##### 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: September 30, 2006
 or
 o
    
    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
 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
  o þ o
 o þ
   Class
    
    Outstanding at November 3, 2006Voting Common Stock 
Non-Voting Common Stock
    
    2,852,616 shares
12,422,992 shares




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##### Table of Contents



PHI, INC.
 Index  Form 10-Q
 Part I  Financial InformationItem 1.
    
    Financial Statements  UnauditedCondensed Consolidated Balance Sheets  September 30, 2006
and December 31, 2005
    
    
    3Condensed Consolidated Statements of Operations  Quarter
and Nine Months Ended September 30, 2006 and 2005
    
    
    4Condensed Consolidated Statements of Cash Flows  Quarter
and Nine Months Ended September 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
    
    
    38Certification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CFO Pursuant to Section 906Certification of CFO 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)
 September 30,
    
    
    December 31,2006
    
    
    2005ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    164,601
    
    
    $
    69,561Accounts receivable  net of allowance:Trade
    
    
    96,931
    
    
    
    89,351Other
    
    
    4,695
    
    
    
    6,766Inventory, net
    
    
    54,814
    
    
    
    48,123Assets held for sale
    
    
    2,384
    
    
    
    Other current assets
    
    
    11,289
    
    
    
    10,042Refundable income taxes
    
    
    138
    
    
    
    422Total current assets
    
    
    334,852
    
    
    
    224,265Property and equipment, net
    
    
    337,934
    
    
    
    311,678Other
    
    
    47,180
    
    
    
    13,266Total Assets
    
    $
    719,966
    
    
    $
    549,209LIABILITIES AND SHAREHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    36,971
    
    
    $
    40,506Accrued liabilities
    
    
    8,828
    
    
    
    10,807Accrued vacation payable
    
    
    3,498
    
    
    
    3,811Accrued interest payable
    
    
    6,774
    
    
    
    3,175Accrued wages and salaries
    
    
    5,647
    
    
    
    2,439Notes payable
    
    
    
    
    
    
    1,000Total current liabilities
    
    
    61,718
    
    
    
    61,738Long-term debt
    
    
    203,500
    
    
    
    203,300Deferred income taxes
    
    
    41,006
    
    
    
    38,906Other long-term liabilities
    
    
    9,377
    
    
    
    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
    
    
    289,766
    
    
    
    129,531Retained earnings
    
    
    113,085
    
    
    
    108,493Total shareholders equity
    
    
    404,365
    
    
    
    239,051Total liabilities and shareholders equity
    
    $
    719,966
    
    
    $
    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
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Operating revenues
    
    $
    109,315
    
    
    $
    100,018
    
    
    $
    317,844
    
    
    $
    261,040Gain (loss) on disposition of
property and equipment, net
    
    
    621
    
    
    
    26
    
    
    
    (541
    )
    
    
    486Other
    
    
    2,659
    
    
    
    861
    
    
    
    6,076
    
    
    
    1,155112,595
    
    
    
    100,905
    
    
    
    323,379
    
    
    
    262,681Expenses:Direct expenses
    
    
    93,224
    
    
    
    80,184
    
    
    
    269,492
    
    
    
    217,115Selling, general and
administrative expenses
    
    
    6,795
    
    
    
    6,561
    
    
    
    20,203
    
    
    
    17,263Interest expense
    
    
    4,039
    
    
    
    5,061
    
    
    
    13,241
    
    
    
    15,337Loss on debt restructuring
    
    
    
    
    
    
    
    
    
    
    12,790
    
    
    
    104,058
    
    
    
    91,806
    
    
    
    315,726
    
    
    
    249,715Earnings before income taxes
    
    
    8,537
    
    
    
    9,099
    
    
    
    7,653
    
    
    
    12,966Income taxes
    
    
    3,415
    
    
    
    3,639
    
    
    
    3,061
    
    
    
    5,186Net earnings
    
    $
    5,122
    
    
    $
    5,460
    
    
    $
    4,592
    
    
    $
    7,780Weighted average shares
outstanding:Basic
    
    
    15,288
    
    
    
