##### Table of Contents



UNITED STATES  SECURITIES AND EXCHANGE COMMISSION
 Washington, D. C. 20549
 FORM 10-Q
  þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended: June 30, 2006   o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to  PHI, Inc.
  Louisiana
(State or other jurisdiction of incorporation or organization)
    
    72-0395707
(I.R.S. Employer Identification No.)
 2001 SE Evangeline Thruway
Lafayette, Louisiana
(Address of principal executive offices)
    
    70508
(Zip Code)
 (337) 235-2452
 þ o
  Large accelerated filer o
    
    Accelerated
filer: þ
    
    Non-accelerated filer: o
 o þ
   Class
    
    Outstanding at July 31, 2006Voting Common Stock
    
    2,852,616 sharesNon-Voting Common Stock
    
    12,422,992 shares




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##### 



PHI, INC.
 Index  Form 10-Q
 Part I  Financial InformationItem 1.
    
    Financial Statements  UnauditedCondensed Consolidated Balance Sheets  June 30, 2006 and December 31, 2005
    
    
    3Condensed Consolidated Statements of Operations  Quarter and Six Months Ended June 30, 2006 and 2005
    
    
    4Condensed Consolidated Statements of Cash Flows  Quarter and Six Months Ended June 30, 2006 and 2005
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    28Item 4.
    
    Controls and Procedures
    
    
    28Part II  Other InformationItem 1.
    
    Legal Proceedings
    
    
    28Item 1.A.
    
    Risk Factors
    
    
    29Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    36Item 3.
    
    Defaults Upon Senior Securities
    
    
    36Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    36Item 5.
    
    Other Information
    
    
    37Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    37Signatures
    
    
    38Amended & Restated Articles of IncorporationCertification Pursuant to Section 302Certification Pursuant to Section 302Certification Pursuant to Section 906Certification Pursuant to Section 906
  2




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PART I  FINANCIAL INFORMATION
 
 Item 1. FINANCIAL STATEMENTS
 
 PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of dollars, except share data)
(Unaudited)
 June 30,
    
    
    December 31,2006
    
    
    2005ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    217,583
    
    
    $
    69,561Accounts receivable  net of allowance:Trade
    
    
    92,489
    
    
    
    89,351Other
    
    
    7,551
    
    
    
    6,766Inventory, net
    
    
    52,758
    
    
    
    48,123Other current assets
    
    
    11,168
    
    
    
    10,042Refundable income taxes
    
    
    138
    
    
    
    422Total current assets
    
    
    381,687
    
    
    
    224,265Property and equipment, net
    
    
    306,902
    
    
    
    311,678Other
    
    
    19,681
    
    
    
    13,266Total Assets
    
    $
    708,270
    
    
    $
    549,209LIABILITIES AND SHAREHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    35,780
    
    
    $
    40,506Accrued liabilities
    
    
    12,054
    
    
    
    10,807Accrued vacation payable
    
    
    4,299
    
    
    
    3,811Accrued interest payable
    
    
    3,189
    
    
    
    3,175Accrued wages and salaries
    
    
    2,108
    
    
    
    2,439Notes payable
    
    
    
    
    
    
    1,000Total current liabilities
    
    
    57,430
    
    
    
    61,738Long-term debt
    
    
    204,000
    
    
    
    203,300Deferred income taxes
    
    
    37,869
    
    
    
    38,906Other long-term liabilities
    
    
    9,635
    
    
    
    6,214Commitments and contingencies (Note 3)Shareholders Equity:Voting common stock  par value of $0.10;
authorized shares of 12,500,000
    
    
    285
    
    
    
    285Non-voting common stock  par value of $0.10;
authorized shares of 12,500,000
    
    
    1,229
    
    
    
    742Additional paid-in capital
    
    
    289,859
    
    
    
    129,531Retained earnings
    
    
    107,963
    
    
    
    108,493Total shareholders equity
    
    
    399,336
    
    
    
    239,051Total liabilities and shareholders equity
    
    $
    708,270
    
    
    $
    549,209
  3




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PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
 Quarter Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Operating revenues
    
    $
    107,157
    
    
    $
    86,783
    
    
    $
    208,529
    
    
    $
    161,022Gain (loss) on disposition of
property and equipment, net
    
    
    (1,392
    )
    
    
    (186
    )
    
    
    (1,162
    )
    
    
    460Other
    
    
    2,497
    
    
    
    198
    
    
    
    3,417
    
    
    
    293108,262
    
    
    
    86,795
    
    
    
    210,784
    
    
    
    161,775Expenses:Direct expenses
    
    
    89,211
    
    
    
    72,896
    
    
    
    176,267
    
    
    
    136,931Selling, general and
administrative expenses
    
    
    6,724
    
    
    
    5,472
    
    
    
    13,409
    
    
    
    10,701Interest expense
    
    
    4,129
    
    
    
    5,159
    
    
    
    9,202
    
    
    
    10,276Loss on debt restructuring
    
    
    12,790
    
    
    
    
    
    
    
    12,790
    
    
    
    112,854
    
    
    
    83,527
    
    
    
    211,668
    
    
    
    157,908Earnings (loss) before income
taxes
    
    
    (4,592
    )
    
    
    3,268
    
    
    
    (884
    )
    
