<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to ______________________
Commission file number 0-16079
AIR METHODS CORPORATION
------------------------------------------------------
(Exact name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C>
Delaware 84-0915893
- -------------------------------------------------------------- ---------------------------------------
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification Number)
</TABLE>
7301 South Peoria, Englewood, Colorado 80112
- ---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (303) 792-7400
--------------
Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report: N/A
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
The number of shares of Common Stock, par value $.06, outstanding as of July 30,
1999, was 8,211,037.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Consolidated Financial Statements 1
Consolidated Balance Sheets - June 30, 1999 and December 31, 1998 1
Consolidated Statements of Operations for the three and six months ended
June 30, 1999 and 1998 3
Consolidated Statements of Cash Flows for the six months ended
June 30, 1999 and 1998 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 7
Item 3. Quantitative and Qualitative Disclosures about Market Risk 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
</TABLE>
<PAGE> 3
PART I: FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
AIR METHODS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
-------- ------------
Assets (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,817 2,407
Current installments of notes receivable 70 66
Receivables:
Trade 10,132 7,298
Less allowance for doubtful accounts (2,706) (1,404)
-------- --------
7,426 5,894
Insurance proceeds 183 154
International franchise fee 37 74
Other 529 259
-------- --------
8,175 6,381
-------- --------
Inventories 2,273 2,077
Work-in-process on medical interiors and products contracts 266 147
Prepaid expenses and other 754 849
-------- --------
Total current assets 13,355 11,927
-------- --------
Equipment and leasehold improvements:
Flight and ground support equipment 60,253 59,371
Furniture and office equipment 2,982 2,648
-------- --------
63,235 62,019
Less accumulated depreciation and amortization (19,005) (16,747)
-------- --------
Net equipment and leasehold improvements 44,230 45,272
-------- --------
Excess of cost over the fair value of net assets acquired, net of accumulated
amortization of $758 and $705 at June 30, 1999 and December 31, 1998,
respectively 1,823 1,876
Notes receivable, less current installments 572 607
Other assets, net of accumulated amortization of $1,026 and $866
at June 30, 1999 and December 31, 1998, respectively 1,672 1,094
-------- --------
Total assets $ 61,652 60,776
======== ========
</TABLE>
(Continued)
See accompanying notes to consolidated financial statements.
1
<PAGE> 4
AIR METHODS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS, CONTINUED
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
-------- ------------
Liabilities and Stockholders' Equity (unaudited)
<S> <C> <C>
Current liabilities:
Notes payable $ 700 1,125
Current installments of long-term debt 2,974 2,781
Current installments of obligations under capital leases 411 554
Accounts payable 998 1,191
Accrued overhaul and parts replacement costs 1,980 2,640
Deferred revenue 1,113 531
Billings in excess of costs and estimated earnings on
uncompleted contracts 167 119
Deferred income taxes 159 315
Other accrued liabilities 1,531 1,709
-------- --------
Total current liabilities 10,033 10,965
Long-term debt, less current installments 19,303 19,718
Obligations under capital leases, less current installments 2,154 2,351
Accrued overhaul and parts replacement costs 5,535 4,586
Deferred income taxes 555 554
Other liabilities 913 931
-------- --------
Total liabilities 38,493 39,105
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 8,281,343 shares at June 30, 1999 and
December 31, 1998 497 497
Additional paid-in capital 49,987 49,979
Accumulated deficit (27,321) (28,802)
Treasury stock, 65,606 and 50,606 common shares at June 30,
1999 and December 31, 1998, respectively (4) (3)
-------- --------
Total stockholders' equity 23,159 21,671
-------- --------
Total liabilities and stockholders' equity $ 61,652 60,776
