10-Q 1 0001.txt Securities and Exchange Commission Washington, D. C. 20549 FORM 10-Q [X] Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended: September 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 ---- ---- Commission file number 0-9827 PETROLEUM HELICOPTERS, INC. (Exact name of registrant as specified in its charter) Louisiana 72-0395707 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2121 Airline Drive Suite 400 P.O. Box 578, Metairie, Louisiana 70001-5979 (Address of principal executive (Zip Code) offices) Registrant's telephone number, including area code: (504) 828-3323 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 --- --- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the Issuer's classes of common stock, as of the latest practicable date. Class Outstanding at October 31, 2000 ----- ------------------------------- Voting Common Stock 2,793,386 shares Non-Voting Common Stock 2,384,715 shares PETROLEUM HELICOPTERS, INC. Index - Form 10-Q Part I - Financial Information Item 1. Financial Statements - Unaudited Consolidated Balance Sheets - September 30, 2000 and December 31, 1999 3 Consolidated Statements of Operations - Three Months and Nine Months Ended September 30, 2000 and 1999 4 Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2000 and 1999 5 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 15 Part II - Other Information Item 1. Legal Proceedings 15 Item 6. Exhibits and Reports on Form 8-K 16 Signature 17 PART I - FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS PETROLEUM HELICOPTERS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Thousands of dollars, except share data) (Unaudited) September 30, December 31, 2000 1999 ------------- ----------- ASSETS Current Assets: Cash and cash equivalents $ 122 $ 1,663 Accounts receivable -- net of allowance: Trade 40,772 36,917 Other 1,619 3,558 Inventory 41,250 37,277 Prepaid expenses 1,570 2,987 Refundable income taxes 2,850 3,922 -------- -------- Total current assets 88,183 86,324 Property and equipment, net 124,864 135,047 Other 2,942 1,685 -------- -------- Total Assets $215,989 $223,056 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable and accrued liabilities $ 28,284 $ 20,013 Accrued vacation payable 6,163 6,020 Current maturities of long-term debt 7,323 5,592 -------- -------- Total current liabilities 41,770 31,625 -------- -------- Long-term debt, net of current maturities 57,123 72,048 Deferred income taxes 17,391 17,776 Other long-term liabilities 8,571 7,984 Commitments and contingencies (Note 5) Shareholders' Equity Voting common stock -- par value of $0.10; authorized shares of 12,500,000 279 279 Non-voting common stock -- par value of $0.10; 237 237 authorized shares of 12,500,000 Additional paid-in capital 12,024 11,729 Retained earnings 78,594 81,378 -------- -------- Total shareholders' equity 91,134 93,623 -------- -------- Total Liabilities and Shareholders' Equity $215,989 $223,056 ======== ======== The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. PETROLEUM HELICOPTERS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited) Quarter Ended Nine Months Ended September 30, September 30, -------------------- ---------------------- 2000 1999 2000 1999 --------- --------- ---------- ---------- REVENUES AND OTHER INCOME: Operating revenues $ 60,894 $ 54,944 $ 168,658 $ 166,830 Other income (loss), net (358) 2,193 2,189 5,840 --------- --------- ---------- ---------- 60,536 57,137 170,847 172,670 --------- --------- ---------- ---------- EXPENSES: Direct expenses 55,724 52,792 157,743 156,244 Selling, general, and administrative expenses 4,412 4,604 12,479 13,564 Special charges -- -- -- 4,846 Interest expense 1,329 1,449 4,312 4,306 --------- --------- ---------- ---------- 61,465 58,845 174,534 178,960 --------- --------- ---------- ---------- Loss before income taxes (929) (1,708) (3,687) (6,290) Income taxes 82 (631) (922) (2,520) --------- --------- ---------- ---------- Net loss $ (1,011) $ (1,077) $ (2,765) $ (3,770) ========= ========= ========== ========== Weighted average common shares outstanding: Basic 5,165 5,160 5,163 5,163 Diluted 5,165 5,160 5,163 5,163 Net loss per common share: Basic $ (0.20) $ (0.21) $ (0.54) $ (0.73) Diluted $ (0.20) $ (0.21) $ (0.54) $ (0.73) Dividends declared per common share $ -- $ 0.05 $ -- $ 0.15 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. PETROLEUM HELICOPTERS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Thousands of dollars) (Unaudited) Nine Months Ended September 30, ------------------------- 2000 1999 ---------- ---------- Cash flows from operating activities: Net loss $ (2,765) $ (3,770) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation 10,088 11,627 Deferred income taxes (385) 726 Gain on asset dispositions (2,855) (5,903) Equity