    
    3,867Income taxes
    
    
    (1,837
    )
    
    
    1,307
    
    
    
    (354
    )
    
    
    1,547Net earnings (loss)
    
    $
    (2,755
    )
    
    $
    1,961
    
    
    $
    (530
    )
    
    $
    2,320Weighted average shares
outstanding:Basic
    
    
    14,579
    
    
    
    6,158
    
    
    
    12,512
    
    
    
    5,773Diluted
    
    
    14,579
    
    
    
    6,246
    
    
    
    12,512
    
    
    
    5,858Net earnings (loss) per shareBasic
    
    $
    (0.19
    )
    
    $
    0.32
    
    
    $
    (0.04
    )
    
    $
    0.40Diluted
    
    $
    (0.19
    )
    
    $
    0.31
    
    
    $
    (0.04
    )
    
    $
    0.40
  4




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PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of dollars)
(Unaudited)
 Six Months EndedJune 30,2006
    
    
    2005Cash flows from operating activities:Net earnings (loss)
    
    $
    (530
    )
    
    $
    2,320Adjustments to reconcile net earnings to net cash
provided by operating activities:Depreciation
    
    
    14,453
    
    
    
    13,202Deferred income taxes (benefit)
    
    
    (1,037
    )
    
    
    836(Gain) loss on disposition of property &
equipment, net
    
    
    1,162
    
    
    
    (460
    )Loss on debt restructuring
    
    
    12,790
    
    
    
    Other
    
    
    388
    
    
    
    658Changes in operating assets and liabilities
    
    
    (14,757
    )
    
    
    (7,197
    )Net cash provided by operating activities
    
    
    12,469
    
    
    
    9,359Cash flows from investing activities:Purchase of property and equipment
    
    
    (39,357
    )
    
    
    (30,910
    )Proceeds from asset dispositions
    
    
    3,163
    
    
    
    6,052Proceeds from sale-leaseback transaction
    
    
    25,069
    
    
    
    Net cash used in investing activities
    
    
    (11,125
    )
    
    
    (24,858
    )Cash flows from financing activities:Proceeds of debt issuance  Senior Notes
    
    
    200,000
    
    
    
    Premium and costs to retire debt early
    
    
    (10,208
    )
    
    
    Repayment of Senior Notes
    
    
    (200,000
    )
    
    
    Debt issuance costs
    
    
    (4,629
    )
    
    
    Proceeds from (payments to) line of credit, net
    
    
    700
    
    
    
    (8,275
    )Payments on long term debt
    
    
    
    
    
    
    (2,000
    )Proceeds from stock issuance, net
    
    
    160,815
    
    
    
    114,317Net cash provided by financing activities
    
    
    146,678
    
    
    
    104,042Increase in cash and cash equivalents
    
    
    148,022
    
    
    
    88,543Cash and cash equivalents, beginning of period
    
    
    69,561
    
    
    
    18,008Cash and cash equivalents, end of period
    
    $
    217,583
    
    
    $
    106,551Supplemental Disclosures Cash Flow InformationInterest paid
    
    $
    8,784
    
    
    $
    9,605Taxes paid, net
    
    $
    68
    
    
    $
    290
  5




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 1. General
   2. Segment Information
  Domestic Oil and Gas segment.
 Air Medical segment.
 International segment.
 Technical Services segment.
  6




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Quarter Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(Thousands of dollars)
    
    
    (Thousands of dollars)Segment operating revenuesDomestic Oil and Gas
    
    $
    66,409
    
    
    $
    51,573
    
    
    $
    127,872
    
    
    $
    96,440Air Medical
    
    
    33,596
    
    
    
    28,300
    
    
    
    64,307
    
    
    
    49,084International
    
    
    5,573
    
    
    
    5,781
    
    
    
    13,221
    
    
    
    12,799Technical Services
    
    
    1,579
    
    
    
    1,129
    
    
    
    3,129
    
    
    
    2,699Total operating revenues
    
    
    107,157
    
    
    
    86,783
    
    
    
    208,529
    
    
    
    161,022Segment direct expenses (1)Domestic Oil and Gas
    
    
    53,094
    
    
    
    42,496
    
    
    
    102,900
    
    
    
    79,345Air Medical
    
    
    30,758
    
    
    
    25,773
    
    
    
    62,377
    
    
    
    47,097International
    
    
    4,165
    
    
    
    3,806
    
    
    
    8,611
    
    
    
    8,466Technical Services
    
    
    1,194
    
    
    
    821
    
    
    
    2,379
    
    
    
    2,023Total direct expenses
    
    
    89,211
    
    
    
    72,896
    
    
    
    176,267
    
    
    
    136,931Segment selling, general and administrative expensesDomestic Oil and Gas
    
    
    198
    
    
    
    202
    
    
    
    540
    
    
    
    448Air Medical
    
    
    1,807
    
    
    
    1,538
    
    
    
    3,645
    
    
    
    2,904International
    
    
    17
    
    
    
    19
    
    
    
    61
    
    
    
    63Technical Services
    
    
    49
    
    
    
    2
    
    
    
    57
    
    
    
    5Total selling, general and administrative expenses
    
    
    2,071
    
    
    
    1,761
    
    
    
    4,303
    
    
    
    3,420Total direct and selling, general and administrative
expenses
    
    
    91,282
    
    
    