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 5
AIR METHODS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
Flight revenue $ 12,401 11,047 23,746 20,836
Sales of medical interiors and products 1,291 588 2,827 1,570
Parts and maintenance sales and services 337 262 758 696
International franchise revenue 39 72 60 146
Gain on disposition of assets, net -- -- -- 897
Other -- -- 15 --
----------- ----------- ----------- -----------
14,068 11,969 27,406 24,145
----------- ----------- ----------- -----------
Operating expenses:
Flight centers 3,821 3,316 7,674 6,564
Aircraft operations 3,396 3,357 6,514 6,201
Aircraft rental 412 444 965 874
Medical interiors and products sold 996 700 2,064 1,574
Cost of parts and maintenance sales and services 268 217 633 542
Depreciation and amortization 1,288 1,041 2,477 2,082
Bad debt expense 978 451 1,539 918
Loss on disposition of assets, net 62 37 62 --
General and administrative 1,571 1,613 3,099 3,156
----------- ----------- ----------- -----------
12,792 11,176 25,027 21,911
----------- ----------- ----------- -----------
Operating income 1,276 793 2,379 2,234
Other income (expense):
Interest expense (549) (570) (1,099) (1,167)
Interest and dividend income 39 65 77 99
Other, net 17 12 28 34
----------- ----------- ----------- -----------
Income before income taxes 783 300 1,385 1,200
Income tax benefit 96 -- 96 --
----------- ----------- ----------- -----------
Net income $ 879 300 1,481 1,200
=========== =========== =========== ===========
Basic income per common share $ .11 .04 .18 .15
=========== =========== =========== ===========
Diluted income per common share $ .11 .04 .18 .14
=========== =========== =========== ===========
Weighted average number of common shares
outstanding - basic 8,215,737 8,197,464 8,223,237 8,177,977
=========== =========== =========== ===========
Weighted average number of common shares
outstanding - diluted 8,223,437 8,567,033 8,232,079 8,437,848
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 6
AIR METHODS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1999 1998
--------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,481 1,200
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization expense 2,477 2,082
Vesting of common stock options issued for services 30 30
Bad debt expense 1,539 918
Loss (gain) on retirement and sale of equipment, net 62 (897)
Changes in assets and liabilities:
Decrease (increase) in prepaid and other current assets 95 (459)
Increase in receivables (3,333) (1,965)
Increase in parts inventories (196) (190)
Decrease (increase) in work-in-process on medical interiors (119) 1,095
Increase (decrease) in accounts payable, other accrued liabilities, and
income tax liabilities (526) 227
Increase in deferred revenue, billings in excess of costs, and other
liabilities 612 289
Increase (decrease) in accrued overhaul and parts replacement costs (33) 78
------- -------
Net cash provided by operating activities 2,089 2,408
------- -------
Cash flows from investing activities:
Acquisition of equipment and leasehold improvements (962) (4,185)
Proceeds from retirement and sale of equipment -- 2,966
Increase in notes receivable, patent development costs and other assets (707) (198)
------- -------
Net cash used by investing activities (1,669) (1,417)
------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock, net -- 167
Payments for purchases of common stock (23) --
Net payments under short-term notes payable (425) (708)
Proceeds from issuance of debt 1,150 1,188
Payments of long-term debt (1,372) (1,322)
Payments of capital lease obligations (340) (314)
------- -------
Net cash used by financing activities (1,010) (989)
------- -------
Increase (decrease) in cash and cash equivalents (590) 2
Cash and cash equivalents at beginning of period 2,407 3,396
------- -------
Cash and cash equivalents at end of period $ 1,817 3,398
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 7
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, 1998.
(2) INCOME PER SHARE
Basic earnings per share is computed by dividing income available to
common stockholders by the weighted average number of common shares
outstanding during the period. Diluted earnings per share is computed
by dividing income available to common stockholders by all dilutive
potential common shares outstanding during the period.
