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, 2000
---------------------------------------------
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 July 21,
2000, was 8,309,855.
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TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - June 30, 2000 and December 31,
1999 1
Consolidated Statements of Operations for the three and six months
ended June 30, 2000 and 1999 3
Consolidated Statements of Cash Flows for the six months ended
June 30, 2000 and 1999 4
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
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PART I: FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
AIR METHODS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
JUNE 30, DECEMBER 31,
2000 1999
------------ -------------
Assets (unaudited)
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<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,310 2,242
Current installments of notes receivable 78 74
Receivables:
Trade 13,224 8,603
Less allowance for doubtful accounts (2,680) (1,210)
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10,544 7,393
Insurance proceeds 168 220
Other 555 798
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11,267 8,411
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Inventories 3,101 2,504
Work-in-process on medical interiors and products contracts 483 172
Costs and estimated earnings in excess of billings on
uncompleted contracts 645 772
Prepaid expenses and other 966 1,019
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Total current assets 19,850 15,194
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Equipment and leasehold improvements:
Flight and ground support equipment 67,220 61,356
Furniture and office equipment 5,265 3,641
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72,485 64,997
Less accumulated depreciation and amortization (23,742) (21,289)
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Net equipment and leasehold improvements 48,743 43,708
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Excess of cost over the fair value of net assets acquired, net of
accumulated amortization of $859 and $810 at June 30, 2000 and
December 31, 1999, respectively 1,588 1,637
Notes receivable, less current installments 494 534
Other assets, net of accumulated amortization of $1,482 and
1,256 at June 30, 2000 and December 31, 1999, respectively
1,684 1,643
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Total assets $ 72,359 62,716
============ =============
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(Continued)
See accompanying notes to consolidated financial statements.
1
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AIR METHODS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS, CONTINUED
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
JUNE 30, DECEMBER 31,
2000 1999
------------ -------------
Liabilities and Stockholders' Equity (unaudited)
------------------------------------
<S> <C> <C>
Current liabilities:
Notes payable $ 1,000 700
Current installments of long-term debt 3,564 3,073
Current installments of obligations under capital leases 321 424
Accounts payable 1,176 1,378
Accrued overhaul and parts replacement costs 2,884 2,114
Deferred revenue 1,452 972
Deferred income taxes 209 231
Other accrued liabilities 2,072 1,681
------------ -------------
Total current liabilities 12,678 10,573
Long-term debt, less current installments 19,084 17,757
Obligations under capital leases, less current installments 3,411 1,931
Accrued overhaul and parts replacement costs 8,203 6,301
Deferred income taxes -- 132
Other liabilities 1,327 882
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Total liabilities 44,703 37,576
Stockholders' equity (note 4):
Preferred stock, $1 par value. Authorized 5,000,000 shares,
none issued -- --
Common stock, $.06 par value. Authorized 16,000,000
shares; issued 8,659,849 and 8,378,843 shares at June 30, 2000
and December 31, 1999 520 503
Additional paid-in capital 50,082 50,002
Accumulated deficit (22,925) (25,357)
Treasury stock, 349,994 and 127,822 common shares at June
30, 2000 and December 31, 1999, respectively (21) (8)
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Total stockholders' equity 27,656 25,140
------------ -------------
Total liabilities and stockholders' equity $ 72,359 62,716
============ =============
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See accompanying notes to consolidated financial statements.