    74,657
    
    
    
    180,570
    
    
    
    140,351Net segment profit (loss)Domestic Oil and Gas
    
    
    13,117
    
    
    
    8,875
    
    
    
    24,432
    
    
    
    16,647Air Medical
    
    
    1,031
    
    
    
    989
    
    
    
    (1,715
    )
    
    
    (917
    )International
    
    
    1,391
    
    
    
    1,956
    
    
    
    4,549
    
    
    
    4,270Technical Services
    
    
    336
    
    
    
    306
    
    
    
    693
    
    
    
    671Total
    
    
    15,875
    
    
    
    12,126
    
    
    
    27,959
    
    
    
    20,671Other, net (2)
    
    
    1,105
    
    
    
    12
    
    
    
    2,255
    
    
    
    753Unallocated selling, general and administrative costs
    
    
    (4,653
    )
    
    
    (3,711
    )
    
    
    (9,106
    )
    
    
    (7,281
    )Interest expense
    
    
    (4,129
    )
    
    
    (5,159
    )
    
    
    (9,202
    )
    
    
    (10,276
    )Loss on debt restructuring
    
    
    (12,790
    )
    
    
    
    
    
    
    (12,790
    )
    
    
    Earnings (loss) before income taxes
    
    $
    (4,592
    )
    
    $
    3,268
    
    
    $
    (884
    )
    
    $
    3,867
 
 (1)
    
    Included in direct expense are the depreciation expense amounts below: Quarter Ended
    
    
    Six Months EndedJune 30
    
    
    June 302006
    
    
    2005
    
    
    2006
    
    
    2005Domestic Oil and Gas
    
    $
    3,848
    
    
    $
    3,777
    
    
    $
    7,633
    
    
    $
    8,033Air Medical
    
    
    2,192
    
    
    
    1,297
    
    
    
    4,284
    
    
    
    2,920International
    
    
    334
    
    
    
    235
    
    
    
    769
    
    
    
    653Technical Services
    
    
    3
    
    
    
    2
    
    
    
    14
    
    
    
    7Total
    
    $
    6,377
    
    
    $
    5,311
    
    
    $
    12,700
    
    
    $
    11,613Unallocated SG&A
    
    $
    884
    
    
    $
    807
    
    
    $
    1,753
    
    
    $
    1,589
 (2)
    
    Including gains (losses) on disposition of property and equipment, and other income.
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3. Commitments and Contingencies
 Environmental Matters 
 Legal Matters
  Long-term Debt
  8




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Operating Leases
  Purchase Commitments
 4. Valuation Accounts
   5. Employees
 Union Negotiations 
 Employee Incentive Compensation 
 9




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6. Recent Accounting Pronouncements
    7. Condensed Consolidating Financial Information
    10




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11




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PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
(Thousands of dollars)
 June 30, 2006ParentCompany
    
    
    GuarantorOnly
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedASSETSCurrent Assets:Cash and cash equivalents
    
    $
    217,092
    
    
    $
    491
    
    
    $
    
    
    
    $
    217,583Accounts receivable  net of allowance
    
    
    86,712
    
    
    
    13,328
    
    
    
    
    
    
    
    100,040Inventory
    
    
    52,758
    
    
    
    
    
    
    
    
    
    
    
    52,758Other current assets
    
    
    11,128
    
    
    
    40
    
    
    
    
    
    
    
    11,168Refundable income taxes
    
    
    44
    
    
    
    94
    
    
    
    
    
    
    
    138Total current assets
    
    
    367,734
    
    
    
    13,953
    
    
    
    
    
    
    
    381,687Intercompany receivable
    
    
    
    
    
    
    40,832
    
    
    
    (40,832
    )
    
    
    Other assets
    
    
    19,672
    
    
    
    9
    
    
    
    
    
    
    
    19,681Investment in subsidiaries and other
    
    
    42,891
    
    
    
    
    
    
    
    (42,891
    )
    
    
    Property and equipment, net
    
    
    299,068
    
    
    
    7,834
    
    
    
    
    
    
    
    306,902Total Assets
    
    $
    729,365
    
    
    $
    62,628
    
    
    $
    (83,723
    )
    
    $
    708,270LIABILITIES AND
SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable and accrued liabilities
    
    $
    49,499
    
    
    $
    3,632
    
    
    $
    
    
    
    $
    53,131Intercompany payable
    
    
    40,832
    
    
    
    
    
    
    
    (40,832
    )
    
    
    Accrued vacation payable
    
    
    4,011
    
    
    
    288
    
    
    
    
    
    
    
    4,299Total current liabilities
    
    
    94,342
    
    
    
    3,920
    
    
    
    (40,832
    )
    
    
    57,430Long-term debt
    
    
    204,000
    
    
    
    
    
    
    
    
    
    
    
    204,000Deferred income taxes and other long-term
liabilities
    
    
    31,687
    
    
    
    15,817
    
    
    
    
    
    
    
    47,504Shareholders Equity:Paid-in capital
    
    
    291,373
    
    
    
    4,402
    
    
    
    (4,402
    )
    
    
    291,373Retained earnings
    
    
    107,963
    
    
    
    38,489
    
    
    
    (38,489
    )
    
    
    107,963Total shareholders equity
    
    
    399,336
    
    
    