in net losses of investee companies, net of distributions 439 182 Special charges -- 3,720 Other 575 638 Changes in operating assets and liabilities 4,414 2,005 --------- --------- Net cash provided by operating activities 9,511 9,225 --------- --------- Cash flows from investing activities: Investments in and advances to affiliates (1,266) (160) Proceeds from notes receivable 198 -- Purchase of property and equipment (12,745) (19,221) Proceeds from asset dispositions 15,955 14,447 --------- --------- Net cash provided by (used in) investing activities 2,142 (4,934) --------- --------- Cash flows from financing activities: Proceeds from long-term debt 9,000 12,000 Payments on long-term debt (22,194) (15,395) Dividends paid -- (778) Other -- (128) --------- --------- Net cash used in financing activities (13,194) (4,301) --------- --------- Decrease in cash and cash equivalents (1,541) (10) --------- --------- Cash and cash equivalents, beginning of period 1,663 205 --------- --------- Cash and cash equivalents, end of period $ 122 $ 195 ========= ========= The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. PETROLEUM HELICOPTERS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. General The accompanying unaudited condensed consolidated financial statements include the accounts of Petroleum Helicopters, Inc. and subsidiaries ("PHI" or the "Company"). Effective December 31, 1999, the Company changed its fiscal year end from April 30 of each year to December 31 of each year. In the opinion of management, these financial statements reflect all adjustments, consisting of only normal, recurring adjustments, necessary to present fairly the financial results for the interim periods presented. These condensed consolidated financial statements should be read in conjunction with the financial statements contained in the Company's Transition Report on Form 10-K for the eight-month transition period ended December 31, 1999 and the accompanying notes and Management's Discussion and Analysis of Financial Condition and Results of Operations. The Company's financial results, particularly as they relate to the Company's domestic oil and gas operations, are influenced by seasonal fluctuations as discussed in the Company's Transition Report on Form 10-K for the eight-month transition period ended December 31, 1999. Therefore, the results of operations for interim periods are not necessarily indicative of the operating results that may be expected for a full fiscal year. 2. Special Charges In April 1999, in connection with expense reduction efforts and management's decision to recognize the impairment of assets as a result of decreased activity, the Company recorded Special Charges of $4.8 million. The Special Charges included impairment of certain foreign based joint ventures amounting to $2.5 million, severance costs of $1.3 million, impairment of property and equipment of $0.4 million, and other charges of $0.6 million. 3. Segment Information The Company has identified three principal segments: Oil and Gas Aviation Services, Aeromedical Services and Technical Services. The Oil and Gas Aviation Services segment includes domestic and international helicopter services provided to oil and gas customers. The Oil and Gas Aviation Services segment also includes certain other helicopter services related to non-oil and gas activities including forest fire-fighting and scientific research. The Aeromedical Services segment includes all services provided to the Company's air medical customers, including hospitals and medical programs. The Technical Services segment provides aircraft maintenance and repair services to outside parties. As of January 1, 2000, the Company has changed its basis of segmentation to present Technical Services as a separate segment. Previously, the Technical Services segment was in the Oil and Gas Aviation Services segment. All periods presented below include Technical Services as a separate reporting segment. Segment operating income is operating revenues less direct expenses, selling, general, and administrative costs, and special charges, as well as interest expense applicable to the operating segment. Unallocated overhead consists primarily of corporate selling, general, and administrative costs that the Company does not allocate to the operating segments. Summarized financial information concerning the Company's reportable operating segments for the quarters and nine months ended September 30, 2000 and 1999 is as follows (in thousands): Quarter Ended Nine Months Ended September 30, September 30, -------------------- --------------------- 2000 1999 2000 1999 --------- --------- --------- --------- Segment operating revenues, excluding other income: Oil and Gas Aviation Services $ 45,199 $ 40,163 $ 123,981 $ 118,930 Aeromedical Services 10,928 11,274 33,041 33,914 Technical Services 4,767 3,507 11,636 13,986 --------- --------- ---------- ---------- Total operating revenues, excluding other income $ 60,894 $ 54,944 $ 168,658 $ 166,830 ========= ========= ========== ========== Segment operating income (loss), excluding other income: Oil and Gas Aviation Services $ 1,990 $ 34 $ 1,846 $ (4,405)(1) Aeromedical Services (98) (714) 28 231 Technical Services 968 486 1,838 2,431 --------- --------- ---------- ---------- Total segment operating income (loss) excluding other income 2,860 (194) 3,712 (1,743) Other income, net (358) 2,193 2,189 5,840 Unallocated overhead (3,431) (3,707) (9,588) (10,387) --------- --------- ---------- ---------- Loss before income taxes $ (929) $ (1,708) $ (3,687) $ (6,290) ========= ========= ========== ========== (1) Includes special charges of $4.8 million as discussed in Note 2 of the unaudited condensed consolidated financial statements. 4. Other Assets Other assets principally includes investments in and advances to an affiliate. The Company has a 50% ownership interest in Clintondale Aviation, Inc. ("Clintondale"), a New York corporation that operates helicopters and fixed-wing aircraft primarily in the Commonwealth of Independent States. PHI leases four aircraft to Clintondale. In May 2000, PHI obtained a $1.3 million note receivable from Clintondale in exchange for conversion of $0.8 million of amounts due from Clintondale and $0.5 million cash. The note is payable through June 2005 in equal monthly principal installments plus interest at 7.81% per annum and is secured by a pledge of the shares not owned by PHI. At September 30, 2000, the note's principal balance was $1.2 million. The Company also holds a note receivable from Clintondale with a $0.4 million principal balance at September 30, 2000. The note is payable through May 2001 in equal monthly principal and interest payments at 13.00% per annum. 5. Commitments and Contingencies Environmental Matters -- The Company continues to review selected domestic bases for possible fuel contamination resulting from routine flight operations. The aggregate estimated liability recorded for environmental related costs at September 30, 2000 was $3.0 million, which the Company believes is adequate for probable and estimable environmental costs. The Company recorded no provisions in the quarter or nine months ended September 30, 2000. The Company will make additional provisions in future periods to the extent appropriate as further information regarding these costs becomes available. In this connection, the Company will conduct environmental site surveys in the fourth quarter at its Lafayette facility, which will be vacated in 2001 when the Company moves to its new facility. The Company will also conduct environmental site surveys at certain other facilities during the fourth quarter of 2000 and the first quarter of 2001. The results of these surveys could require additional provisions. Legal Matters -- The Company is named as a defendant in various legal actions that have arisen in the ordinary course of its business and have not been finally adjudicated. The amount, if any, of ultimate liability with respect to such matters cannot be determined; however, after consulting with legal counsel, the Company has established accruals that it believes adequately provide for the resolution of such litigation. In the opinion of management, the amount of the ultimate liability with respect to these actions will not have a material adverse effect on results of operations, cash flow or financial position of the Company. Long-Term Debt -- The Company is subject to certain financial covenants under its loan agreement with its principal lending group, as amended on June 30, 2000, and was in compliance with those covenants on September 30, 2000. These covenants include maintaining certain levels of cash flow, working capital and shareholders' equity and contain other provisions some of which restrict purchases of the Company's stock, capital expenditures and payment of dividends. The declaration or payment of dividends is restricted to 20% of net earnings for the previous four fiscal quarters. The loan agreement also limits the creation, incurrence, or assumption of Funded Debt (as defined, which includes long-term debt) and the acquisition of investments in unconsolidated subsidiaries. On November 30, 2000, the revolving credit facility portion of the loan agreement converts to a term loan, thereby increasing total annual principal debt payments to approximately $12 million. The Company intends to obtain an extension of the conversion requirement, which may involve certain other changes to the credit agreement, or to refinance its debt. New Principal Operating Facility -- The Company is leasing a new principal operating facility for 20 years effective September 2001. Under the terms of the lease, there is a commitment by the Company to fund, under certain circumstances, $4.0 million of construction costs. Any such amounts funded by PHI will amortize over 10 years at 7% per annum and the resulting monthly amortization amounts will reduce PHI's monthly lease payments for the first 10 years of the lease. 