2
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AIR METHODS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- ----------------------
2000 1999 2000 1999
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<S> <C> <C> <C> <C>
Revenue:
Flight revenue $ 17,314 12,401 30,162 23,746
Sales of medical interiors and products 1,753 1,291 3,228 2,827
Parts and maintenance sales and services 318 337 570 758
Other 105 39 121 75
----------- ---------- ---------- ----------
19,490 14,068 34,081 27,406
----------- ---------- ---------- ----------
Operating expenses:
Flight centers 5,366 3,821 9,959 7,674
Aircraft operations 4,108 3,396 7,380 6,514
Aircraft rental 736 412 1,286 965
Medical interiors and products sold 1,153 996 2,227 2,064
Cost of parts and maintenance sales and services 266 268 485 633
Depreciation and amortization 1,384 1,288 2,729 2,477
Bad debt expense 1,996 978 2,940 1,539
Loss on disposition of assets, net -- 62 -- 62
General and administrative 2,007 1,571 3,725 3,099
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17,016 12,792 30,731 25,027
----------- ---------- ---------- ----------
Operating income 2,474 1,276 3,350 2,379
Other income (expense):
Interest expense (528) (549) (1,051) (1,099)
Interest income 53 39 97 77
Other, net 16 17 36 28
----------- ---------- ---------- ----------
Income before income taxes 2,015 783 2,432 1,385
Income tax benefit -- 96 -- 96
----------- ---------- ---------- ----------
Net income $ 2,015 879 2,432 1,481
=========== ========== ========== ==========
Basic income per common share $ .24 .11 .29 .18
=========== ========== ========== ==========
Diluted income per common share $ .24 .11 .28 .18
=========== ========== ========== ==========
Weighted average number of common shares outstanding
- basic 8,309,855 8,215,737 8,295,818 8,223,237
=========== ========== ========== ==========
Weighted average number of common shares outstanding
- diluted 8,544,571 8,223,437 8,586,995 8,232,079
=========== ========== ========== ==========
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See accompanying notes to consolidated financial statements.
3
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AIR METHODS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
-------------------------
2000 1999
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,432 1,481
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization expense 2,729 2,477
Vesting of common stock options issued for services 30 30
Bad debt expense 2,940 1,539
Loss on retirement and sale of equipment, net -- 62
Changes in assets and liabilities:
Decrease in prepaid expenses and other current assets 86 95
Increase in receivables (5,796) (3,333)
Decrease (increase) in parts inventories 137 (196)
Increase in work-in-process on medical interiors and costs in excess of
billings (184) (119)
Decrease in accounts payable, other accrued liabilities, and deferred
income taxes (81) (526)
Increase in deferred revenue and other liabilities 925 612
Increase (decrease) in accrued overhaul and parts replacement costs 242 (33)
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Net cash provided by operating activities 3,460 2,089
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Cash flows from investing activities:
Acquisition of net assets of Area Rescue Consortium of Hospitals and SkyLife
Aviation LLC:
Inventory (734) --
Equipment and leasehold improvements (12,349) --
Liabilities assumed 116 --
Proceeds from sale of equipment 10,600 --
Acquisition of equipment and leasehold improvements (1,742) (962)
Increase in notes receivable and other assets (231) (707)
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Net cash used by investing activities (4,340) (1,669)
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(Continued)
See accompanying notes to consolidated financial statements.
4
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AIR METHODS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
2000 1999
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<S> <C> <C>
Cash flows from financing activities:
Proceeds from issuance of common stock, net 981 --
Payments for purchases of common stock (927) (23)
Net borrowings (payments) under short-term notes payable 300 (425)
Proceeds from issuance of debt 3,350 1,150
Payments of long-term debt (1,565) (1,372)
Payments of capital lease obligations (191) (340)
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Net cash provided (used) by financing activities 1,948 (1,010)
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Increase (decrease) in cash and cash equivalents 1,068 (590)
Cash and cash equivalents at beginning of period 2,242 2,407
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Cash and cash equivalents at end of period $ 3,310 1,817
======== =======
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Non-cash investing and financing activities:
In the six months ended June 30, 2000, the Company assumed a capital lease
obligation of $1,568 to finance the buyout of a helicopter. The Company also
issued notes payable of $33 to finance insurance policies.
See accompanying notes to consolidated financial statements.
5
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AIR METHODS CORPORATION AND SUBSIDIARY
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, 1999.