    42,891
    
    
    
    (42,891
    )
    
    
    399,336Total Liabilities and
Shareholders Equity
    
    $
    729,365
    
    
    $
    62,628
    
    
    $
    (83,723
    )
    
    $
    708,270
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PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
(Thousands of dollars)
 December 31, 2005ParentCompany
    
    
    GuarantorOnly
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedASSETSCurrent Assets:Cash and cash equivalents
    
    $
    69,102
    
    
    $
    459
    
    
    $
    
    
    
    $
    69,561Accounts receivable  net of allowance
    
    
    81,881
    
    
    
    14,236
    
    
    
    
    
    
    
    96,117Inventory
    
    
    48,123
    
    
    
    
    
    
    
    
    
    
    
    48,123Other current assets
    
    
    9,978
    
    
    
    64
    
    
    
    
    
    
    
    10,042Refundable income taxes
    
    
    (61
    )
    
    
    483
    
    
    
    
    
    
    
    422Total current assets
    
    
    209,023
    
    
    
    15,242
    
    
    
    
    
    
    
    224,265Investment in subsidiaries
    
    
    38,700
    
    
    
    
    
    
    
    (38,700
    )
    
    
    Intercompany receivable
    
    
    
    
    
    
    39,867
    
    
    
    (39,867
    )
    
    
    Other assets
    
    
    13,253
    
    
    
    13
    
    
    
    
    
    
    
    13,266Property and equipment, net
    
    
    303,421
    
    
    
    8,257
    
    
    
    
    
    
    
    311,678Total assets
    
    $
    564,397
    
    
    $
    63,379
    
    
    $
    (78,567
    )
    
    $
    549,209LIABILITIES AND
SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable and accrued liabilities
    
    $
    46,322
    
    
    $
    10,605
    
    
    $
    
    
    
    $
    56,927Intercompany payable
    
    
    39,867
    
    
    
    
    
    
    
    (39,867
    )
    
    
    Accrued vacation payable
    
    
    3,522
    
    
    
    289
    
    
    
    
    
    
    
    3,811Notes payable
    
    
    1,000
    
    
    
    
    
    
    
    
    
    
    
    1,000Total current liabilities
    
    
    90,711
    
    
    
    10,894
    
    
    
    (39,867
    )
    
    
    61,738Long-term debt
    
    
    203,300
    
    
    
    
    
    
    
    
    
    
    
    203,300Deferred income taxes and other long-term
liabilities
    
    
    31,335
    
    
    
    13,785
    
    
    
    
    
    
    
    45,120Shareholders EquityPaid-in capital
    
    
    130,558
    
    
    
    4,402
    
    
    
    (4,402
    )
    
    
    130,558Retained earnings
    
    
    108,493
    
    
    
    34,298
    
    
    
    (34,298
    )
    
    
    108,493Total shareholders equity
    
    
    239,051
    
    
    
    38,700
    
    
    
    (38,700
    )
    
    
    239,051Total liabilities and
shareholders equity
    
    $
    564,397
    
    
    $
    63,379
    
    
    $
    (78,567
    )
    
    $
    549,209
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PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(Thousands of dollars)
 For the quarter ended June 30, 2006ParentCompany
    
    
    GuarantorOnly
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedOperating revenues
    
    $
    94,010
    
    
    $
    13,147
    
    
    $
    
    
    
    $
    107,157Management fees
    
    
    579
    
    
    
    
    
    
    
    (579
    )
    
    
    Gain (loss) on dispositions of property and
equipment, net
    
    
    (1,392
    )
    
    
    
    
    
    
    
    
    
    
    (1,392
    )Other
    
    
    2,493
    
    
    
    4
    
    
    
    
    
    
    
    2,49795,690
    
    
    
    13,151
    
    
    
    (579
    )
    
    
    108,262Expenses:Direct expenses
    
    
    79,748
    
    
    
    9,463
    
    
    
    
    
    
    
    89,211Management fees
    
    
    
    
    
    
    579
    
    
    
    (579
    )
    
    
    Selling, general, and administrative
    
    
    6,069
    
    
    
    655
    
    
    
    
    
    
    
    6,724Equity in net income of consolidated
subsidiaries
    
    
    (1,236
    )
    
    
    
    
    
    
    1,236
    
    
    
    Interest expense
    
    
    4,129
    
    
    
    
    
    
    
    
    
    
    
    4,129Loss on debt restructuring
    
    
    12,790
    
    
    
    
    
    
    
    
    
    
    
    12,790101,500
    
    
    
    10,697
    
    
    
    657
    
    
    
    112,854Earnings (loss) before income taxes
    
    
    (5,810
    )
    
    
    2,454
    
    
    
    (1,236
    )
    
    
    (4,592
    )Income taxes
    
    
    (3,055
    )
    
    
    1,218
    
    
    
    
    
    
    
    (1,837
    )Net earnings (loss)
    
    $
    (2,755
    )
    
    $
    1,236
    
    
    $
    (1,236
    )
    
    $
    (2,755
    )
 For the quarter ended June 30, 2005ParentCompany
    
    
    GuarantorOnly
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedOperating revenues
    
    $
    73,698
    
    
    $
    13,085
    
    
    $
    
    
    
    $
    86,783Management fees
    
    
    895
    
    
    
    
    
