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, 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
-------------------------
(Exact name of Registrant as Specified in Its Charter)
Delaware 84-0915893
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(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification Number)
7301 South Peoria, Englewood, Colorado 80112
- ------------------------------------------ -----
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (303) 792-7400
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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 August
2, 2002, was 9,448,327.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - June 30, 2002 and December 31,
2001 1
Consolidated Statements of Operations for the three and six
months ended June 30, 2002 and 2001 3
Consolidated Statements of Cash Flows for the six months ended
June 30, 2002 and 2001 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 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
PART I: FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
AIR METHODS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
JUNE 30, DECEMBER 31,
2002 2001
-------------------------
Assets
- ------
Current assets:
Cash and cash equivalents $ 3,472 2,838
Current installments of notes receivable 127 120
Receivables:
Trade 30,754 22,555
Less allowance for doubtful accounts (7,746) (5,673)
-------------------------
23,008 16,882
Insurance proceeds 263 471
Other 1,127 851
-------------------------
Total receivables 24,398 18,204
-------------------------
Inventories 3,796 3,427
Work-in-process on medical interiors and products contracts 311 253
Costs and estimated earnings in excess of billings on
uncompleted contracts 409 797
Deferred tax asset 3,080 3,397
Prepaid expenses and other 1,428 1,083
-------------------------
Total current assets 37,021 30,119
-------------------------
Equipment and leasehold improvements:
Flight and ground support equipment 75,454 71,392
Furniture and office equipment 5,989 5,841
-------------------------
81,443 77,233
Less accumulated depreciation and amortization (33,038) (30,561)
-------------------------
Net equipment and leasehold improvements 48,405 46,672
-------------------------
Excess of cost over the fair value of net assets acquired 2,974 2,974
Notes receivable, less current installments 446 472
Other assets, net of accumulated amortization of $670 and $447
at June 30, 2002 and December 31, 2001, respectively 5,162 5,320
-------------------------
Total assets $ 94,008 85,557
=========================
(Continued)
See accompanying notes to consolidated financial statements.
1
AIR METHODS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
JUNE 30, DECEMBER 31,
2002 2001
-------------------------
Liabilities and Stockholders' Equity
- -------------------------------------
Current liabilities:
Current installments of long-term debt $ 3,443 3,737
Current installments of obligations under capital leases 362 351
Accounts payable 2,369 1,925
Accrued overhaul and parts replacement costs 3,954 3,407
Deferred revenue 1,274 1,158
Accrued wages and compensated absences 2,128 2,037
Other accrued liabilities 1,385 2,189
-------------------------
Total current liabilities 14,915 14,804
Long-term debt, less current installments 16,626 17,335
Obligations under capital leases, less current installments 2,706 2,882
Accrued overhaul and parts replacement costs 12,736 10,377
Deferred income taxes 3,704 2,178
Other liabilities 1,928 1,438
-------------------------
Total liabilities 52,615 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 9,559,607 and 8,619,026 shares at
June 30, 2002 and December 31, 2001, respectively 573 517
Additional paid-in capital 52,364 50,665
Accumulated deficit (11,533) (14,637)
Treasury stock at par, 182,099 and 37,005 common
shares at June 30, 2002 and December 31, 2001 (11) (2)
-------------------------
Total stockholders' equity 41,393 36,543
-------------------------
Total liabilities and stockholders' equity $ 94,008 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------------------------------------
2002 2001 2002 2001
---------------------------------------------------------------
Revenue:
Flight revenue $ 25,791 21,009 50,315 38,745
Sales of medical interiors and products 1,765 2,168 3,227 3,986
Parts and maintenance sales and services 194 353 537 703
Gain on disposition of assets, net -- 3 14 113
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27,750 23,533 54,093 43,547
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Operating expenses:
Flight centers 8,594 6,753 16,454 13,463
Aircraft operations 6,690 5,050 12,151 9,734
Aircraft rental 1,223 1,005 2,358 1,941
Medical interiors and products sold 1,239 1,650 2,177 2,879
Cost of parts and maintenance sales and services 171 303 493 615
Depreciation and amortization 1,414 1,318 2,785 2,645
Bad debt expense 3,239 2,850 6,723 4,420
General and administrative 2,489 2,477 5,076 4,734
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25,059 21,406 48,217 40,431
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Operating income 2,691 2,127 5,876 3,116
Other income (expense):
Interest expense (417) (495) (862) (1,023)
Interest income 10 30 16 82
Other, net 12 18 57 37
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Income before income taxes 2,296 1,680 5,087 2,212
Income tax expense 895 -- 1,983 --
---------------------------------------------------------------
Net income $ 1,401 1,680 3,104 2,212
===============================================================
Basic income per common share $ .15 .20 .35 .26
===============================================================
Diluted income per common share $ .15 .20 .34 .26
===============================================================
Weighted average number of common shares outstanding
- - basic 9,055,443 8,383,265 8,913,054 8,383,130
===============================================================
Weighted average number of common shares outstanding
- - diluted 9,306,469 8,590,513 9,120,950 8,605,098
===============================================================
See accompanying notes to consolidated financial statements.