(2) ACQUISITION
-----------
On April 25, 2000, Mercy Air Service, Inc. (Mercy Air), a wholly owned
subsidiary of the Company, acquired through a newly formed company
substantially all of the business assets of Area Rescue Consortium of
Hospitals, a Missouri non-profit organization, for $11,268,000. The newly
formed company, ARCH Air Medical Service, Inc. (ARCH), will provide air
medical transportation services as a Missouri corporation and a wholly
owned subsidiary of Mercy Air. The purchase agreement includes a provision
under which the sellers will receive 50% of all collections greater than
50% of standard billing rates for transports older than six months, up to a
maximum of $1,500,000. Also on April 25, 2000, ARCH acquired two fixed wing
aircraft and related equipment and inventory from SkyLife Aviation, LLC, a
Missouri limited liability company, for $1,699,000. Funding for the
acquisitions was provided primarily by the sale of five helicopters and two
fixed wing aircraft to a leasing company for $10.6 million. The aircraft
have been leased back under an operating lease with monthly lease payments
due over ten years. ARCH also entered into a $1,350,000 note payable to a
bank with interest at 8.01% and monthly principal and interest payments
over seven years. The remainder of the purchase price was funded from
Company treasuries. The allocation of the purchase price was as follows
(amounts in thousands):
Assets purchased:
Aircraft $ 10,600
Equipment 1,749
Inventory 734
---------
13,083
Liabilities assumed (116)
---------
Purchase price 12,967
=========
(3) INCOME PER SHARE
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Basic earnings per share is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding
during the period. Diluted earnings per share is computed by dividing
income available to common stockholders by all dilutive potential common
shares outstanding during the period.
The reconciliation of basic to diluted weighted average common shares
outstanding is as follows (amounts in thousands except share and per share
amounts):
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2000 1999
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<S> <C> <C>
FOR QUARTER ENDED JUNE 30:
Weighted average number of common shares outstanding - basic 8,309,855 8,215,737
Dilutive effect of:
Common stock options 209,953 7,700
Common stock warrants 24,763 --
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Weighted average number of common shares outstanding - diluted 8,544,571 8,223,437
========= =========
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6
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(3) INCOME PER SHARE, (CONTINUED)
--------------------------------
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2000 1999
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<S> <C> <C>
FOR SIX MONTHS ENDED JUNE 30:
Weighted average number of common shares outstanding - basic 8,295,818 8,223,237
Dilutive effect of:
Common stock options 261,255 8,842
Common stock warrants 29,922 --
--------- ---------
Weighted average number of common shares outstanding - diluted 8,586,995 8,232,079
========= =========
</TABLE>
Common stock options totaling 104,414 and 1,498,910 and common stock
warrants of -0- and 275,000 were not included in the diluted income per
share calculation for the quarter ended June 30, 2000 and 1999,
respectively, because their effect would have been anti-dilutive. Common
stock options totaling 18,988 and 1,498,910 and common stock warrants of
-0- and 275,000 were not included in the diluted income per share
calculation for the six months ended June 30, 2000 and 1999, respectively,
because their effect would have been anti-dilutive.
(4) STOCKHOLDERS' EQUITY
---------------------
Changes in stockholders' equity for the six months ended June 30, 2000,
consisted of the following (amounts in thousands except share amounts):
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Shares
Outstanding Amount
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<S> <C> <C>
Balance at January 1, 2000 8,251,021 $25,140
Issuance of common shares for options & warrants exercised 281,006 981
Vesting of common stock options for services rendered -- 30
Purchase of treasury shares (222,172) (927)
Net income -- 2,432
----------- --------
Balance at June 30, 2000 8,309,855 $27,656
=========== ========
</TABLE>
As of June 30, 2000, the Company's total accumulated deficit was
$22,925,000. Of that amount, $20,467,000 relates to Cell Technology, a
predecessor company, which was involved in the research and development of
a biological response modifier.
(5) BUSINESS SEGMENT INFORMATION
------------------------------
Summarized financial information for the Company's operating segments is
shown in the following table (amounts in thousands). Amounts in the
"Corporate Activities" column represent corporate headquarters expenses and
results of insignificant operations. The Company does not allocate assets
between Air Medical Services, Products, and Corporate Activities for
internal reporting and performance evaluation purposes. Operating segments
and their principal products or services are as follows:
- Air Medical Services Division - provides air medical transportation
services to hospitals throughout the U.S. under exclusive operating
agreements. Services include aircraft operation and maintenance.
- Mercy Air - provides air medical transportation services in southern
California and Nevada, and in Missouri and Illinois through its wholly
owned subsidiary ARCH, to the general population as an independent
community-based service. Services include aircraft operation and
maintenance, medical care, dispatch and communications, and medical
billing and collection.
- Products Division - designs, manufactures, and installs aircraft
medical interiors and other aerospace products for domestic and
international customers.