    10,271
    
    
    
    13,447
    
    
    
    7,288Diluted
    
    
    15,306
    
    
    
    10,295
    
    
    
    13,463
    
    
    
    7,314Net earnings per shareBasic
    
    $
    0.34
    
    
    $
    0.53
    
    
    $
    0.34
    
    
    $
    1.07Diluted
    
    $
    0.33
    
    
    $
    0.53
    
    
    $
    0.34
    
    
    $
    1.06
  4




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PHI, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Thousands of dollars)
 (Unaudited)
 Nine Months EndedSeptember 30,2006
    
    
    2005Cash flows from operating activities:Net earnings
    
    $
    4,592
    
    
    $
    7,780Adjustments to reconcile net earnings to net cash
provided by operating activities:Depreciation
    
    
    22,389
    
    
    
    19,923Deferred income taxes
    
    
    2,100
    
    
    
    3,806(Gain) loss on disposition of property &
equipment, net
    
    
    541
    
    
    
    (486
    )Loss on debt restructuring
    
    
    12,790
    
    
    
    Other
    
    
    594
    
    
    
    983Changes in operating assets and liabilities
    
    
    (20,226
    )
    
    
    (15,187
    )Net cash provided by operating activities
    
    
    22,780
    
    
    
    16,819Cash flows from investing activities:Purchase of property and equipment
    
    
    (81,622
    )
    
    
    (59,636
    )Deposit on aircraft
    
    
    (23,000
    )
    
    
    Proceeds from asset dispositions
    
    
    5,728
    
    
    
    6,147Proceeds from sale-leaseback transaction
    
    
    25,069
    
    
    
    Net cash used in investing activities
    
    
    (73,825
    )
    
    
    (53,489
    )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
    
    
    200
    
    
    
    (4,775
    )Proceeds from stock issuance, net
    
    
    160,722
    
    
    
    113,909Proceeds from exercise of stock options
    
    
    
    
    
    
    1,081Net cash provided by financing activities
    
    
    146,085
    
    
    
    110,215Increase in cash and cash equivalents
    
    
    95,040
    
    
    
    73,545Cash and cash equivalents, beginning of period
    
    
    69,561
    
    
    
    18,008Cash and cash equivalents, end of period
    
    $
    164,601
    
    
    $
    91,553Supplemental Disclosures Cash Flow InformationInterest paid
    
    $
    9,021
    
    
    $
    9,887Taxes paid, net
    
    $
    68
    
    
    $
    296
  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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##### Table of Contents



Quarter Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(Thousands of dollars)
    
    
    (Thousands of dollars)Segment operating revenuesDomestic Oil and Gas
    
    $
    66,240
    
    
    $
    58,952
    
    
    $
    194,111
    
    
    $
    155,392Air Medical
    
    
    35,735
    
    
    
    33,905
    
    
    
    100,042
    
    
    
    82,989International
    
    
    5,438
    
    
    
    6,766
    
    
    
    18,660
    
    
    
    19,565Technical Services
    
    
    1,902
    
    
    
    395
    
    
    
    5,031
    
    
    
    3,094Total operating revenues
    
    
    109,315
    
    
    
    100,018
    
    
    
    317,844
    
    
    
    261,040Segment direct expenses (1)Domestic Oil and Gas
    
    
    55,407
    
    
    
    46,773
    
    
    
    158,306
    
    
    
    126,116Air Medical
    
    
    32,560
    
    
    
    28,701
    
    
    
    94,938
    
    
    
    75,799International
    
    
    4,137
    
    
    
    4,358
    
    
    
    12,749
    
    
    
    12,824Technical Services
    
    
    1,120
    
    
    
    352
    
    
    
    3,499
    
    
    
    2,376Total direct expenses
    
    
    93,224
    
    
    
    80,184
    
    
    
    269,492
    
    
    
    217,115Segment selling, general and administrative expensesDomestic Oil and Gas
    
    
    282
    
    
    
    256
    
    
    
    822
    
    
    
    704Air Medical
    
    
    1,758
    
    
    
    1,741
    
    
    
    5,403
    
    
    