3
AIR METHODS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
-----------------------------
2002 2001
-----------------------------
Cash flows from operating activities:
Net income $ 3,104 2,212
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization expense 2,785 2,645
Vesting of common stock options issued for services 30 30
Bad debt expense 6,723 4,420
Deferred income tax expense 1,843 --
Gain on retirement and sale of equipment, net (14) (113)
Changes in assets and liabilities:
Increase in prepaid expenses and other current assets (345) (67)
Increase in receivables (12,917) (6,112)
Increase in parts inventories (369) (46)
Decrease (increase) in work-in-process on medical interiors and costs in
excess of billings 330 (332)
Decrease in accounts payable and other accrued liabilities (269) (1,544)
Increase (decrease) in deferred revenue, billings in excess of cost, and
other liabilities 606 (735)
Increase (decrease) in accrued overhaul and parts replacement costs 1,397 (32)
-----------------------------
Net cash provided by operating activities 2,904 326
-----------------------------
Cash flows from investing activities:
Acquisition of equipment and leasehold improvements (2,287) (1,898)
Proceeds from disposition and sale of equipment 764 207
Increase in notes receivable and other assets (5) (259)
-----------------------------
Net cash used by investing activities (1,528) (1,950)
-----------------------------
(Continued)
See accompanying notes to consolidated financial statements.
4
AIR METHODS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
-----------------------------
2002 2001
-----------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock, net $ 2,787 1
Payments for purchases of common stock (1,071) --
Net borrowings under short-term notes payable -- 418
Payments of long-term debt (2,293) (1,754)
Payments of capital lease obligations (165) (155)
Net cash used by financing activities (742) (1,490)
Increase (decrease) in cash and cash equivalents 634 (3,114)
Cash and cash equivalents at beginning of period 2,838 4,107
-----------------------------
Cash and cash equivalents at end of period $ 3,472 993
=============================
Non-cash investing and financing activities:
In the six months ended June 30, 2002, the Company entered into a note payable
totaling $1,290 to finance the buyout of a helicopter previously under an
operating lease.
In the six months ended June 30, 2001, the Company recognized a total liability
of $1,500 as additional consideration for the purchase of ARCH Air Medical
Service, Inc. (ARCH). During the second quarter of 2001, the Company determined
that the payment of this consideration, which was based on the cash flows of
post-acquisition ARCH operations, was reasonably assured based on receivable
collection trends to date.
See accompanying notes to consolidated financial statements.
5
AIR METHODS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED 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, 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 common shares
and dilutive potential common shares outstanding during the period.