7
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Air
Medical
Services Mercy Products Corporate Intersegment
FOR QUARTER ENDED JUNE 30: Division Air Division Activities Eliminations Consolidated
------------------------------ ------------ ------- -------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
2000
External revenue $ 8,390 9,233 1,760 107 -- 19,490
Intersegment revenue 3 -- 382 -- (385) --
------------- ------- -------- ----------- ------------- -------------
Total revenue 8,393 9,233 2,142 107 (385) 19,490
------------- ------- -------- ----------- ------------- -------------
Operating expenses 6,651 4,981 1,577 733 (322) 13,620
Depreciation & amortization 873 380 54 77 -- 1,384
Bad debt expense -- 1,996 -- -- -- 1,996
Interest expense 247 275 -- 6 -- 528
Interest income (17) (2) -- (34) -- (53)
------------- ------- -------- ----------- ------------- -------------
Segment net income (loss) $ 639 1,603 511 (675) (63) 2,015
============= ======= ======== =========== ============= =============
Total assets N/A 27,283 N/A 45,076 N/A 72,359
============= ======= ======== =========== ============= =============
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
============= ======= ======== =========== ============= =============
FOR SIX MONTHS ENDED JUNE 30:
2000
External revenue $ 16,486 14,245 3,235 115 -- 34,081
Intersegment revenue 3 -- 789 -- (792) --
------------- ------- -------- ----------- ------------- -------------
Total revenue 16,489 14,245 4,024 115 (792) 34,081
------------- ------- -------- ----------- ------------- -------------
Operating expenses 12,971 8,195 3,081 1,438 (659) 25,026
Depreciation & amortization 1,752 715 107 155 -- 2,729
Bad debt expense -- 2,940 -- -- -- 2,940
Interest expense 488 531 -- 32 -- 1,051
Interest income (34) (3) -- (60) -- (97)
------------- ------- -------- ----------- ------------- -------------
Segment net income (loss) $ 1,312 1,867 836 (1,450) (133) 2,432
============= ======= ======== =========== ============= =============
Total assets N/A 27,283 N/A 45,076 N/A 72,359
============= ======= ======== =========== ============= =============
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
============= ======= ======== =========== ============= =============
</TABLE>
8
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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 Air
Medical Services and products markets, the continuation and/or renewal of flight
service contracts, the acquisition of new and profitable Products Division
contracts, the volume of Mercy Air's operations, the successful integration of
ARCH, 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 $2,015,000 and $2,432,000 for the three and
six months ended June 30, 2000, respectively, compared to net income of $879,000
and $1,481,000 for the three and six months ended June 30, 1999, respectively.
The improvement in operating results in 2000 is attributable to strong flight
volume for Air Medical Services and Mercy Air, the acquisition of ARCH, and
increased external revenue from Products Division.
Flight revenue increased $4,913,000, or 39.6%, and $6,416,000, or 27.0%, for the
three and six months ended June 30, 2000, respectively, compared to 1999. Flight
revenue for the Air Medical Services Division increased 9.4% and 9.8% for the
three and six months ended June 30, 2000, primarily due to revenue of $416,000
and $954,000, respectively, from 3 new contracts added since June 30, 1999, and
to annual price increases in contracts with hospital clients. Flight volume for
continuing contracts also increased 9.3% and 10.6% in the three- and six-month
periods of 2000. Flight revenue for Mercy Air increased 88.5% and 56.2% in the
three and six months ended June 30, 2000, respectively, compared to 1999,
primarily due to the acquisition of ARCH in April 2000. Flight revenue for ARCH
from the acquisition date through June 30, 2000, totaled $3,096,000. Absent the
impact of the ARCH acquisition, flight revenue for Mercy Air increased 23.3% and
21.0% for the quarter and six months, respectively, due almost entirely to
increased transport volume during 2000.
Sales of medical interiors and products increased $462,000, or 35.8%, and
$401,000, or 14.2%, for the three and six months ended June 30, 2000.