    4,645International
    
    
    20
    
    
    
    118
    
    
    
    81
    
    
    
    182Technical Services
    
    
    13
    
    
    
    1
    
    
    
    71
    
    
    
    5Total selling, general and administrative expenses
    
    
    2,073
    
    
    
    2,116
    
    
    
    6,377
    
    
    
    5,536Total direct and selling, general and administrative
expenses
    
    
    95,297
    
    
    
    82,300
    
    
    
    275,869
    
    
    
    222,651Net segment profitDomestic Oil and Gas
    
    
    10,551
    
    
    
    11,923
    
    
    
    34,983
    
    
    
    28,572Air Medical
    
    
    1,417
    
    
    
    3,463
    
    
    
    (299
    )
    
    
    2,545International
    
    
    1,281
    
    
    
    2,290
    
    
    
    5,830
    
    
    
    6,559Technical Services
    
    
    769
    
    
    
    42
    
    
    
    1,461
    
    
    
    713Total
    
    
    14,018
    
    
    
    17,718
    
    
    
    41,975
    
    
    
    38,389Other, net (2)
    
    
    3,280
    
    
    
    887
    
    
    
    5,535
    
    
    
    1,641Unallocated selling, general and administrative costs
    
    
    (4,722
    )
    
    
    (4,445
    )
    
    
    (13,826
    )
    
    
    (11,727
    )Interest expense
    
    
    (4,039
    )
    
    
    (5,061
    )
    
    
    (13,241
    )
    
    
    (15,337
    )Loss on debt restructuring
    
    
    
    
    
    
    
    
    
    
    (12,790
    )
    
    
    Earnings before income taxes
    
    $
    8,537
    
    
    $
    9,099
    
    
    $
    7,653
    
    
    $
    12,966
 
 (1)
    
    Included in direct expense are the depreciation expense amounts below: Quarter Ended
    
    
    Nine Months EndedSeptember 30
    
    
    September 302006
    
    
    2005
    
    
    2006
    
    
    2005Domestic Oil and Gas
    
    $
    4,199
    
    
    $
    4,002
    
    
    $
    11,832
    
    
    $
    12,035Air Medical
    
    
    2,343
    
    
    
    1,711
    
    
    
    6,627
    
    
    
    4,631International
    
    
    323
    
    
    
    233
    
    
    
    1,092
    
    
    
    886Technical Services
    
    
    24
    
    
    
    1
    
    
    
    38
    
    
    
    8Total
    
    $
    6,889
    
    
    $
    5,947
    
    
    $
    19,589
    
    
    $
    17,560Unallocated SG&A
    
    $
    1,047
    
    
    $
    776
    
    
    $
    2,800
    
    
    $
    2,363
 
 (2)
    
    Including gains (losses) on disposition of property and equipment, and other income. 7




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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 
  9




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Employee Incentive Compensation 
 6. Recent Accounting Pronouncements
     10




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7. Condensed Consolidating Financial Information
      11




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PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
(Thousands of dollars)
(Unaudited)
 September 30, 2006ParentCompany
    
    
    GuarantorOnly
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedASSETSCurrent Assets:Cash and cash equivalents
    
    $
    164,128
    
    
    $
    473
    
    
    $
    
    
    
    $
    164,601Accounts receivable  net of allowance
    
    
    87,118
    
    
    
    14,508
    
    
    
    
    
    
    
    101,626Inventory
    
    
    54,814
    
    
    
    
    
    
    
    
    
    
    
    54,814Assets held for sale
    
    
    2,384
    
    
    
    
    
    
    
    
    
    
    
    2,384Other current assets
    
    
    11,264
    
    
    
    25
    
    
    
    
    
    
    
    11,289Refundable income taxes
    
    
    44
    
    
    
    94
    
    
    
    
    
    
    
    138Total current assets
    
    
    319,752
    
    
    
    15,100
    
    
    
    
    
    
    
    334,852Intercompany receivable
    
    
    
    
    
    
    41,739
    
    
    
    (41,739
    )
    
    
    Other assets
    
    
    47,172
    
    
    
    8
    
    
    