The reconciliation of basic to diluted weighted average common shares
outstanding is as follows:
2002 2001
--------------------
FOR QUARTER ENDED JUNE 30:
Weighted average number of common shares outstanding - basic 9,055,443 8,383,265
Dilutive effect of:
Common stock options 236,138 185,296
Common stock warrants 14,888 21,952
--------------------
Weighted average number of common shares outstanding - diluted 9,306,469 8,590,513
====================
FOR SIX MONTHS ENDED JUNE 30:
Weighted average number of common shares outstanding - basic 8,913,054 8,383,130
Dilutive effect of:
Common stock options 193,545 200,545
Common stock warrants 14,351 21,423
--------------------
Weighted average number of common shares outstanding - diluted 9,120,950 8,605,098
====================
Common stock options totaling 173,825 were not included in the diluted
income per share calculation for the quarter ended June 30, 2001, because
their effect would have been anti-dilutive. Common stock options totaling
260,000 and 173,825 were not included in the diluted income per share
calculation for the six months ended June 30, 2002 and 2001, respectively,
because their effect would have been anti-dilutive.
(3) STOCKHOLDERS' EQUITY
---------------------
Changes in stockholders' equity for the six months ended June 30, 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 940,581 2,787
Purchase of treasury shares (145,094) (1,071)
Vesting of common stock options for services rendered -- 30
Net income -- 3,104
----------------------
Balances at June 30, 2002 9,377,508 $41,393
======================
6
(4) INCOME TAXES
------------
The Company recorded income tax expense of $1,983,000 at an effective rate
of 39% in the six months ended June 30, 2002, and no tax provision in the
six months ended June 30, 2001. During 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 June 30, 2002, a
valuation allowance has been provided for net operating loss carryforwards
which are not expected to be realized prior to expiration.
(5) NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
In June 2001 the Financial Accounting Standards Board (FASB) issued FASB
Statement No. 142, Accounting for Goodwill and Intangible Assets (Statement
142). 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. As required by Statement
142, the standard has not been retroactively applied to the results for the
period prior to adoption. Amortization expense related to goodwill totaled
$60,000 and $95,000 for the three and six months ended June 30, 2001.
In April 2002 the FASB issued FASB Statement No. 145 (Statement 145),
Rescission of FASB Statements No. 4, 44, and 64, amendment of FASB
Statement No. 13, and Technical Corrections. Statement 145 updates,
clarifies and simplifies existing accounting pronouncements, including the
rescission of Statement 4, which required all gains and losses from
extinguishments of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. As a result the
criteria in Opinion 30 will now be used to classify those gains and losses.
The Company does not anticipate a material impact on its financial
condition or results of operations as a result of implementing this
standard.
(6) DEFINITIVE PURCHASE AGREEMENT
-----------------------------
In June 2002, the Company entered into a Definitive Purchase Agreement (the
Agreement) to acquire 100% ownership of Rocky Mountain Holdings, LLC (RMH).
The Agreement provides for a cash purchase price of $28,000,000 due at
closing, subject to customary closing and post-closing adjustments.
Additional consideration of up to $2.6 million contingent upon provisions
set forth in the Agreement will, if earned, be paid out within nine years
of closing. Closing is anticipated no later than October 31, 2002.
Consummation of the transaction is subject to various consents and usual
and customary closing conditions.
(7) 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 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.