(3) STOCKHOLDERS' EQUITY
Changes in the stockholders' equity for the six months ended June 30,
1999, consisted of the following (amounts in thousands except share
amounts):
<TABLE>
<CAPTION>
Shares
Outstanding Amount
----------- ----------
<S> <C> <C>
Balance at January 1, 1999 8,230,737 $ 21,671
Vesting of common stock options for services
rendered -- 30
Retirement of common shares (15,000) (23)
Net income -- 1,481
---------- ----------
Balance at June 30, 1999 8,215,737 $ 23,159
========== ==========
</TABLE>
As of June 30, 1999, the Company's total accumulated deficit was
$27,321,000. Of that amount, $20,467,000 relates to Cell Technology, a
predecessor company, which was involved in the research and development
of a biological response modifier.
(4) INCOME TAX BENEFIT
In the second quarter of 1999, the Company recognized an income tax
benefit of $96,000 from the recognition of a portion of its deferred
tax asset as a result of current period taxable losses. A deferred tax
liability was generated by a change in tax accounting method for
Mercy's trade receivables from cash to accrual basis when the Company
acquired Mercy in 1997. The taxable income created by this change was
unable to be offset by the Company's net operating loss carryforwards
but could be offset by current period taxable losses.
(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 Flight Services, Products, and Corporate Activities for
internal reporting and performance evaluation purposes.
5
<PAGE> 8
<TABLE>
<CAPTION>
Flight Mercy
Services Air Products Corporate Intersegment
FOR QUARTER ENDED JUNE 30: Division Service Division Activities Eliminations Consolidated
-------- -------- -------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
1999
External revenue $ 7,683 5,024 1,294 67 -- 14,068
Intersegment revenue 33 -- 360 -- (393) --
-------- -------- -------- -------- -------- --------
Total revenue 7,716 5,024 1,654 67 (393) 14,068
-------- -------- -------- -------- -------- --------
Operating expenses 5,995 2,849 1,421 648 (404) 10,509
Depreciation & amortization 861 317 62 48 -- 1,288
Bad debt expense -- 978 -- -- -- 978
Interest expense 272 272 -- 5 -- 549
Interest income (19) (2) -- (18) -- (39)
Income tax benefit -- (96) -- -- -- (96)
-------- -------- -------- -------- -------- --------
Segment net income (loss) $ 607 706 171 (616) 11 879
======== ======== ======== ======== ======== ========
Total assets N/A 18,486 N/A 43,166 N/A 61,652
======== ======== ======== ======== ======== ========
1998
External revenue $ 7,294 4,020 583 72 -- 11,969
Intersegment revenue 14 -- 602 -- (616) --
-------- -------- -------- -------- -------- --------
Total revenue 7,308 4,020 1,185 72 (616) 11,969
-------- -------- -------- -------- -------- --------
Operating expenses 5,536 2,670 1,283 662 (479) 9,672
Depreciation & amortization 735 192 70 44 -- 1,041
Bad debt expense -- 451 -- -- -- 451
Interest expense 262 267 -- 41 -- 570
Interest income (21) (2) -- (42) -- (65)
-------- -------- -------- -------- -------- --------
Segment net income (loss) $ 796 442 (168) (633) (137) 300
======== ======== ======== ======== ======== ========
Total assets N/A 17,702 N/A 43,002 N/A 60,704
======== ======== ======== ======== ======== ========
FOR SIX MONTHS ENDED JUNE 30:
1999
External revenue $ 15,025 9,405 2,834 142 -- 27,406
Intersegment revenue 41 -- 1,084 -- (1,125) --
-------- -------- -------- -------- -------- --------
Total revenue 15,066 9,405 3,918 142 (1,125) 27,406
-------- -------- -------- -------- -------- --------
Operating expenses 11,425 6,079 3,104 1,326 (951) 20,983
Depreciation & amortization 1,679 575 102 121 -- 2,477
Bad debt expense -- 1,539 -- -- -- 1,539
Interest expense 530 535 -- 34 -- 1,099
Interest income (38) (4) -- (35) -- (77)
Income tax benefit -- (96) -- -- -- (96)
-------- -------- -------- -------- -------- --------
Segment net income (loss) $ 1,470 777 712 (1,304) (174) 1,481
======== ======== ======== ======== ======== ========
