the
expected timing of reversals of existing temporary differences in assessing the
need for a valuation allowance against deferred tax assets. In the event the
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Company were to determine that it would not be able to realize all or part of
its net deferred tax assets in the future, an adjustment to the valuation
allowance would be charged to income in the period such determination was made.
Likewise, should the Company determine that it would be able to realize its
deferred tax assets in the future in excess of its net recorded amount, an
adjustment to the valuation allowance would increase income in the period such
determination was made.
Aircraft Overhaul Costs
The Company uses the accrual method of accounting for major engine and airframe
component overhauls and replacements. The cost of overhaul or replacement is
estimated using published manufacturers' price lists, when available, or
historical experience. This cost is accrued based on usage of the aircraft
component over the period between overhauls or replacements as mandated by the
parts manufacturer. If the cost of overhaul or replacement is greater than
estimated by management, additional aircraft operating costs may be recorded in
the period in which the price increase becomes effective or in which the
aircraft component is overhauled.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the potential loss arising from adverse changes in market rates
and prices, such as foreign currency exchange and interest rates. The Company
does not use financial instruments to any degree to manage these risks and does
not hold or issue financial instruments for trading purposes. All of the
Company's product sales and related receivables are payable in U.S. dollars. The
Company is subject to interest rate risk on its debt obligations and notes
receivable, all of which have fixed interest rates, except the line of credit
which does not have a balance outstanding as of March 31, 2002. Interest rates
on these instruments approximate current market rates as of March 31, 2002.
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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 15, 2002 By \s\ Aaron D. Todd
----------------------------------------------------
On behalf of the Company, and as Principal Financial
Officer
Date: May 15, 2002 By \s\ Sharon J. Keck
----------------------------------------------------
Principal Accounting Officer
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