    
    
    (895
    )
    
    
    Gain (loss) on dispositions of property and
equipment, net
    
    
    (186
    )
    
    
    
    
    
    
    
    
    
    
    (186
    )Other
    
    
    198
    
    
    
    
    
    
    
    
    
    
    
    19874,605
    
    
    
    13,085
    
    
    
    (895
    )
    
    
    86,795Expenses:Direct expenses
    
    
    64,994
    
    
    
    7,902
    
    
    
    
    
    
    
    72,896Management fees
    
    
    
    
    
    
    895
    
    
    
    (895
    )
    
    
    Selling, general, and administrative
    
    
    4,838
    
    
    
    634
    
    
    
    
    
    
    
    5,472Equity in net income of consolidated
subsidiaries
    
    
    (2,372
    )
    
    
    
    
    
    
    2,372
    
    
    
    Interest expense
    
    
    5,159
    
    
    
    
    
    
    
    
    
    
    
    5,15972,619
    
    
    
    9,431
    
    
    
    1,477
    
    
    
    83,527Earnings before income taxes
    
    
    1,986
    
    
    
    3,654
    
    
    
    (2,372
    )
    
    
    3,268Income taxes
    
    
    25
    
    
    
    1,282
    
    
    
    
    
    
    
    1,307Net earnings
    
    $
    1,961
    
    
    $
    2,372
    
    
    $
    (2,372
    )
    
    $
    1,961
 14




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##### Table of Contents



PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(Thousands of dollars)
(Unaudited)
 For the six months ended June 30, 2006ParentCompany
    
    
    GuarantorOnly
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedOperating revenues
    
    $
    181,387
    
    
    $
    27,142
    
    
    $
    
    
    
    $
    208,529Management fees
    
    
    1,086
    
    
    
    
    
    
    
    (1,086
    )
    
    
    Gain (loss) on dispositions of property and
equipment, net
    
    
    (1,162
    )
    
    
    
    
    
    
    
    
    
    
    (1,162
    )Other
    
    
    3,410
    
    
    
    7
    
    
    
    
    
    
    
    3,417184,721
    
    
    
    27,149
    
    
    
    (1,086
    )
    
    
    210,784Expenses:Direct expenses
    
    
    157,628
    
    
    
    18,639
    
    
    
    
    
    
    
    176,267Management fees
    
    
    
    
    
    
    1,086
    
    
    
    (1,086
    )
    
    
    Selling, general, and administrative
    
    
    12,042
    
    
    
    1,367
    
    
    
    
    
    
    
    13,409Equity in net income of consolidated
subsidiaries
    
    
    (4,191
    )
    
    
    
    
    
    
    4,191
    
    
    
    Interest expense
    
    
    9,202
    
    
    
    
    
    
    
    
    
    
    
    9,202Loss on debt restructuring
    
    
    12,790
    
    
    
    
    
    
    
    
    
    
    
    12,790187,471
    
    
    
    21,092
    
    
    
    3,105
    
    
    
    211,668Earnings (loss) before income taxes
    
    
    (2,750
    )
    
    
    6,057
    
    
    
    (4,191
    )
    
    
    (884
    )Income taxes
    
    
    (2,220
    )
    
    
    1,866
    
    
    
    
    
    
    
    (354
    )Net earnings (loss)
    
    $
    (530
    )
    
    $
    4,191
    
    
    $
    (4,191
    )
    
    $
    (530
    )
 For the six months ended June 30, 2005ParentCompany
    
    
    GuarantorOnly
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedOperating revenues
    
    $
    135,425
    
    
    $
    25,597
    
    
    $
    
    
    
    $
    161,022Management fees
    
    
    1,153
    
    
    
    
    
    
    
    (1,153
    )
    
    
    Gain on dispositions of property and
equipment, net
    
    
    460
    
    
    
    
    
    
    
    
    
    
    
    460Other
    
    
    293
    
    
    
    
    
    
    
    
    
    
    
    293137,331
    
    
    
    25,597
    
    
    
    (1,153
    )
    
    
    161,775Expenses:Direct expenses
    
    
    121,041
    
    
    
    15,890
    
    
    
    
    
    
    
    136,931Management fees
    
    
    
    
    
    
    1,153
    
    
    
    (1,153
    )
    
    
    Selling, general, and administrative
    
    
    9,398
    
    
    
    1,303
    
    
    
    
    
    
    
    10,701Equity in net income of consolidated
subsidiaries
    
    
    (4,918
    )
    
    
    
    
    
    
    4,918
    
    
    
    Interest expense
    
    
    10,276
    
    
    
    
    
    
    
    
    
    
    
    10,276135,797
    
    
    
    18,346
    
    
    
    3,765
    
    
    
    157,908Earnings before income taxes
    
    
    1,534
    
    
    
    7,251
    
    
    
    (4,918
    )
    
    
    3,867Income taxes
    
    
    (786
    )
    
    
    2,333
    
    
    
    
    
    
    
    1,547Net earnings
    
    $
    2,320
    
    
    $
    4,918
    
    
    $
    (4,918
    )
    
    $
    2,320
 15




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##### Table of Contents



PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(Thousands of dollars)
(Unaudited)
 For the six months ended June 30, 2006ParentCompany
    
    
    GuarantorOnly
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet cash provided by operating activities
    