Total assets N/A 18,486 N/A 43,166 N/A 61,652
======== ======== ======== ======== ======== ========
1998
External revenue $ 14,961 7,478 1,561 145 -- 24,145
Intersegment revenue 14 -- 1,146 -- (1,160) --
-------- -------- -------- -------- -------- --------
Total revenue 14,975 7,478 2,707 145 (1,160) 24,145
-------- -------- -------- -------- -------- --------
Operating expenses 10,729 5,040 2,658 1,312 (862) 18,877
Depreciation & amortization 1,455 382 117 128 -- 2,082
Bad debt expense -- 918 -- -- -- 918
Interest expense 498 555 -- 114 -- 1,167
Interest income (21) (3) -- (75) -- (99)
-------- -------- -------- -------- -------- --------
Segment net income (loss) $ 2,314 586 (68) (1,334) (298) 1,200
======== ======== ======== ======== ======== ========
Total assets N/A 17,702 N/A 43,002 N/A 60,704
======== ======== ======== ======== ======== ========
</TABLE>
6
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the results of operations and financial condition
should be read in conjunction with the Company's consolidated financial
statements and notes thereto included in Item 1 of this report. This report
contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. For this purpose, statements contained herein that are
not statements of historical fact may be deemed to be forward-looking
statements. Without limiting the foregoing, the words "believes", "expects",
"anticipates", "plans", "estimates", and similar words and expressions are
intended to identify such statements. These forward-looking statements include
statements concerning the size, structure and growth of the Company's flight
services and products markets, the continuation and/or renewal of flight service
contracts, the acquisition of new and profitable Products Division contracts,
the volume of Mercy's operations, continued royalty revenue from Unimed Air,
Year 2000 compliance issues, 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.
RESULTS OF OPERATIONS
The Company reported net income of $879,000 and $1,481,000 for the three and six
months ended June 30, 1999, respectively, compared to net income of $300,000 and
$1,200,000 for the three and six months ended June 30, 1998, respectively. The
improvement in operating results in 1999 is primarily attributable to improved
performance Mercy Air Service, Inc., the Company's wholly owned subsidiary, and
the Company's Products Division.
Flight revenue increased $1,354,000, or 12.3%, and $2,910,000, or 14.0%, for the
three and six months ended June 30, 1999, respectively, compared to 1998. Flight
revenue for the Flight Services Division increased 5.6% and 7.6% for the three
and six months ended June 30, 1999, respectively, primarily due to revenue of
$512,000 and $808,000, respectively, from 2 new contracts added since June 30,
1998, and to annual price increases in contracts with hospital clients. Flight
volume for continuing contracts also increased 2.1% in the second quarter of
1999 and 10.6% in the six-month period. Flight revenue for Mercy increased 25.0%
and 26.7% in the three and six months ended June 30, 1999, respectively,
compared to 1998 due to the addition of 2 new bases in Las Vegas and San Diego
and to the purchase of the business operations of another air ambulance service
provider in San Diego in March 1999. Transport volume also increased 6.1% and
6.3% for the three and six months ended June 30, 1999, respectively. Transport
volume in the first quarter of 1998 was adversely impacted by the El Nino
weather pattern because the Visual Flight Rules certified aircraft were unable
to fly during periods of heavy rain.
Sales of medical interiors and products increased $703,000, or 119.6%, and
$1,257,000, or 80.1%, for the three and six months ended June 30, 1999.
Significant projects in 1999 included design work for a Spinal Cord Injury
Transport System (SCITS) for the U.S. Air Force and the manufacture of
multi-functional interiors for six Bell helicopters and one MD902 helicopter.