    
    
    
    
    47,180Investment in subsidiaries and other
    
    
    44,395
    
    
    
    
    
    
    
    (44,395
    )
    
    
    Property and equipment, net
    
    
    329,945
    
    
    
    7,989
    
    
    
    
    
    
    
    337,934Total Assets
    
    $
    741,264
    
    
    $
    64,836
    
    
    $
    (86,134
    )
    
    $
    719,966LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable and accrued liabilities
    
    $
    54,146
    
    
    $
    4,074
    
    
    $
    
    
    
    $
    58,220Intercompany payable
    
    
    41,739
    
    
    
    
    
    
    
    (41,739
    )
    
    
    Accrued vacation payable
    
    
    3,209
    
    
    
    289
    
    
    
    
    
    
    
    3,498Total current liabilities
    
    
    99,094
    
    
    
    4,363
    
    
    
    (41,739
    )
    
    
    61,718Long-term debt
    
    
    203,500
    
    
    
    
    
    
    
    
    
    
    
    203,500Deferred income taxes and other long-term
liabilities
    
    
    34,305
    
    
    
    16,078
    
    
    
    
    
    
    
    50,383Shareholders Equity:Paid-in capital
    
    
    291,280
    
    
    
    4,402
    
    
    
    (4,402
    )
    
    
    291,280Retained earnings
    
    
    113,085
    
    
    
    39,993
    
    
    
    (39,993
    )
    
    
    113,085Total shareholders equity
    
    
    404,365
    
    
    
    44,395
    
    
    
    (44,395
    )
    
    
    404,365Total Liabilities and
Shareholders Equity
    
    $
    741,264
    
    
    $
    64,836
    
    
    $
    (86,134
    )
    
    $
    719,966
 12




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PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
(Thousands of dollars)
(Unaudited)
 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
 13




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PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(Thousands of dollars)
(Unaudited)
 For the quarter ended September 30, 2006ParentCompany
    
    
    GuarantorOnly
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedOperating revenues
    
    $
    94,968
    
    
    $
    14,347
    
    
    $
    
    
    
    $
    109,315Management fees
    
    
    574
    
    
    
    
    
    
    
    (574
    )
    
    
    Gain on dispositions of property and
equipment, net
    
    
    621
    
    
    
    
    
    
    
    
    
    
    
    621Other
    
    
    2,651
    
    
    
    8
    
    
    
    
    
    
    
    2,65998,814
    
    
    
    14,355
    
    
    
    (574
    )
    
    
    112,595Expenses:Direct expenses
    
    
    82,158
    
    
    
    11,066
    
    
    
    
    
    
    
    93,224Management fees
    
    
    
    
    
    
    574
    
    
    
    (574
    )
    
    
    Selling, general, and administrative
    
    
    6,042
    
    
    
    753
    
    
    
    
    
    
    
    6,795Equity in net income of consolidated
subsidiaries
    
    
    (1,564
    )
    
    
    
    
    
    
    1,564
    
    
    
    Interest expense
    
    
    4,039
    
    
    
    
    
    
    
    
    
    
    
    4,03990,675
    
    
    
    12,393
    
    
    
    990
    
    
    
    104,058Earnings before income taxes
    
    
    8,139
    
    
    
    1,962
    
    
    
    (1,564
    )
    
    
    8,537Income taxes
    
    
    3,017
    
    
    
    398
    
    
    
    
    
    
    
    3,415Net earnings
    
    $
    5,122
    
    
    $
    1,564
    
    
    $
    (1,564
    )
    
    $
    5,122
 For the quarter ended September 30, 2005ParentCompany
    
    
    GuarantorOnly
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedOperating revenues
    
    $
    86,863
    
    
    $
    13,155
    
    
    $
    
    
    
    $
    100,018Management fees
    
    
    476
    
    
    
    
    
    
    
    (476
    )
    
    
    Gain on dispositions of property and
equipment, net
    
    
    26
    
    
    
    
    
    
    
    
    
    
    
    26Other
    
    
    861
    
    
    
    
    
    
    
    
    
    
    