Significant projects in 2000 included continued manufacture of six UH-60Q
Multi-Mission Medevac Systems for the U.S. Army and design work on a Spinal Cord
Injury Transport System (SCITS) for the U.S. Air Force. During the second
quarter of 2000, the Company also began manufacture of medical interiors or
multi-functional interior components for six commercial customers. Revenue by
product line for the quarter and six months ended June 30, 2000, respectively,
was as follows:
- $757,000 and $2,008,000 - design and manufacture of multi-mission interiors
- $622,000 and $622,000 - manufacture and installation of modular, multi-
functional interiors
- $374,000 and $598,000 - design and manufacture of other aerospace products
Significant projects in 1999 included design work on SCITS 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:
- $890,000 and $2,038,000 - manufacture and installation of modular, multi-
functional interiors
- $401,000 and $789,000 - design and manufacture of other aerospace products
9
<PAGE>
Cost of medical interiors and products increased by 15.8% and 7.9% for the three
and six months ended June 30, 2000, as compared to the previous year, reflecting
the increase in volume of sales offset in part by lower unit costs due to the
maturity of product lines currently being manufactured.
Parts and maintenance sales and services decreased 5.6% and 24.8% for the
quarter and six months ended June 30, 2000, respectively, compared to the prior
year, due to a decrease in volume of sales. Parts sales in the first quarter of
1999 included $90,000 for the sale of a single aircraft part to a customer. Cost
of parts and maintenance sales and services for the quarter and six months also
decreased accordingly.
Other revenue increased 169.2% and 61.3% for the three and six months ended June
30, 2000, respectively, compared to 1999. The Company holds a 50% interest in a
joint venture to provide air ambulance services in the Santa Barbara region of
California. Under the agreement, Mercy Air provides medical staffing, dispatch,
marketing, and medical billing and collection functions. The Company also holds
a 50% interest in a joint venture to provide management services for a ground
ambulance operation in New York. In 2000 other revenue consisted primarily of
earnings from these joint ventures. In 1999 other revenue consisted of
international franchise revenue, which ceased in late 1999.
Flight center costs, consisting primarily of pilot and mechanics salaries and
fringe benefits, increased 40.4% and 29.8% for the three and six months ended
June 30, 2000, respectively, compared to 1999. Flight center costs for the Air
Medical Services Division increased 13.7% and 18.6% for the three and six
months, respectively, primarily due to the addition of 3 new hospital contracts
and increases in salaries for merit pay raises. The Company also increased
matching and supplemental contributions to the employee defined contribution
retirement plan in July 1999 and again in January 2000. Flight center costs for
Mercy Air increased 91.2% and 49.8% in the three and six months ended June 30,
2000. Flight center costs related to ARCH from the acquisition date through June
30, 2000, totaled $819,000. Without the effect of the ARCH acquisition, Mercy
Air's flight center costs increased 27.5% and 18.8% for the three and six months
ended June 30, 2000, respectively, due to the addition of personnel to staff two
new base locations opened during the second quarter, merit pay raises, and
changes to retirement plan contributions.
Aircraft operating expenses increased by 21.0% and 13.3% for the three and six
months ended June 30, 2000, respectively, in comparison to the three and six
months ended June 30, 1999. 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 Company
has added 10 aircraft to its fleet since June 30, 1999, including 5 helicopters
and 2 fixed wing aircraft added as a result of the ARCH acquisition. Excluding
the ARCH aircraft, aircraft operating expenses increased 8.7% and 6.9% in the
three and six months ended June 30, 2000, reflecting increases in the size of
the fleet and flight volume.
Aircraft rental expense increased 78.6% and 33.3% for the three and six months
ended June 30, 2000, respectively, in comparison to the three and six months
ended June 30, 1999. Lease expense for ARCH aircraft from the acquisition date
through June 30, 2000, totaled $179,000. Lease expense related to the other new
aircraft totaled $136,000 and $252,000 for the three- and six-month periods of
2000, respectively. The impact of adding new aircraft was offset in part during
the six-month period by the refinance of one helicopter lease and expiration of
two other lease agreements during 1999.
Depreciation and amortization expense increased 7.5% and 10.2% for the three and
six months ended June 30, 2000, respectively, reflecting the addition of a Bell
222 helicopter to Mercy Air's fleet and two Bell 407 autopilots, as well as new
medical interiors, to the Air Medical Services Division's fleet of owned
aircraft.
Bad debt expense is estimated during the period the related services are
performed based on historical experience for Mercy Air's operations. The
provision is adjusted as required based on actual collections in subsequent
periods. The increases of 104.1% and 91.0% for the three and six months ended
June 30, 2000, respectively, compared to 1999 reflect the acquisition of ARCH in
April 2000. Bad debt expense related to ARCH flight revenue totaled
approximately $1,177,000 in the second quarter. Bad debt expense related to
Mercy Air's California and Nevada operations increased 14.6% for the six months
ended June 30, 2000, due to the increase in flight volume. In the second quarter
of 2000 bad debt expense for Mercy Air's operations decreased 16.3% as improved
collection rates offset the increase in flight volume.