Revenue by product line for the quarter and six months ended June 30, 1999,
respectively, was as follows:
o $890,000 and $2,038,000 - manufacture and installation of modular,
multi-functional interiors
o $401,000 and $789,000 - design and manufacture of other aerospace products
Significant projects in 1998 included production of electrical system components
for the U. S. Air Force HH-60G helicopter, manufacture and installation of a
Bell 407 medical interior, and design and integration of avionics and
communications systems for a special-use police helicopter. Revenue recognized
in the three and six months ended June 30, 1998, respectively, consisted of the
following:
o $36,000 and $90,000 - design and manufacture of multi-mission interiors
o $180,000 and $565,000 - manufacture and installation of modular,
multi-functional interiors
o $372,000 and $915,000 - manufacture of other aerospace products
7
<PAGE> 10
Cost of medical interiors and products increased by 42.3% and 31.1% for the
three and six months ended June 30, 1999, as compared to the previous year,
reflecting the increase in volume of sales. In addition, the second quarter of
1998 included approximately $123,000 in costs to re-manufacture electrical
system components for the HH-60G Pave Hawk helicopter pursuant to modifications
directed by the customer. All significant projects in process or completed
during 1999, with the exception of SCITS, represent adaptations of the
multi-mission or multi-functional interiors.
International franchise fees decreased $33,000, or 45.8%, and $86,000, or 58.9%,
for the three and six months ended June 30, 1999, compared to 1998 due to
negotiated reductions in fees driven by the devaluation of the Brazilian
currency. Under the exclusive franchise agreement, Unimed Air, a Brazilian
company, purchased the right to use the trademarks and expertise of the Company
in providing air medical services in Brazil.
In the six months ended June 30, 1998, the Company recognized net gains totaling
$897,000 on the disposition of assets, including $870,000 from an insurance
settlement for one of the Company's helicopters destroyed in an accident in
January 1998.
Flight center costs, consisting primarily of pilot and mechanics salaries and
fringe benefits, increased 15.2% and 16.9% for the three and six months ended
June 30, 1999, respectively, compared to 1998. Flight center costs for the
Flight Services Division increased 8.1% and 6.5% for the three and six months,
respectively, primarily due to the addition of 2 new hospital contracts and
increases in salaries for merit pay raises. Flight center costs related to
Mercy's operations increased 32.5% and 43.7% in the three and six months ended
June 30, 1999, almost entirely due to costs of approximately $362,000 and
$760,000, respectively, for the 2 new bases established in 1998.
Aircraft operating expenses increased by 1.2% and 5.0% for the three and six
months ended June 30, 1999, respectively, in comparison to the three and six
months ended June 30, 1998. 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. Increases in
aircraft operating expenses driven by the addition of five helicopters and two
airplanes to the fleet were offset almost entirely by lower maintenance costs
for Mercy's fleet of aircraft during the three and six months ended June 30,
1999.
Aircraft rental expense decreased 7.2% for the quarter ended June 30, 1999, but
increased 10.4% for the six months ended June 30, 1999. Lease expense for the
six months ended June 30, 1999, related to four new aircraft for the Flight
Services Division totaled $382,000. The impact of adding these four aircraft was
offset in part during the six-month period and entirely during the second
quarter by the refinance of leases covering three helicopters and expiration of
a fourth lease agreement in March 1999.
Depreciation and amortization expense increased 23.7% and 19.0% for the three
and six months ended June 30, 1999, respectively, reflecting the addition of one
Bell 407 helicopter and one Bell 222 helicopter, as well as two new medical
interiors, to the Flight Services Division's fleet of owned aircraft. The
Company also completed the renovation of its corporate headquarters facility in
Colorado and of Mercy's headquarters in California at the end of the first
quarter of 1999, increasing depreciable leasehold improvements by approximately
$300,000.