    $
    12,388
    
    
    $
    81
    
    
    $
    
    
    
    $
    12,469Cash flows from investing activities:Purchase of property and equipment
    
    
    (39,308
    )
    
    
    (49
    )
    
    
    
    
    
    
    (39,357
    )Proceeds from asset dispositions
    
    
    3,163
    
    
    
    
    
    
    
    
    
    
    
    3,163Proceeds from sale-leaseback transactions
    
    
    25,069
    
    
    
    
    
    
    
    
    
    
    
    25,069Net cash used in investing activities
    
    
    (11,076
    )
    
    
    (49
    )
    
    
    
    
    
    
    (11,125
    )Cash flows from financing activities:Proceeds of debt issuance  senior notes
    
    
    200,000
    
    
    
    
    
    
    
    
    
    
    
    200,000Premium and costs to retire debt early
    
    
    (10,208
    )
    
    
    
    
    
    
    
    
    
    
    (10,208
    )Repayment of senior notes
    
    
    (200,000
    )
    
    
    
    
    
    
    
    
    
    
    (200,000
    )Debt issuance costs
    
    
    (4,629
    )
    
    
    
    
    
    
    
    
    
    
    (4,629
    )Proceeds from line of credit, net
    
    
    700
    
    
    
    
    
    
    
    
    
    
    
    700Proceeds from stock issuance, net
    
    
    160,815
    
    
    
    
    
    
    
    
    
    
    
    160,815Net cash provided by financing activities
    
    
    146,678
    
    
    
    
    
    
    
    
    
    
    
    146,678Increase in cash and cash equivalents
    
    
    147,990
    
    
    
    32
    
    
    
    
    
    
    
    148,022Cash and cash equivalents, beginning of
period
    
    
    69,102
    
    
    
    459
    
    
    
    
    
    
    
    69,561Cash and cash equivalents, end of period
    
    $
    217,092
    
    
    $
    491
    
    
    $
    
    
    
    $
    217,583
 For the six months ended June 30, 2005ParentCompany
    
    
    GuarantorOnly
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet cash provided by (used in) operating
activities
    
    $
    9,208
    
    
    $
    151
    
    
    $
    
    
    
    $
    9,359Cash flows from investing activities:Purchase of property and equipment
    
    
    (30,910
    )
    
    
    
    
    
    
    
    
    
    
    (30,910
    )Proceeds from asset dispositions
    
    
    6,052
    
    
    
    
    
    
    
    
    
    
    
    6,052Net cash used in investing activities
    
    
    (24,858
    )
    
    
    
    
    
    
    
    
    
    
    (24,858
    )Cash flows from financing activities:Payments on line of credit, net
    
    
    (10,275
    )
    
    
    
    
    
    
    
    
    
    
    (10,275
    )Proceeds from stock issuance, net
    
    
    114,317
    
    
    
    
    
    
    
    
    
    
    
    114,317Net cash provided by financing activities
    
    
    104,042
    
    
    
    
    
    
    
    
    
    
    
    104,042Increase in cash and cash equivalents
    
    
    88,392
    
    
    
    151
    
    
    
    
    
    
    
    88,543Cash and cash equivalents, beginning of
period
    
    
    17,718
    
    
    
    290
    
    
    
    
    
    
    
    18,008Cash and cash equivalents, end of period
    
    $
    106,110
    
    
    $
    441
    
    
    $
    
    
    
    $
    106,551
 16




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##### Table of Contents



Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Forward-Looking Statements
  Overview
    17




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18




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##### Table of Contents



Operating Statistics
  Quarter Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Flight hours:Domestic Oil and Gas
    
    
    29,151
    
    
    
    28,090
    
    
    
    55,243
    
    
    
    50,396Air Medical
    
    
    7,725
    
    
    
    6,944
    
    
    
    14,880
    
    
    
    11,573International
    
    
    3,047
    
    
    
    3,706
    
    
    
    7,244
    
    
    
    7,578Total
    
    
    39,923
    
    
    
    38,740
    
    
    
    77,367
    
    
    
    69,547Air Medical Transports(1)
    
    
    5,311
    
    
    
    4,323
    
    
    
    10,133
    
    
    
    7,469
 June 30,2006
    
    
    2005Aircraft operated at period end:Domestic Oil and Gas
    
    
    151
    
    
    
    158Air Medical
    
    
    67
    
    
    
    56International
    
    
    16
    
    
    
    16Total (2)
    
    
    234
    
    
    
    230
 
 (1)
    
    Represents individual patient transports for the period. Flight hours for these
transports are included above.(2)
    
    Includes 12 and 18 aircraft as of June 30, 2006 and 2005, respectively that are customer owned. Quarter Ended June 30, 2006 compared with Quarter Ended June 30, 2005
 Combined Operations
 Revenues
  Other Income and Gains
 19




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##### Table of Contents



Direct Expenses
  Selling, General, and Administrative Expenses
 Interest Expense
 Loss on Debt Restructuring
 Income Taxes
 Earnings
 20




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##### Table of Contents



Segment Discussion
 Domestic Oil and Gas
    Air Medical
  21




---



##### Table of Contents



International
   Technical Services
   Six Months Ended June 30, 2006 compared with Six Months Ended June 30, 2005
 Combined Operations
 Revenues 
 22