7
Products Corporate Intersegment
FOR QUARTER ENDED JUNE 30: CBM HBM Division Activities Eliminations Consolidated
- ------------------------------------------------------------------------------------------------------
2002
External revenue $15,339 10,646 1,765 -- -- 27,750
Intersegment revenue -- -- 101 -- (101) --
----------------------------------------------------------------------
Total revenue 15,339 10,646 1,866 -- (101) 27,750
----------------------------------------------------------------------
Operating expenses 9,185 9,061 1,393 848 (93) 20,394
Depreciation & amortization 621 715 34 44 -- 1,414
Bad debt expense 3,239 -- -- -- -- 3,239
Interest expense 243 174 -- -- -- 417
Interest income -- (4) -- (6) -- (10)
Income tax expense -- -- -- 895 -- 895
----------------------------------------------------------------------
Segment net income (loss) $ 2,051 700 439 (1,781) (8) 1,401
======================================================================
Total assets $41,120 N/A N/A 55,052 (2,164) 94,008
======================================================================
2001
External revenue $12,148 9,777 1,608 -- -- 23,533
Intersegment revenue -- 12 629 -- (641) --
----------------------------------------------------------------------
Total revenue 12,148 9,789 2,237 -- (641) 23,533
----------------------------------------------------------------------
Operating expenses 7,105 8,063 1,825 771 (544) 17,220
Depreciation & amortization 456 736 50 76 -- 1,318
Bad debt expense 2,850 -- -- -- -- 2,850
Interest expense 279 215 -- 1 -- 495
Interest income (2) (18) -- (10) -- (30)
----------------------------------------------------------------------
Segment net income (loss) $ 1,460 793 362 (838) (97) 1,680
======================================================================
Total assets $29,495 N/A N/A 47,425 (2,164) 74,756
======================================================================
FOR SIX MONTHS ENDED JUNE 30:
2002
External revenue $30,127 20,739 3,227 -- -- 54,093
Intersegment revenue -- -- 290 -- (290) --
----------------------------------------------------------------------
Total revenue 30,127 20,739 3,517 -- (290) 54,093
----------------------------------------------------------------------
Operating expenses 17,470 17,048 2,627 1,778 (271) 38,652
Depreciation & amortization 1,205 1,416 74 90 -- 2,785
Bad debt expense 6,723 -- -- -- -- 6,723
Interest expense 496 366 -- -- -- 862
Interest income (1) (5) -- (10) -- (16)
Income tax expense -- -- -- 1,983 -- 1,983
----------------------------------------------------------------------
Segment net income (loss) $ 4,234 1,914 816 (3,841) (19) 3,104
======================================================================
Total assets $41,120 N/A N/A 55,052 (2,164) 94,008
======================================================================
2001
External revenue $21,699 18,419 3,429 -- -- 43,547
Intersegment revenue -- 13 1,385 -- (1,398) --
----------------------------------------------------------------------
Total revenue 21,699 18,432 4,814 -- (1,398) 43,547
----------------------------------------------------------------------
Operating expenses 14,031 15,122 3,754 1,620 (1,198) 33,329
Depreciation & amortization 917 1,476 98 154 -- 2,645
Bad debt expense 4,420 -- -- -- -- 4,420
Interest expense 577 441 -- 5 -- 1,023
Interest income (3) (37) -- (42) -- (82)
----------------------------------------------------------------------
Segment net income (loss) $ 1,757 1,430 962 (1,737) (200) 2,212
======================================================================
Total assets $29,495 N/A N/A 47,425 (2,164) 74,756
======================================================================
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the results of operations and financial condition
should be read in conjunction with the Company's consolidated financial
statements and notes thereto included in Item 1 of this report. This report,
including the information incorporated by reference herein, contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. For this purpose, statements contained herein that are not
statements of historical fact may be deemed to be forward-looking statements.
Without limiting the foregoing, the words "believes," "expects," "anticipates,"
"plans," "estimates," and similar words and expressions are intended to identify
such statements. These forward-looking statements include statements concerning
the size, structure and growth of the Company's air medical services and
products markets, the continuation and/or renewal of 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 $1,401,000 and $3,104,000 for the three and
six months ended June 30, 2002, respectively, compared to net income of
$1,680,000 and $2,212,000 for the three and six months ended June 30, 2001,
respectively.
Flight revenue increased $4,782,000, or 22.8%, and $11,570,000, or 29.9%, for
the three and six months ended June 30, 2002, respectively, compared to 2001.
Flight revenue is generated by both CBM and HBM operations and is recorded net
of contractual allowances under agreements with third-party payers and
Medicare/Medicaid discounts.
- - CBM - Flight revenue increased 28.2% and 39.6% in the three and six months
ended June 30, 2002, respectively, 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 all CBM operations in the Las Vegas
region increased 133.1% and 172.0% in the quarter and six months ended
June 30, 2002, compared to 2001.