6. New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS No. 133 establishes new accounting and reporting standards for derivative financial instruments and for hedging activities. SFAS No. 133 requires the Company to measure all derivatives at fair value and to recognize them in the balance sheet as an asset or liability, depending on the Company's rights or obligations under the applicable derivative contract. In June 1999, the FASB issued SFAS No. 137, which deferred the effective date of adoption of SFAS No. 133 for one year. In June 2000, the FASB issued SFAS No. 138 to address a limited number of issues causing implementation difficulties, including a provision to provide an exception for "Normal" purchases and sales. The Company will adopt SFAS No. 133, as amended, no later than the first quarter of fiscal year 2001. The Company has considered the implications of adopting the new method of accounting for derivatives and hedging activities and has concluded that its implementation will not have a material impact on the Company's consolidated financial statements. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements". SAB No. 101 summarizes certain of the SEC's views in applying generally accepted accounting principles to revenue recognition in financial statements. SAB No. 101, as amended, is effective beginning in the fourth quarter of fiscal year 2000. The Company believes that this new accounting pronouncement will not have a material affect on its consolidated financial statements. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and the notes thereto as well as the Company's Transition Report on Form 10-K for the eight month transition period ended December 31, 1999. Forward-Looking Statements All statements other than statements of historical fact contained in this Form 10-Q, other periodic reports filed by the Company under the Securities Exchange Act of 1934 and other written or oral statements made by it or on its behalf, are forward-looking statements. When used herein, the words "anticipates", "expects", "believes", "intends", "plans", or "projects" and similar expressions are intended to identify forward-looking statements. It is important to note that forward-looking statements are based on a number of assumptions about future events and are subject to various risks, uncertainties and other factors that may cause the Company's actual results to differ materially from the views, beliefs and estimates expressed or implied in such forward-looking statements. Although the Company believes that the assumptions reflected in forward-looking statements are reasonable, no assurance can be given that such assumptions will prove correct. Factors that could cause the Company's results to differ materially from the results discussed in such forward-looking statements include but are not limited to the following: flight variances from expectations, volatility of oil and gas prices, the substantial capital expenditures and commitments required to acquire aircraft, environmental risks, competition, government regulation, unionization, and the ability of the Company to implement its business strategy. All forward-looking statements in this document are expressly qualified in their entirety by the cautionary statements in this paragraph. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Overview Despite increased oil and gas prices during the first nine months of 2000 when compared to 1999, oil and gas exploration and production activities in the Gulf of Mexico, the Company's principal market, did not begin to increase significantly until the latter part of the second quarter of 2000. It was then that PHI began to realize improvements in its Gulf of Mexico services activities. However, activity and revenues remain below the levels achieved in 1998. The Company also realized a significant increase in activity and revenues related to forest fire-fighting. Overall international oil and gas service activities have experienced decreased activity due to closure of certain operations in South America. Aeromedical Services activities have decreased due to restructure of operations in Arizona in late 1999. The Company's technical services activity increased in the second and third quarters of 2000 as the result of the start of new contracts to provide maintenance to certain military