Bad debt expense is estimated during the period the related services are
performed based on historical experience for Mercy's operations. The provision
is adjusted as required based on actual collections in subsequent periods. The
increases of 116.9% and 67.6% for the three and six months ended June 30, 1999,
respectively, compared to 1998 reflect increases in flight revenue for Mercy. In
addition, the Company achieved better than anticipated collection rates during
the first six months of 1998. Bad debt expense for the three and six months
ended June 30, 1999, was approximately 18% and 21%, respectively, of Mercy's net
flight revenue, consistent with historical levels.
General and administrative expenses remained relatively constant for the three
and six months ended June 30, 1999, compared to 1998, despite the revenue growth
over the same period. Most of the general and administrative costs are fixed in
nature and do not vary with revenue volume.
8
<PAGE> 11
In the second quarter of 1999, the Company recognized an income tax benefit of
$96,000 from the recognition of a portion of its deferred tax asset as a result
of current period taxable losses. A deferred tax liability was generated by a
change in tax accounting method for Mercy's trade receivables from cash to
accrual basis when the Company acquired Mercy in 1997. The taxable income
created by this change was unable to be offset by the Company's net operating
loss carryforwards but could be offset by current period taxable losses.
FINANCIAL CONDITION
Cash and cash equivalents decreased from $2,407,000 at December 31, 1998, to
$1,817,000 at June 30, 1999. Net working capital improved from $962,000 to
$3,322,000 over the same period. The change in cash and working capital
positions is primarily due to increased trade receivables. Mercy's trade
receivables grew by 20.9% from December 31, 1998, to June 30, 1999, driven
mainly by the expansion of operations in San Diego in March 1999. The increase
in receivables also mirrors the 13.5% increase in the Company's total revenue
for the six-month period ended June 30, 1999.
OUTLOOK 1999
The statements contained in this Outlook are based on current expectations.
These statements are forward looking, and actual results may differ materially.
Flight Services Division
In July 1999 the Flight Services Division entered into an agreement to begin
operations, pending execution of final contract, for a new hospital customer in
Nebraska in September 1999. With the new contract, the Flight Services Division
has expanded its operations to 17 states. Start up costs associated with the new
contract are expected to be incurred primarily during the third quarter of 1999.
The Company expects 1999 flight activity for current hospital contracts to
remain consistent with historical levels. No contracts are due for renewal
during the third and fourth quarters of 1999.
The Company expects operating royalties generated by Unimed Air, its Brazilian
franchisee, during the remainder of 1999 to remain consistent with the levels
attained in the first six months.
Mercy Air Service
The Company expects flight volume for Mercy's operations to be consistent with
historical levels during the remainder of 1999 with increases resulting from a
full year of operations at its new location in San Diego and from the
acquisition of another air ambulance provider, also in San Diego.
Products Division
In July 1999 the Products Division completed and delivered a modular,
multi-functional interior in an MD902 helicopter for the first air medical
helicopter program to be operated in Japan. In addition, the Company expects to
complete the manufacture of four other modular, multi-functional interiors
during the third quarter of 1999 and to continue design work on the
developmental phase of the SCITS program for the U.S. Air Force throughout 1999.
The Department of Defense has allocated funds for and approved seven
Multi-Mission Medevac Systems developed by the Company for the U.S. Army UH-60Q
helicopter. Sikorsky Aircraft Company, the prime contractor for the UH-60Q
project, is currently under contract with the Department of Defense to produce
six units. The Company's authorization to commence production for six units is
expected in 1999. Orders for these units have not yet been received, and there
is no assurance that the work will be performed or units delivered in 1999 or in
future periods.
9
<PAGE> 12
The Company began the production of four SCITS test units for developmental
testing and evaluation during the second quarter of 1999. These units will be
subject to static, vibration, and environmental testing beginning in the fourth
quarter of 1999. The Company is also under contract to produce 10 additional
units for operational testing and evaluation in the year 2000. The long-range
Air Force plan includes between 75 and 250 SCITS units over the next 5 years.
The production contract for SCITS has not yet been awarded and there is no
assurance that the contract will be awarded in 1999 or in future periods.