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##### Table of Contents



Other Income and Losses
  Direct Expenses
 Selling, General, and Administrative Expenses
 Interest Expense
 Loss on Debt Restructuring
 Income Taxes
 Earnings
 23




---



##### Table of Contents



Segment Discussion
 Domestic Oil and Gas
    Air Medical
   24




---



##### Table of Contents



International
    Technical Services
   Liquidity and Capital Resources
 General
   25




---



##### Table of Contents



Operating Activities
  Financing Activities
     26




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##### Table of Contents



Payment Due by YearBeyondTotal
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2010(Thousands of dollars)Aircraft purchase
commitments (1)
    
    $
    179,275
    
    
    $
    123,745
    
    
    $
    55,530
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Aircraft lease
obligations
    
    
    134,177
    
    
    
    6,532
    
    
    
    13,064
    
    
    
    13,064
    
    
    
    13,064
    
    
    
    13,666
    
    
    
    74,787Facility lease
obligations
    
    
    22,435
    
    
    
    3,134
    
    
    
    2,700
    
    
    
    2,246
    
    
    
    1,722
    
    
    
    1,442
    
    
    
    11,191Revolving credit
facility
    
    
    4,000
    
    
    
    
    
    
    
    4,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Senior notes (2)
    
    
    200,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    200,000$
    539,887
    
    
    $
    133,411
    
    
    $
    75,294
    
    
    $
    15,310
    
    
    $
    14,786
    
    
    $
    15,108
    
    
    $
    285,978
 
 (1)
    
    These commitments are for aircraft that we intend to fund with proceeds from the
equity offerings completed June 2005 and April 2006.(2)
    
    Amounts reflect new 7 1/8% Senior Notes issued subsequent to March 31, 2006, that
mature 2013. The 9 3/8% Senior Notes were retired April 12, 2006 ($184.8 million) and May
1, 2006 ($15.2 million). Environmental Matters
  27




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##### Table of Contents



New Accounting Pronouncements
  
 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 Item 4. CONTROLS AND PROCEDURES
   
 PART II  OTHER INFORMATION
 
 Item 1. LEGAL PROCEEDINGS
   28




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##### Table of Contents



Item 1. A. RISK FACTORS
  RISKS INHERENT IN OUR BUSINESS
 Our operations are affected by adverse weather conditions and seasonal factors.
  
    
    the tropical storm and hurricane season in the Gulf of Mexico;
    
    poor weather conditions that often prevail during winter and can
generally develop in any season; and
    
    reduced daylight hours during the winter months.
    We may not be able to obtain acceptable customer contracts covering some of our new helicopters and
some of our new helicopters may replace existing helicopters already under contract, which could
adversely affect the utilization of our existing fleet.
   29




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##### Table of Contents



Our contracts generally can be terminated or downsized by our customers without penalty.
  Increased governmental regulations could increase our costs or reduce our ability to operate
successfully.
      30




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##### Table of Contents



The helicopter services business is highly competitive, which could adversely impact our pricing
and demand for our services.
    The failure to maintain our safety record would seriously harm our ability to attract new customers
and maintain our existing customers.
  Helicopter operations involve risks that may not be covered by our insurance or may increase the
cost of our insurance.
    31




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##### Table of Contents



Our air medical operations expose us to numerous special risks, including collection risks, high
start-up costs and potential medical malpractice claims.
   Our dependence on a small number of helicopter manufacturers poses a significant risk to our
business and prospects.
  Our international operations are subject to political, economic and regulatory uncertainty.
  
    
    political, social and economic instability;
    
    terrorism, kidnapping and extortion;
    
    potential seizure or nationalization of assets;
    
    import-export quotas; and
    
    currency fluctuations or devaluation.
  
    
    the awarding of contracts to local contractors;
    
    the employment of local citizens; and
    
    the establishment of foreign subsidiaries with significant ownership
positions reserved by the foreign government for local ownership.
 32




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##### Table of Contents



Our failure to attract and retain qualified personnel could adversely affect us.
  RISKS SPECIFIC TO OUR COMPANY
 We are highly dependent on the offshore oil and gas industry.
   
    
    the supply of, and demand for, oil and natural gas and market
expectations regarding supply and demand;
    
    actions of OPEC, and Middle Eastern and other oil producing
countries, to control prices or change production levels;
    
    general economic conditions in the United States and worldwide;
    
    war, civil unrest or terrorist activities;
    
    governmental regulation; and
    
    the price and availability of alternative fuels.
    33




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##### Table of Contents



We currently are negotiating a new collective bargaining agreement covering our pilots.
   We depend on a small number of large oil and gas industry customers for a significant portion of
our revenues, and our credit exposure within this industry is significant.
  Our Chairman of the Board and Chief Executive Officer is also our principal stockholder and has
voting control of the Company.
  Our substantial indebtedness could adversely affect our financial condition and impair our ability
to operate our business.
   34




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##### Table of Contents




    
    require us to dedicate a substantial portion of our cash flow from operations to pay principal of, and interest on, our
indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures or other
general corporate purposes, or to carry out other aspects of our business plan;
    
    increase our vulnerability to general adverse economic and industry conditions and limit our ability to withstand
competitive pressures;
    
    limit our flexibility in planning for, or reacting to, changes in our business and future business opportunities;
    
    place us at a competitive disadvantage compared to our competitors that have less debt; and
    
    limit our ability to obtain additional financing to fund future working capital, capital expenditures and other aspects
of our business plan.
  Our stock has a low trading volume.
  We do not pay dividends.
  Provisions in our articles of incorporation and bylaws and Louisiana law make it more difficult to
effect a change in control of us, which could discourage a takeover of our company and adversely
affect the price of our common stock.
  35




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##### Table of Contents



Future sales of our shares could depress the market price of our non-voting common stock.
  The DOJ investigation could result in criminal proceedings and the imposition of fines and
penalties.
   
 Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 Item 3. DEFAULTS UPON SENIOR SECURITIES
  
 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  36




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##### Table of Contents



Number of Votes CastBrokerName of Director
    
    For
    
    
    Withhold
    
    
    Non-VoteAl A. Gonsoulin
    
    
    1,482,266
    
    
    
    0
    
    
    
    0Lance F. Bospflug
    
    
    1,482,266
    
    
    
    0
    
    
    
    0Arthur J. Breault, Jr.
    
    
    1,482,266
    
    
    
    0
    
    
    
    0C. Russell Luigs
    
    
    1,482,266
    
    
    
    0
    
    
    
    0Richard H. Matzke
    
    
    1,482,266
    
    
    
    0
    
    
    
    0Thomas H. Murphy
    
    
    1,482,266
    
    
    
    0
    
    
    
    0
 
 Item 5. OTHER INFORMATION
 Related Party Transaction
  
 Item 6. EXHIBITS AND REPORTS ON FORM 8-K
  3.1   (i)
    
    Amended and Restated Articles of Incorporation of the Company.
 (ii)
    
    Amended and Restated 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 March
31, 2002).
 4.1
    
    First Supplemental Indenture dated April 12, 2006, among PHI, Inc., the Subsidiary
Guarantors named therein and The Bank of New York, as Trustee (incorporated by reference to
Exhibit 10.1 to PHIs Report on Form 8-K filed on April 13, 2006).4.2
    
    Indenture dated April 12, 2006 among PHI, Inc., the Subsidiary Guarantors named therein
and The Bank of New York, as Trustee (incorporated by reference to Exhibit 10.2 to PHIs
Report on Form 8-K filed on April 13, 2006).4.3
    
    Registration Rights Agreement dated April 12, 2006 (incorporated by reference to
Exhibit 10.3 to PHIs Report on Form 8-K filed on April 13, 2006).4.4
    
    Third Amendment to Loan Agreement dated April 12, 2006 by and among PHI, Inc., Air Evac
Services, Inc., PHI Tech Services, Inc. (formerly Evangeline Airmotive, Inc.), and
International Helicopter Transport, Inc. and Whitney National Bank (incorporated by
reference to Exhibit 10.4 to PHIs Report on Form 8-K filed on April 13, 2006).
 37




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##### Table of Contents



31.1
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Al A.
Gonsoulin, Chairman and Chief Executive Officer.31.2
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Michael J.
McCann, Chief Financial Officer.32.1
    
    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Al A.
Gonsoulin, Chairman and Chief Executive Officer.32.2
    
    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Michael J.
McCann, Chief Financial Officer.
 
 SIGNATURES
  PHI, Inc.August 9, 2006
    By:
    /s/ Al A. GonsoulinAl A. GonsoulinChairman and Chief Executive OfficerAugust 9, 2006
    By:
    /s/ Michael J. McCannMichael J. McCannChief Financial Officer and Treasurer 38




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##### Table of Contents



Exhibit Index
 Exhibits
    
    Description of Exhibit3.1  (i)
    
    Amended and Restated Articles of Incorporation of the Company.(ii)
    
    Amended and Restated 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 March
31, 2002).4.1
    
    First Supplemental Indenture dated April 12, 2006, among PHI, Inc., the Subsidiary
Guarantors named therein and The Bank of New York, as Trustee (incorporated by reference to
Exhibit 10.1 to PHIs Report on Form 8-K filed on April 13, 2006).4.2
    
    Indenture dated April 12, 2006 among PHI, Inc., the Subsidiary Guarantors named therein
and The Bank of New York, as Trustee (incorporated by reference to Exhibit 10.2 to PHIs
Report on Form 8-K filed on April 13, 2006).4.3
    
    Registration Rights Agreement dated April 12, 2006 (incorporated by reference to
Exhibit 10.3 to PHIs Report on Form 8-K filed on April 13, 2006).4.4
    
    Third Amendment to Loan Agreement dated April 12, 2006 by and among PHI, Inc., Air Evac
Services, Inc., PHI Tech Services, Inc. (formerly Evangeline Airmotive, Inc.), and
International Helicopter Transport, Inc. and Whitney National Bank (incorporated by
reference to Exhibit 10.4 to PHIs Report on Form 8-K filed on April 13, 2006).






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##### Table of Contents



Exhibits
    
    Description of Exhibit31.1
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Al A.
Gonsoulin, Chairman and Chief Executive Officer.31.2
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Michael J.
McCann, Chief Financial Officer.32.1
    
    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Al A.
Gonsoulin, Chairman and Chief Executive Officer.32.2
    
    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Michael J.
McCann, Chief Financial Officer.