- Increase of 7.3% and 15.3% in transport volume for CBM operations in
California for the quarter and six months ended June 30, 2002,
attributable primarily to favorable weather conditions in 2002 and to
the expansion of operations to a fifth base within the Los Angeles
metropolitan area in March 2002.
- Increase of 2.2% and 9.8% in transport volume for CBM operations in
the St. Louis metropolitan area for the three and six months ended
June 30, 2002. The Company opened operations during the second quarter
of 2002 at an additional base in the St. Louis region.
- Total volume for all CBM operations increased from approximately 2,400
patient transports in the first quarter of 2001 to 2,700 in the first
quarter of 2002 and from 4,300 to 5,400 in the six-month period ended
June 30, 2002, compared to the prior year.
- - HBM - Flight revenue increased 15.7% and 18.1% for the three and six months
ended June 30, 2002, respectively, for the following reasons:
- Revenue of approximately $956,000 and $2,256,000 for the three and six
months ended June 30, 2002, respectively, generated by the addition of
two new contracts in the last half of 2001 and one new contract in the
second quarter of 2002.
- 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 7.5% in flight volume, excluding the impact of new
contracts, in the six months ended June 30, 2002, compared to the same
period in 2001. Flight volume excluding new contracts in the second
quarter of 2002 remained relatively unchanged compared to the prior
year.
9
Sales of medical interiors and products decreased $403,000, or 18.6%, and
$759,000, or 19.0%, for the three and six months ended June 30, 2002, compared
to 2001. Significant projects in 2002 included the completion of five HH-60L
Multi-Mission Medevac Systems for the U.S. Army and manufacture of medical
interiors or multi-functional interior components for six commercial customers.
In the first quarter of 2002, the Company also began development of a litter
system for the U.S. Army's Medical Evacuation Vehicle (MEV). Production of 42
MEV units began in the second quarter. Revenue by product line for the quarter
and six months ended June 30, 2002, respectively, was as follows:
- - $10,000 and $778,000 - design and manufacture of multi-mission interiors
- - $1,134,000 and $1,615,000 - manufacture and installation of modular,
multi-functional interiors
- - $621,000 and $834,000 - 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 six commercial customers. Revenue by
product line for the quarter and six months ended June 30, 2001, respectively,
was as follows:
- - $804,000 and $1,679,000 - design and manufacture of multi-mission interiors
- - $1,256,000 and $2,068,000 - manufacture and installation of modular,
multi-functional interiors
- - $108,000 and $239,000 - design and manufacture of other aerospace products
Cost of medical interiors and products decreased 24.9% and 24.4% for the three
and six months ended June 30, 2002, as compared to the previous year. The
decrease is consistent with the decrease in related product revenue over the
same periods.
Parts and maintenance sales and services decreased 45.0% and 23.6% for the
quarter and six months ended June 30, 2002, respectively, compared to 2001.
Parts sales in 2001 included $183,000 for the sale of an autopilot system to an
HBM customer. Cost of parts and maintenance sales and services for the quarter
and six months also decreased accordingly.
In the six months ended June 30, 2001, the Company recognized a gain of $110,000
on the sale of a fixed wing aircraft which was no longer utilized in the fleet.
Flight center costs (consisting primarily of pilot, mechanic, and medical staff
salaries and benefits) increased 27.3% and 22.2% for the quarter and six months
ended June 31, 2002, respectively, compared to 2001. Changes by business segment
are as follows:
- - CBM - Flight center costs increased 31.6% and 26.8% for the three and six
months ended June 30, 2002, for the following reasons:
- Approximately $632,000 and $931,000 for the quarter and six months
ended June 30, 2002, for the addition of personnel to staff new base
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 22.9% and 17.6% for the three and six
months ended June 30, 2002, primarily due to the following:
- Approximately $643,000 and $1,050,000 for the quarter and six months
ended June 30, 2002, for the addition of personnel to staff new base
locations described above.
- Increases in salaries for merit pay raises.