    86188,226
    
    
    
    13,155
    
    
    
    (476
    )
    
    
    100,905Expenses:Direct expenses
    
    
    71,028
    
    
    
    9,156
    
    
    
    
    
    
    
    80,184Management fees
    
    
    
    
    
    
    476
    
    
    
    (476
    )
    
    
    Selling, general, and administrative
    
    
    5,881
    
    
    
    680
    
    
    
    
    
    
    
    6,561Equity in net income of consolidated
subsidiaries
    
    
    (1,913
    )
    
    
    
    
    
    
    1,913
    
    
    
    Interest expense
    
    
    5,061
    
    
    
    
    
    
    
    
    
    
    
    5,06180,057
    
    
    
    10,312
    
    
    
    1,437
    
    
    
    91,806Earnings before income taxes
    
    
    8,169
    
    
    
    2,843
    
    
    
    (1,913
    )
    
    
    9,099Income taxes
    
    
    2,709
    
    
    
    930
    
    
    
    
    
    
    
    3,639Net earnings
    
    $
    5,460
    
    
    $
    1,913
    
    
    $
    (1,913
    )
    
    $
    5,460
 14




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##### Table of Contents



PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(Thousands of dollars)
(Unaudited)
 For the nine months ended September 30, 2006ParentCompany
    
    
    GuarantorOnly
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedOperating revenues
    
    $
    276,355
    
    
    $
    41,489
    
    
    $
    
    
    
    $
    317,844Management fees
    
    
    1,660
    
    
    
    
    
    
    
    (1,660
    )
    
    
    Loss on dispositions of property and
equipment, net
    
    
    (541
    )
    
    
    
    
    
    
    
    
    
    
    (541
    )Other
    
    
    6,061
    
    
    
    15
    
    
    
    
    
    
    
    6,076283,535
    
    
    
    41,504
    
    
    
    (1,660
    )
    
    
    323,379Expenses:Direct expenses
    
    
    239,786
    
    
    
    29,706
    
    
    
    
    
    
    
    269,492Management fees
    
    
    
    
    
    
    1,660
    
    
    
    (1,660
    )
    
    
    Selling, general, and administrative
    
    
    18,083
    
    
    
    2,120
    
    
    
    
    
    
    
    20,203Equity in net income of consolidated
subsidiaries
    
    
    (5,755
    )
    
    
    
    
    
    
    5,755
    
    
    
    Interest expense
    
    
    13,241
    
    
    
    
    
    
    
    
    
    
    
    13,241Loss on debt restructuring
    
    
    12,790
    
    
    
    
    
    
    
    
    
    
    
    12,790278,145
    
    
    
    33,486
    
    
    
    4,095
    
    
    
    315,726Earnings before income taxes
    
    
    5,390
    
    
    
    8,018
    
    
    
    (5,755
    )
    
    
    7,653Income taxes
    
    
    798
    
    
    
    2,263
    
    
    
    
    
    
    
    3,061Net earnings
    
    $
    4,592
    
    
    $
    5,755
    
    
    $
    (5,755
    )
    
    $
    4,592For the nine months ended September 30, 2005ParentCompany
    
    
    GuarantorOnly
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedOperating revenues
    
    $
    222,288
    
    
    $
    38,752
    
    
    $
    
    
    
    $
    261,040Management fees
    
    
    1,629
    
    
    
    
    
    
    
    (1,629
    )
    
    
    Gain on dispositions of property and
equipment, net
    
    
    486
    
    
    
    
    
    
    
    
    
    
    
    486Other
    
    
    1,155
    
    
    
    
    
    
    
    
    
    
    
    1,155225,558
    
    
    
    38,752
    
    
    
    (1,629
    )
    
    
    262,681Expenses:Direct expenses
    
    
    192,081
    
    
    
    25,034
    
    
    
    
    
    
    
    217,115Management fees
    
    
    
    
    
    
    1,629
    
    
    
    (1,629
    )
    
    
    Selling, general, and administrative
    
    
    15,280
    
    
    
    1,983
    
    
    
    
    
    
    