There can be no assurance that the Company will continue to renew operating
agreements for the Flight Services Division, generate new profitable contracts
for the Products Division, or expand flight volume for Mercy. In addition, there
can be no assurance that Unimed Air will continue to generate royalties from
operations. However, based on the anticipated level of flight activity for its
hospital customers and Mercy and the backlog of projects for the Products
Division, the Company expects to generate sufficient cash flow to meet its
operational needs throughout 1999.
YEAR 2000 UPDATE
The Year 2000 issue ("Y2K") results from computer programs being written using
two digits rather than four to designate a year. Date-sensitive systems may fail
to process dates correctly after December 31, 1999, possibly resulting in major
system failure or miscalculations.
State of Readiness
The Company initiated assessment of computer systems in 1996 and anticipates
minimal need for new equipment beyond the routine system upgrade schedule. The
Company has formed a corporate-wide Y2K project team led by the information
services manager and supervised by the Chief Financial Officer to ensure an
uninterrupted transition to the year 2000 by assessing, modifying, and testing
information technology (IT) and non-IT systems. IT systems include the Company's
software and hardware; non-IT systems include embedded chip technology in
various manufacturing equipment, avionics systems, utilities, and communication
systems. The team has categorized the Company's systems into mission critical
and non-critical systems based on the expected impact of failure or malfunction
on the Company's operations. A comprehensive inventory and testing of IT systems
identified workstations which required upgrades or replacement to become Y2K
compliant. Replacement or upgrade of these systems has begun and is expected to
be completed in the third quarter of 1999.
The Company uses primarily software programs written and updated by outside
firms, and Y2K upgrades are covered under standard maintenance contracts. Vendor
representations of Y2K compliance have been received for all mission-critical
software except one system as of June 30, 1999. The Company expects to replace
that system during the third quarter of 1999.
The Company has been in contact with the primary manufacturers of its airframe
and avionics equipment to determine the impact of imbedded chip technology on
the Company's flight systems. The airframe manufacturer has conducted tests of
its products and has not identified significant Y2K issues. The avionics
manufacturer has identified potential problems with certain communications
equipment and the expected dates those problems may be experienced in its
equipment. Because none of the potential problems reported by the manufacturer
relate to models of equipment currently used by the Company, these
communications indicate that imbedded chip technology will not cause the
Company's fleet to be grounded as a result of Y2K issues. As a precautionary
measure, the Company may limit Instrument Flight Rules (IFR) operations on the
dates identified by the manufacturer. Although the Company has evaluated its
airframe and avionics equipment based on the vendor communications, there can be
no assurance that all Y2K issues have been identified or that the equipment will
perform without interruption in the year 2000.
The Company has begun the development of a standard questionnaire for
significant suppliers and customers to determine the status of their Y2K
programs. Although primary vendors (specific to mission critical systems and
software) have been contacted, the Company has not yet determined the full
extent to which it is vulnerable to the failure of vendors or customers to
address Y2K compliance issues.
10
<PAGE> 13
Costs of Year 2000 Compliance
Because most of the software updates related to Y2K compliance have been covered
by the Company's existing maintenance contracts, the amounts expensed in the
first six months of 1999 were immaterial. Total capitalized costs associated
with hardware and software upgrades were approximately $70,000 for the six
months ended June 30, 1999, including costs associated with new systems which
will be Year 2000 compliant even though such compliance was not the primary
reason for installation. The Company has not used and does not plan to employ
independent contractors to assess or test Y2K compliance. The process for
tracking internal costs, primarily salaries and benefits for employees
dedicating time to Y2K compliance issues, does not capture all of the costs of
Y2K compliance. The Company estimates the cost of replacing or upgrading
remaining non-compliant systems to range from $70,000 to $100,000. Management
expects, but makes no assurance, that changes required for Y2K will not have a
material adverse effect on its financial position or results of operations. The
Company expects to fund the cost of Y2K compliance through operating cash flows
or equipment financing. The estimates given above are subject to change.