aircraft. The new contracts are one year contracts that are renewable annually. As part of the preparation of its 2001 business plan, management has initiated a comprehensive review of operations, including joint ventures and other investments, inventories, environmental and other matters. It is anticipated that this review will be completed by year end. Results of Operations The following tables present certain non-financial operational statistics for the quarter and nine months ended September 30, 2000 and 1999: Quarter Ended Nine Months Ended September 30, September 30, ------------------- ------------------ 2000 1999 2000 1999 ------- ------- ------- ------- Flight hours: Oil and Gas Aviation Services: Domestic 43,762 39,581 118,663 114,661 International 5,078 5,353 16,107 17,029 ------- ------- ------- ------- Sub-total 48,840 44,934 134,770 131,690 Aeromedical Services 5,639 6,344 16,552 17,537 Other 91 153 459 444 ------- ------- ------- ------- Total 54,570 51,431 151,781 149,671 ======= ======= ======= ======= September 30, ----------------- 2000 1999 ------ ------ Aircraft operated at period end: Oil and Gas Aviation Services: Domestic 200 199 International 31 26 ---- ---- Sub-total 231 225 Aeromedical Services 46 49 ---- ---- Total 277 274 ==== ==== Quarter Ended September 30, 2000 compared with Quarter Ended September 30, 1999 Oil and Gas Aviation Services Oil & Gas Aviation Services revenue increased 12.5% to $45.2 million for the quarter ended September 30, 2000 compared to $40.2 million during the same period in the prior year. Increased domestic activity, including increased forest fire-fighting activity, and rate increases implemented in January 2000 contributed to the increase. Decreased revenues and activity that resulted from the closure of certain operations in South America partially offset the increase. Oil and Gas Aviation Services had $2.0 million operating income for the quarter compared to less than $0.1 million operating income for the same period in 1999. Operating margin of 4.4% for the third quarter compares to less than 0.1% for the same quarter in the prior year. Increased flight activity and rate increases implemented in January 2000 helped increase the margins. Increased repairs and maintenance, insurance, employee benefits, and fuel costs, and the decreased international revenues partially offset the margin increase. Aeromedical Services Aeromedical Services revenues decreased 3.1% to $10.9 million for the quarter ended September 30, 2000 compared to $11.3 million during the same period in the prior year. The decrease in revenues is primarily attributable to decreased revenue and activity in the Company's AirEvac operations in Arizona. In November 1999, the Company restructured its Arizona operations and reduced the number of its operating aircraft there. Aeromedical Services operating income was a $0.1 million loss for the quarter compared to a $0.7 million loss for the same period in 1999. Operating margin was (0.1)% for the quarter and compares to (6.3)% for the same quarter in 1999. Lower labor and other costs that were attributable to AirEvac's restructuring were partially offset by increased repairs and maintenance and employee benefit costs. Technical Services Technical Services operating revenues for the quarter ended September 30, 2000 were $4.8 million compared to $3.5 million in the prior year, an increase of 35.9%. Technical Services operating income improved to $1.0 million for the quarter compared to $0.5 million for the same quarter in 1999. The operating margin was 20.3% in the current year quarter and 13.9% in the prior year quarter. The increases in operating revenues and operating income were primarily attributable to the start of ongoing contracts in 2000 to provide maintenance to certain military aircraft. Other Income (Loss), net Other losses, net, were $0.4 million for the quarter ended September 30, 2000 as compared to other income, net, of $2.2 million for the prior year quarter. The other income, net, for the third quarter of 1999 included $2.1 million of net gains on aircraft sales and other asset dispositions. There were no aircraft sales in the third quarter of 2000 and net gains on asset dispositions were $0.1 million. Also, the third quarter of 2000 includes $0.5 million equity in net losses of investee companies, which compares to $0.1 million equity in net losses of investee companies recorded in the third quarter of 1999. Direct Expenses Direct expenses for the quarter ended September 30, 2000 increased by 5.6% to $55.7 million compared to $52.8 million in the same period in the prior year. Higher repairs and maintenance, fuel, aircraft rent, and insurance costs, and the cost related to increased Technical Services revenue were the primary reasons for the