    17,263Equity in net income of consolidated
subsidiaries
    
    
    (6,843
    )
    
    
    
    
    
    
    6,843
    
    
    
    Interest expense
    
    
    15,337
    
    
    
    
    
    
    
    
    
    
    
    15,337215,855
    
    
    
    28,646
    
    
    
    5,214
    
    
    
    249,715Earnings before income taxes
    
    
    9,703
    
    
    
    10,106
    
    
    
    (6,843
    )
    
    
    12,966Income taxes
    
    
    1,923
    
    
    
    3,263
    
    
    
    
    
    
    
    5,186Net earnings
    
    $
    7,780
    
    
    $
    6,843
    
    
    $
    (6,843
    )
    
    $
    7,780
 15




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##### Table of Contents



PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(Thousands of dollars)
(Unaudited)
 For the nine months ended September 30, 2006ParentCompany
    
    
    GuarantorOnly
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet cash provided by operating activities
    
    $
    22,572
    
    
    $
    208
    
    
    $
    
    
    
    $
    22,780Cash flows from investing activities:Purchase of property and equipment
    
    
    (81,428
    )
    
    
    (194
    )
    
    
    
    
    
    
    (81,622
    )Deposit on aircraft
    
    
    (23,000
    )
    
    
    
    
    
    
    
    
    
    
    (23,000
    )Proceeds from asset dispositions
    
    
    5,728
    
    
    
    
    
    
    
    
    
    
    
    5,728Proceeds from sale-leaseback transactions
    
    
    25,069
    
    
    
    
    
    
    
    
    
    
    
    25,069Net cash used in investing activities
    
    
    (73,631
    )
    
    
    (194
    )
    
    
    
    
    
    
    (73,825
    )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
    
    
    200
    
    
    
    
    
    
    
    
    
    
    
    200Proceeds from stock issuance, net
    
    
    160,722
    
    
    
    
    
    
    
    
    
    
    
    160,722Net cash provided by financing activities
    
    
    146,085
    
    
    
    
    
    
    
    
    
    
    
    146,085Increase in cash and cash equivalents
    
    
    95,026
    
    
    
    14
    
    
    
    
    
    
    
    95,040Cash and cash equivalents, beginning of
period
    
    
    69,102
    
    
    
    459
    
    
    
    
    
    
    
    69,561Cash and cash equivalents, end of period
    
    $
    164,128
    
    
    $
    473
    
    
    $
    
    
    
    $
    164,601
 For the nine months ended September 30, 2005ParentCompany
    
    
    GuarantorOnly
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet cash provided by operating activities
    
    $
    16,673
    
    
    $
    146
    
    
    $
    
    
    
    $
    16,819Cash flows from investing activities:Purchase of property and equipment
    
    
    (59,636
    )
    
    
    
    
    
    
    
    
    
    
    (59,636
    )Proceeds from asset dispositions
    
    
    6,147
    
    
    
    
    
    
    
    
    
    
    
    6,147Net cash used in investing activities
    
    
    (53,489
    )
    
    
    
    
    
    
    
    
    
    
    (53,489
    )Cash flows from financing activities:Payments on line of credit, net
    
    
    (4,775
    )
    
    
    
    
    
    
    
    
    
    
    (4,775
    )Proceeds from stock issuance, net
    
    
    113,909
    
    
    
    
    
    
    
    
    
    
    
    113,909Proceeds from exercise of stock options
    
    
    1,081
    
    
    
    
    
    
    
    
    
    
    
    1,081Net cash provided by financing activities
    
    
    110,215
    
    
    
    
    
    
    
    
    
    
    
    110,215Increase in cash and cash equivalents
    
    
    73,399
    
    
    
    146
    
    
    
    
    
    
    
    73,545Cash and cash equivalents, beginning of
period
    
    
    17,701
    
    
    
    307
    
    
    
    
    
    
    
    18,008Cash and cash equivalents, end of period
    
    $
    91,100
    
    
    $
    453
    
    
    $
    
    
    
    $
    91,553
 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
    
    Nine Months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Flight hours:Domestic Oil and Gas
    
    
    28,678
    
    
    