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The increases in general and administrative expenses for the three and six
months ended June 30, 2000, compared to the three and six months ended June 30,
1999, reflect the impact of the ARCH transaction. Excluding ARCH expenses,
general and administrative expenses increased 17.2% and 14.8% for the three and
six months, respectively. This increase is primarily due to merit pay salary
increases and changes in administrative staffing to manage the expanded employee
base with the acquisition of ARCH and addition of new bases.
Interest expense decreased 3.8% and 4.4% for the three and six months ended June
30, 2000, respectively, due to regular payments made on outstanding notes.
In the second quarter 1999, the Company recorded 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 Air's trade receivables from cash to
accrual basis when the Company acquired Mercy Air 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 losses.
FINANCIAL CONDITION
Net working capital increased from $4,621,000 at December 31, 1999, to
$7,172,000 at June 30, 2000, primarily due to an increase in receivables
resulting from the ARCH acquisition and increased revenue for all three
operating segments. Cash and cash equivalents increased $1,068,000 from
$2,242,000 to $3,310,000 over the same period, due to cash generated by
operations and proceeds from the issuance of three notes, offset by the purchase
of ARCH assets.
Cash generated by operations increased to $3,460,000 in 2000 from $2,089,000 in
1999. The increase is primarily due to the Company's improved profitability as
discussed above in "Results of Operations."
Cash used for investing activities totaled $4,340,000 in 2000, compared to
$1,669,000 in 1999. The increase was driven primarily by the purchase of ARCH
assets. Other significant equipment acquisitions included a Bell 222 helicopter
for Mercy Air's fleet.
Financing activities generated $1,948,000 in cash in 2000, compared to using
$1,010,000 in 1999. 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 new note
agreements. In February 2000 the Company entered into a $1.1 million note
payable to a company with interest at 8.99% to finance the acquisition of the
Bell 222 helicopter which collateralizes the note. In March 2000 the Company
entered into a $900,000 note payable to a company with interest at 8.67% to
finance the acquisition of the assets of Area Rescue Consortium of Hospitals.
The note is collateralized by a Bell 222 helicopter. In April 2000 the Company
entered into a $1,350,000 note payable to a bank related to the ARCH
acquisition, with interest at 8.01%. The note is collateralized by two buildings
and various equipment.
OUTLOOK 2000
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
In the first quarter of 2000, the Air Medical Services Division extended an
operating agreement due for renewal for an additional 2 years. In the second
quarter the division deployed a Bell 206 helicopter to expand operations under
its contract in St. Paul, Minnesota. The Company expects to expand services
under another contract in August 2000 with the deployment of an additional
aircraft. At the end of July 2000, the Company will discontinue services to one
hospital customer which did not renew its operating agreement with the Company.
One other contract is due for renewal in 2000. Flight activity for continuing
hospital contracts is expected to remain consistent with historical levels
during the remainder of 2000.
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Mercy Air Service
On April 25, 2000, Mercy Air acquired through a newly formed company
substantially all of the business assets of Area Rescue Consortium of Hospitals.
ARCH, a wholly owned subsidiary of Mercy Air, will operate as an independent
provider of air medical transportation services. Also in the second quarter,
Mercy Air began operations at a second base in southern Nevada. In July 2000
Mercy Air acquired an air medical service program in Cape Girardeau, Missouri.
The program will be operated within ARCH, using a Eurocopter BO-105 helicopter.
The Company expects flight volume for Mercy Air's and ARCH's operations to be
consistent with historical levels during the remainder of 2000, with increases
for the new locations.
Products Division
In early July 2000, the Company completed production of six UH-60Q Multi-Mission
Medevac Systems. The current contract for the UH-60Q program includes an option
for five additional units which has not yet been exercised. The Army Program
Objective Memorandum (POM) includes funding for 357 units in total over the next
10 to 20 years. There can be no assurance that the current contract option will
be exercised or orders for additional units will be received in 2000 or in
future periods.