increase. Lower labor costs attributable to AirEvac's restructuring, partially offset the increase in direct expenses. Selling, General, and Administrative Expenses Selling, general, and administrative expenses for the quarter ended September 30, 2000 were $4.4 million and compare to $4.6 million in the same period in 1999. During the quarter ended September 30, 1999, the Company reduced its number of employees and recorded related severance costs totaling $0.8 million in selling, general, and administrative expenses. Higher bad debt provisions, general salary increases for administrative employees, and the reassignment of certain employees to administrative positions partially offset the decrease. Interest Expense Interest expense for the quarter ended September 30, 2000 decreased $0.1 million to $1.3 million. The decrease is due primarily to lower debt levels in the current quarter compared to the same quarter in the prior year. Increases in interest rates for the period mostly offset the decrease. Income Taxes Income tax expense for the quarter ended September 30, 2000 was $0.1 million compared to a $0.6 million benefit for the quarter ended September 30, 1999. The effective tax rates were (8.8)% and 36.9% for the September 30, 2000 and 1999 quarters, respectively. The lower effective rate in the current quarter is the result of higher equity in net losses of investee companies and other permanent differences between book income and tax income. Nine Months Ended September 30, 2000 compared with Nine Months Ended September 30, 1999 Oil and Gas Aviation Services Oil & Gas Aviation Services revenues increased 4.2% to $124.0 million for the nine months ended September 30, 2000 compared to $118.9 million during the same period in the prior year. Increased domestic activity, including increased forest fire-fighting activity, and rate increases implemented in January 2000 contributed to the increase. Decreased revenues that resulted from the closure of certain operations in South America partially offset the increase. Oil and Gas Aviation Services had $1.8 million operating income for the nine months ended September 30, 2000 compared to a $4.4 million operating loss for the same period in 1999. The operating loss in 1999 included $4.8 million of special charges (see Special Charges within this discussion). Operating margin of 1.5% for the nine months compares to (3.7)% for the same period last year. The increase in margin is primarily due to the special charges recorded in 1999, increased revenues, lower aircraft depreciation, and rate increases in January 2000. Increased repairs and maintenance, fuel, helicopter rental, and employee benefit expenses and the decreased international revenues partially offset the increase in margin. Aeromedical Services Aeromedical Services revenue decreased 2.6% to $33.0 million for the nine months ended September 30, 2000 compared to $33.9 million during the same period in the prior year. The decrease in revenues is primarily attributable to decreased revenue and activity in the Company's AirEvac operations in Arizona. In November 1999, the Company restructured its Arizona operations and reduced the number of its operating aircraft there. Aeromedical Services operating income decreased to less than $0.1 million for the nine months ended September 30, 2000 compared to $0.2 million for the same period in 1999. Operating margin was less than 0.1% for the nine months ended September 30, 2000 and compares to 0.7% for the same period in 1999. Increased repairs and maintenance, fuel, helicopter rental, and employee benefit expenses and the decreased revenues contributed to the lower operating income. Lower labor costs that were primarily attributable to AirEvac's restructuring partially offset the decrease in operating income. Technical Services Technical Services operating revenues for the nine months ended September 30, 2000 were $11.6 million compared to $14.0 million in the prior year, a decrease of 16.8%. Technical Services operating income decreased to $1.8 million for the nine months compared to $2.4 million for the same nine months in 1999. The operating margin was 15.8% in the nine months ended September 30, 2000 and 17.4% in the nine months ended September 30, 1999. The decrease in operating revenues and operating margin was primarily attributable to work performed on two large contracts for the refurbishment and overhaul of two helicopters and a large parts sale, all occurring during the nine months ended September 30, 1999. An ongoing contract to provide maintenance to certain military aircraft started in the second quarter of 2000 and partially offset the decrease. Other Income, net Other income, net, was $2.2 million for the nine months ended September 30, 2000 as compared to $5.8 million