Risks Associated with Year 2000
The Company presently believes that planned hardware and software upgrades will
prevent significant operational problems for information systems resulting from
Year 2000 issues. However, if such upgrades are not timely or properly
implemented, the Year 2000 problem could affect the ability of the Company to
maintain its fleet, manufacture products, procure materials, manage patient
billings and collections, or perform other functions, which may have a material
adverse effect on the Company's financial condition and results of operations.
Additionally, failure of third party suppliers or customers to become Year 2000
compliant on a timely basis could create a need to change suppliers or otherwise
impair the Company's ability to procure spare parts, materials, or services or
to receive timely payment of accounts receivable, any of which could have a
material adverse effect on the Company's financial condition and results of
operations.
In management's opinion, the most reasonably likely worst case scenario for
failure to achieve Year 2000 compliance is that a limited number of avionics
systems may unexpectedly fail, requiring the Company to operate under only
Visual Flight Rules (VFR) for a short time. The Company does not believe that
malfunction of these avionics systems will result in mechanical failure of the
aircraft or grounding of the fleet. Failure by the Company or certain of its
vendors to resolve Y2K compliance issues in advance could result in disruption
of operations. However, while no assurance can be given, management believes
that efforts to test and address Y2K compliance issues will likely be successful
and that the worst case scenario discussed above is unlikely to significantly
disrupt operations.
Contingency Plans
In the event of the most reasonably likely worst case scenario described above,
the Company plans to operate its fleet of aircraft under Visual Flight Rules
until the issues have been resolved. In addition, the Company has established
back-up and recovery procedures for computer systems and data, independent of
Y2K concerns.
The Company can give no assurance that it can identify and correct all Year 2000
issues which may affect operations. In addition, the Company can give no
assurance that vendors, customers, public utilities, governmental agencies, or
other service providers will not experience Year 2000 problems which may have a
material adverse impact on the Company's operations. Forward-looking statements
contained in the Year 2000 Update should be read in conjunction with the
Company's cautionary statement regarding forward-looking statements contained on
page 7 of this report, which is provided under the "Safe Harbor" provisions of
the Private Securities Litigation Reform Act of 1995.
11
<PAGE> 14
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 risk 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, all of which have fixed
interest rates. Interest rates on these instruments approximate current market
rates as of June 30, 1999.
12
<PAGE> 15
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 2. CHANGES IN SECURITIES
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
13
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AIR METHODS CORPORATION
Date: August 9, 1999 By /s/ Aaron D. Todd
--------------------------------------
On behalf of the Company, and as
Principal Financial and Accounting
Officer
14
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S INTERIM UNAUDITED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE
30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,817
<SECURITIES> 0
<RECEIVABLES> 10,881
<ALLOWANCES> 2,706
<INVENTORY> 2,539
<CURRENT-ASSETS> 13,355
<PP&E> 63,235
<DEPRECIATION> 19,005
<TOTAL-ASSETS> 61,652
<CURRENT-LIABILITIES> 10,033
<BONDS> 0
0
0
<COMMON> 493
<OTHER-SE> 49,987
<TOTAL-LIABILITY-AND-EQUITY> 61,652
<SALES> 3,585
<TOTAL-REVENUES> 27,406
<CGS> 2,697
<TOTAL-COSTS> 25,027
<OTHER-EXPENSES> 28<F1>
<LOSS-PROVISION> 1,539
<INTEREST-EXPENSE> 1,022<F2>
<INCOME-PRETAX> 1,385
<INCOME-TAX> (96)<F3>
<INCOME-CONTINUING> 1,481
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,481
<EPS-BASIC> .18
<EPS-DILUTED> .18
<FN>
<F1>Net non-operating income
<F2>Net of interest income of $77
<F3>Income tax benefit
</FN>
</TABLE>