The testing and evaluation phase of the SCITS program for the U.S. Air Force is
expected to be completed in the third quarter of 2000. The Company expects to
manufacture ten units for operational evaluation during the last half of 2000,
with operational testing to be completed during the first half 2001. Food and
Drug Administration (FDA) approval, which will allow the division to market the
unit in the commercial market, is expected to be received in the third quarter
of 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 2000 or
in future periods.
During the second quarter, the Products Division was awarded four new contracts
valued at approximately $1,500,000. The contracts provide for manufacturing and
installation of medical interior systems for four separate helicopters: two MD
902s, a Bell 412, and a Bell 407. Delivery of all four systems is anticipated by
the end of the third quarter.
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, expand flight volume for Mercy Air, or
successfully integrate the ARCH acquisition. However, based on the anticipated
level of flight activity for its hospital customers and Mercy Air and the
backlog of projects for the Products Division, the Company expects to generate
sufficient cash flow to meet its operational needs throughout the remainder of
2000.
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 2000" and
those described below.
- Flight volume - All of Mercy Air's revenue and approximately 30% of the Air
Medical Services Division's revenue is dependent upon flight volume.
Approximately 22% 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.
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- Collection rates - Mercy Air invoices patients and their insurers directly
for services rendered, and 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. 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), because its fleet is composed primarily of Bell
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 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 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 for helicopter
parts, the Company could also be subject to adverse impacts from unusually
high price increases which are greater than overall inflationary trends.
Increases in the Company's flight fees billed to its customers are
generally limited to changes in the consumer price index.
- Department of Defense funding - The two major projects in process for the
Products Division, UH-60Q and SCITS, are both dependent upon Department of
Defense funding. Failure of the U.S. Congress to approve funding for the
production of additional UH-60Q or SCITS units could have a material
adverse impact on Products Division revenue.
- Governmental regulation - The air medical transportation services and
products industry is subject to extensive regulation by governmental
agencies, including the Federal Aviation Administration, which impose
significant compliance costs on the Company. In addition, reimbursement
rates for air ambulance services established by governmental programs such
as Medicare directly affect Mercy Air's revenue and indirectly affect Air
Medical Services Division's revenue from its hospital customers. Changes in
laws or regulations or reimbursement rates could have a material adverse
impact on the Company's cost of operations or revenue from flight
operations.
- Competition - The Air Medical Services Division faces significant
competition from several national and regional air medical transportation
providers for contracts with hospitals and other healthcare institutions.
Operators generally compete on the basis of price, safety record, accident
prevention and training, and the medical capability of the aircraft
offered. There can be no assurance that the Company will be able to
continue to compete successfully for new or renewing contracts in the
future.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the potential loss arising from adverse changes in market rates
and prices, such as foreign currency exchange and interest rates. The Company
does not use financial instruments to any degree to manage these risks and does
not hold or issue financial instruments for trading purposes. All of the
Company's product sales, international franchise revenue, and related
receivables are payable in U.S. dollars. The Company is subject to interest rate
risk on its debt obligations and notes receivable, most of which have fixed
interest rates. Interest rates on these instruments approximate current market
rates as of June 30, 2000.
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PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 2. CHANGES IN SECURITIES
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 2000 Annual Meeting of Stockholders was held on June 13, 2000. At
the meeting, Messrs. Ralph J. Bernstein and Lowell D. Miller, Ph.D.,
were elected to Class III directorships. Voting results were as
follows:
Total Vote
Total Vote For Withheld From
Each Director Each Director
-------------- -------------
Ralph J. Bernstein 6,404,543 1,043,257
Lowell D. Miller, Ph.D. 6,404,543 1,043,257
The stockholders also approved an amendment to the Company's Employee
Stock Option Plan to increase the number of shares of common stock
available for issue from 2,500,000 to 3,500,000. Voting results were
as follows:
For Against Abstain
--- ------- -------
2,421,924 1,514,191 141,446
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
Current Report on Form 8-K, dated April 25, 2000, regarding the
Company's acquisition of substantially all of the assets of Area
Rescue Consortium of Hospitals
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
AIR METHODS CORPORATION
Date: August 7, 2000 By \s\ Aaron D. Todd
------------------------------------------
On behalf of the Company, and as
Principal Financial and Accounting Officer
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