for the prior year nine months. The other income, net, for the nine months ended September 30, 2000 included $2.7 million of net gains on aircraft sales and other asset dispositions. The net gains on aircraft sales and other asset dispositions during the nine months ended September 30, 1999 were $5.9 million. Also, the nine months ended September 30, 2000 includes $0.6 million equity in net losses of investee companies, which compares to $0.1 million equity in net losses of investee companies recorded in the nine months ended September 30, 1999. Direct Expenses Direct expenses for the nine months ended September 30, 2000 increased by 1.0% to $157.7 million compared to $156.2 million in same period in the prior year. The increase was due to higher repairs and maintenance, fuel, helicopter rental, and employee benefit expenses. The Technical Services segment's decrease in cost of sales, lower aircraft depreciation, and lower labor costs that were attributable to AirEvac's restructuring mostly offset the increase in direct expenses. Selling, General, and Administrative Expenses Selling, general, and administrative expenses for the nine months ended September 30, 2000 decreased by 8.0% to $12.5 million compared to $13.6 million in the same period in the prior year. The decrease was primarily due to a decrease in Y2K compliance and certain other computer programming costs. During the nine months ended September 30, 1999, the Company also recorded severance costs totaling $0.8 million in selling, general, and administrative expenses related to a reduction in its number of employees. Higher bad debt provisions, general salary increases for administrative employees, and the reassignment of certain employees to administrative positions partially offset the decrease. Special Charges In April 1999, in connection with expense reduction efforts and management's decision to recognize the impairment of assets as a result of decreased activity, the Company recorded Special Charges of $4.8 million. The Special Charges included impairment of certain foreign based joint ventures amounting to $2.5 million, severance costs of $1.3 million, impairment of property and equipment of $0.4 million, and other charges of $0.6 million. Interest Expense Interest expense for the nine months ended September 30, 2000 and September 30, 1999 was $4.3 million. Lower debt levels in the current nine-month period, compared to the debt levels in the same nine months in the prior year, offset the effect of increased interest rates for the period. Income Taxes Income tax benefit for the nine months ended September 30, 2000 decreased $1.6 million to $0.9 million. The effective tax rates were 25.0% and 40.1% for the nine months ended September 30, 2000 and 1999, respectively. The lower effective rate for the nine months ended September 30, 2000 is the result of higher equity in net losses of investee companies and other permanent differences between book income and tax income. Liquidity and Capital Resources The Company's cash position as of September 30, 2000 was $0.1 million compared to $1.7 million at December 31, 1999. Working capital decreased $8.3 million from $54.7 million at December 31, 1999 to $46.4 million. Net cash provided by operating activities during the nine months ended September 30, 2000 was $9.5 million. Net cash provided by operating activities along with $16.0 million of aircraft sales funded payments of long-term debt, purchases of property and equipment, and advances to affiliates. Total long-term debt decreased $13.2 million since December 31, 1999 to $64.4 million at September 30, 2000. The current portion of the long-term debt was $7.3 million at September 30, 2000, which the Company intends to pay with cash flow from operations and planned aircraft sales. At October 31, 2000, the Company had $11.5 million of credit capacity available under its credit facilities. On November 30, 2000, the revolving credit facility portion of the credit agreement converts to a term loan, thereby increasing total annual principal debt payments to approximately $12 million. The Company intends to obtain an extension of the conversion requirement, which may involve certain other changes to the credit agreement, or to refinance its debt. The amount expended for the purchase and completion of aircraft improvements and engines and other property and equipment was $12.7 million for the nine months ended September 30, 2000, compared to $19.2 million in the first nine months of 1999. The decrease in capital expenditures when compared to 1999 reflects the Company's reduced fleet and efforts to conserve cash. The Company believes its cash flow from operations in conjunction with its credit capacity and proceeds from planned asset sales is sufficient to meet its planned