Aircraft operating expenses increased 32.5% and 24.8% for the three and six
months ended June 30, 2002, respectively, in comparison to the three and six
months ended June 30, 2001. Aircraft operating expenses consist of fuel,
insurance, and maintenance costs and generally are a function of the size of the
fleet, the type of aircraft flown, and the number of hours flown. The increase
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, one MD902 helicopter at the beginning of 2002, and
two Bell 230 helicopters and one Sikorsky S76 helicopter during the second
quarter of 2002.
- - Increase in the standard cost for overhaul of BK117 helicopter
transmissions by the equipment manufacturer and in the cost of on-condition
maintenance, primarily for the HBM fleet.
10
- - 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 21.7% and 21.5% for the three and six months
ended June 30, 2002, respectively, in comparison to the three and six months
ended June 30, 2001. Rental expense related to five leased aircraft added to the
Company's fleet during the first and second quarters of 2002 totaled $247,000
and $461,000 for the three and six months ended June 30, 2002, respectively. The
increase for new aircraft was offset in part during the second quarter and
six-month period 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 7.3% and 5.3% for the three and
six months ended June 30, 2002, respectively, compared to 2001. The quarter and
six months ended June 30, 2002 included $125,000 and $250,000, respectively, 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 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 quarter and six months ended June 30, 2001, included
$60,000 and $95,000 of goodwill amortization compared to none in 2002, in
accordance with the adoption of Statement 142 effective January 1, 2002. None of
the aircraft added to the Company's fleet since June 2001 are owned by the
Company. Five are leased under operating leases, as described above, and nine
are owned by HBM hospital customers and operated by the Company.
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
creditworthiness of the patient. Bad debt expense increased 13.6% and 52.1% for
the quarter and six months ended June 30, 2002, respectively, compared to 2001,
due primarily to the increase in flight revenue for CBM operations. Bad debt as
a percentage of related net flight revenue also increased from 20.8% in 2001 to
22.7% in 2002, for the six-month periods. The Company believes the decrease in
the collection rate for CBM operations is due to general recessionary trends in
the economy and to changes in previous collectibility estimates. For the second
quarter of 2002, the trend toward overall lower collection rates was partially
offset by stronger than anticipated collections for certain older receivables
within the Missouri and Illinois CBM operations. Bad debt expense related to HBM
operations and Products Divisions was not significant in either 2002 or 2001.
General and administrative expenses remained effectively unchanged in the second
quarter of 2002 compared to 2001, and increased 7.2% for the six-month period
ended June 30, 2002. The change for the six-month period 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 growth in general and administrative expenses are merit pay
and incentive compensation increases and increases in administrative staffing to
manage the expanded employee base with the addition of new bases. These factors
were offset during the second quarter of 2002 by lower legal and professional
fees for administrative matters and by the decision not to host an HBM customer
conference in 2002. The second quarter of 2001 included approximately $83,000 in
costs related to the customer conference for 2001.
The Company recorded income tax expense of $1,983,000 at an effective rate of
39% in the six months ended June 30, 2002, and no tax provision in the six
months ended June 30, 2001. During 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 June 30, 2002, a valuation allowance has been
provided for net operating loss carryforwards which are not expected to be
realized prior to expiration.
FINANCIAL CONDITION
Net working capital increased from $15,315,000 at December 31, 2001, to
$22,106,000 at June 30, 2002, primarily due to an increase in receivables
consistent with increased revenue for all operating divisions. Cash and cash
equivalents increased $634,000 from $2,838,000 to $3,472,000 over the same
period, for the reasons discussed below.
11
Cash generated by operations in the six months ended June 30, 2002, totaled
$2,904,000 compared to $326,000 in 2001. Significant uses of cash in 2002
consisted primarily of the increase in receivables described above. Costs in
excess of billings decreased during 2002 as significant Products Division
projects, including the HH60L, were completed by the end of the second quarter
and all amounts were billed. Other liabilities also increased as the Company
received advance funding for the installation of a medical interior and avionics
equipment in an aircraft leased for CBM operations. The balance of accrued
overhaul and parts replacements costs also grew during the six months ended June
30, 2002, due to the increased level of flight volume for both CBM and HBM
operations. The accrual increases with each hour flown by the fleet and is
offset when life-limited aircraft components are actually replaced or
overhauled.