expenditure requirements for the next twelve months. Environmental Matters The Company continues to review selected domestic bases for possible fuel contamination resulting from routine flight operations. The aggregate liability recorded for environmental related costs at September 30, 2000 is $3.0 million, which the Company believes is adequate for probable and estimable environmental costs. The Company will make additional provisions in future periods to the extent appropriate as further information regarding these costs becomes available. In this connection, the Company will conduct environmental site surveys in the fourth quarter at its Lafayette facility, which will be vacated in 2001 when the Company moves to its new facility. The Company will also conduct environmental site surveys at certain other facilities during the fourth quarter of 2000 and the first quarter of 2001. The results of these surveys could require additional provisions. Employees On March 10, 2000, the Company's pilots voted to become organized under the Office and Professional Employees International Union and the Company is currently negotiating a contract with the union. While the ultimate outcome of these negotiations cannot be predicted with certainty, the Company's position is that the terms of any pilots' contract should not place it at a disadvantage with its competitors. New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS No. 133 establishes new accounting and reporting standards for derivative financial instruments and for hedging activities. SFAS No. 133 requires the Company to measure all derivatives at fair value and to recognize them in the balance sheet as an asset or liability, depending on the Company's rights or obligations under the applicable derivative contract. In June 1999, the FASB issued SFAS No. 137, which deferred the effective date of adoption of SFAS No. 133 for one year. In June 2000, the FASB issued SFAS No. 138 to address a limited number of issues causing implementation difficulties, including a provision to provide an exception for "Normal" purchases and sales. The Company will adopt SFAS No. 133, as amended, no later than the first quarter of fiscal year 2001. The Company has considered the implications of adopting the new method of accounting for derivatives and hedging activities and has concluded that its implementation will not have a material impact on the Company's consolidated financial statements. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements." SAB No. 101 summarizes certain of the SEC's views in applying generally accepted accounting principles to revenue recognition in financial statements. SAB No. 101, as amended, is effective beginning in the fourth quarter of fiscal year 2000. The Company believes that this new accounting pronouncement will not have a material affect on its consolidated financial statements. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There were no material changes to the Company's disclosures regarding derivatives in its Form 10-K for the eight-month transition period ended December 31, 1999. PART II - OTHER INFORMATION Item 1. LEGAL PROCEEDINGS The Company is involved in various legal proceedings primarily involving claims for personal injury. The Company believes that the outcome of all such proceedings, even if determined adversely, would not have a material adverse effect on its consolidated financial statements. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 3.1 (i) Articles of Incorporation of the Company (incorporated by reference to Exhibit No. 3.1 (i) to PHI's Report on Form 10-Q for the quarterly period ended October 31, 1994). (ii) By-laws of the Company (incorporated by reference to Exhibit No. 3.1 (ii) to PHI's Report on Form 10-Q for the quarterly period ended July 31, 1996). (iii) Amendment dated March 17, 2000 to Section 2.2 of the By-laws of the Company (incorporated by reference to Exhibit No. 3.1 (iii) to PHI's Report on Form 10-Q for the quarterly period ended March 31, 2000). (iv) Amendment dated September 15, 2000 to Section 3.1 of the By-laws of the Company. (v) Amendment dated September 15, 2000 to Section 5 of the By-laws of the Company. 10.23 Supplemental Executive Retirement Plan adopted by PHI's Board effective September 14, 2000. 27 Financial Data Schedule (b) Reports on Form 8-K No reports were filed on Form 8-K during the quarter ended September 30, 2000. 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. Petroleum Helicopters, Inc. November 14, 2000 By: /s/ Carroll W. Suggs --------------------------------- Carroll W. Suggs Chairman of the Board, President and Chief Executive Officer November 14, 2000 By: /s/ Michael J. McCann --------------------------------- Michael J. McCann Chief Financial Officer and Treasurer