Cash used by investing activities totaled $1,528,000 in 2002 compared to
$1,950,000 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 in 2001 consisted primarily of rotable equipment
purchases and upgrades to existing equipment. The cost of equipment acquisitions
was offset in part in 2001 by proceeds from the sale of one of the Company's
airplanes.
Financing activities used $742,000 in 2002 compared with $1,490,000 in 2001. The
primary uses of cash in 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 six months. The primary uses of cash in 2001 were regularly scheduled
payments of long-term debt, offset by advances against 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 continued 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 during the last six months of 2002. In the second
quarter of 2002, the Company opened one new location in the Los Angeles
metropolitan area and one in the St. Louis region. The Company expects to open a
new base of operation in central Illinois in the fourth 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 other 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. Four of these contracts have
been renewed and one has been extended through the first quarter of 2003.
Renewal of the other contract is 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. The Company began operations under a new
helicopter contract in Florida during the second quarter and under a new fixed
wing contract in New Mexico in August 2002. The Company expects 2002 flight
activity for all other hospital contracts to remain consistent with historical
levels.
12
Products Division
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 42 units in 2002
and includes options for 76 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.
As of the end of the second quarter of 2002, the Company was in the process of
completing the production of multi-functional interiors for two commercial
customers. Work under these contracts is expected to continue through the third
quarter of 2002 and remaining revenue is estimated at approximately $600,000.
During the second quarter, the company completed the production of five HH60L
Multi-Mission Medevac Systems. The Company expects to be awarded a contract for
five to eight additional HH-60L units 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
In June 2002, the Company entered into a Definitive Purchase Agreement (the
Agreement) to acquire 100% ownership of Rocky Mountain Holdings, LLC (RMH). RMH
provides air medical transportation services under both the community-based and
hospital-based models, utilizing a fleet of over 80 helicopters and fixed-wing
aircraft. Closing is anticipated no later than October 31, 2002. The
consummation of the transaction is subject to various consents and usual and
customary closing conditions. The Company expects to finance the majority of the
$28,000,000 purchase price with unsecured, subordinated debt. The Company
expects growth in revenue and in net income as a result of the acquisition in
future years upon completion of the transition plan to integrate RMH into its
three operating divisions.
There can be no assurance that the Company will successfully integrate RMH
operations into its three divisions or continue to renew operating agreements
for its HBM operations, generate new profitable contracts for the Products
Division, or expand flight volume for CBM operations. 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.
13
- - 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 creditworthiness of the
patients. 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.
- - 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 HBM customers are
generally limited to changes in the consumer price index.
- - Department of Defense funding - One of the significant projects
historically for the Products Division, the HH-60L program, 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. 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 the relationship with such
hospitals.
14
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.
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 creditworthiness of the patients. 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
Company were to determine that it would not be able to realize all or part of
its 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.
15
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 did not have a balance outstanding as of June 30, 2002.
16
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 2002 Annual Meeting of Stockholders was held on June 26,
2002. At the meeting, Messrs. Samuel H. Gray and Morad Tahbaz
were elected to Class II directorships. Voting results were as
follows:
Total Vote
Total Vote For Withheld From
Each Director Each Director
------------- -------------
Samuel H. Gray 7,668,814 128,347
Morad Tahbaz 7,668,814 128,347
20
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------ -------------------------
99.1 Certification adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
None
17
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 12, 2002 By /s/ Aaron D. Todd
----------------------------------
Aaron D. Todd
On behalf of the Company,
and as Principal Financial Officer
Date: August 12, 2002 By /s/ Sharon J. Keck
----------------------------------
Sharon J. Keck
Principal Accounting Officer
18