    29,896
    
    
    
    83,921
    
    
    
    80,292Air Medical
    
    
    7,986
    
    
    
    7,811
    
    
    
    22,866
    
    
    
    19,384International
    
    
    2,870
    
    
    
    3,989
    
    
    
    10,114
    
    
    
    11,567Total
    
    
    39,534
    
    
    
    41,696
    
    
    
    116,901
    
    
    
    111,243Air Medical Transports(1)
    
    
    5,661
    
    
    
    5,018
    
    
    
    15,794
    
    
    
    12,489
 September 30,2006
    
    2005Aircraft operated at period end:Domestic Oil and Gas
    
    
    150
    
    
    
    158Air Medical
    
    
    69
    
    
    
    60International
    
    
    16
    
    
    
    16Total (2)
    
    
    235
    
    
    
    234
 
 (1)
    
    Represents individual patient transports for the period. Flight hours for these
transports are included above.(2)
    
    Includes 12 aircraft as of September 30, 2006 and 2005, respectively that are customer owned. Quarter Ended September 30, 2006 compared with Quarter Ended September 30, 2005
 Combined Operations
 Revenues
  19




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##### Table of Contents



Other Income and Gains
  Direct Expenses
  Selling, General, and Administrative Expenses
 Interest Expense
 Income Taxes
 Earnings
 Segment Discussion
 Domestic Oil and Gas
 20




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##### Table of Contents



Air Medical
    21




---



##### Table of Contents



International
   Technical Services
   Nine
Months Ended September 30, 2006 compared with Nine Months Ended September 30, 2005
 Combined Operations
 Revenues 
  22




---



##### 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)
    
    $
    248,570
    
    
    $
    92,119
    
    
    $
    139,222
    
    
    $
    17,229
    
    
    $
    
    
    
    $
    
    
    
    $
    Aircraft lease
obligations
    
    
    130,911
    
    
    
    3,266
    
    
    
    13,064
    
    
    
    13,064
    
    
    
    13,064
    
    
    
    13,666
    
    
    
    74,787Facility lease
obligations
    
    
    20,783
    
    
    
    818
    
    
    
    2,963
    
    
    
    2,433
    
    
    
    1,816
    
    
    
    1,529
    
    
    
    11,224Revolving credit
facility
    
    
    3,500
    
    
    
    
    
    
    
    
    
    
    
    3,500
    
    
    
    
    
    
    
    
    
    
    
    Senior notes (2)
    
    
    200,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    200,000$
    603,764
    
    
    $
    96,203
    
    
    $
    155,249
    
    
    $
    36,226
    
    
    $
    14,880
    
    
    $
    15,195
    
    
    $
    286,011
 
 (1)
    
    These commitments are for aircraft that we intend to fund with proceeds from the
equity offerings completed June 2005 and April 2006, with the exception of $72.5 million
related to transport category aircraft that will be funded with an operating lease.(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.
  Ø
    
    the tropical storm and hurricane season in the Gulf of Mexico;Ø
    
    poor weather conditions that often prevail during winter and can generally develop in any season; andØ
    
    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.
      The helicopter services business is highly competitive, which could adversely impact our pricing
and demand for our services.
  30




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##### Table of Contents



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.
    Our air medical operations expose us to numerous special risks, including collection risks, high
start-up costs and potential medical malpractice claims.
  31




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##### Table of Contents



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.
  Ø
    
    political, social and economic instability;Ø
    
    terrorism, kidnapping and extortion;Ø
    
    potential seizure or nationalization of assets;Ø
    
    import-export quotas; andØ
    
    currency fluctuations or devaluation.
  Ø
    
    the awarding of contracts to local contractors;Ø
    
    the employment of local citizens; andØ
    
    the establishment of foreign subsidiaries with
significant ownership positions reserved by the foreign
government for local ownership.
 Our failure to attract and retain qualified personnel could adversely affect us.
  32




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##### Table of Contents



RISKS SPECIFIC TO OUR COMPANY
 Approximately 176 of our pilots are currently conducting a general strike.
   We are highly dependent on the offshore oil and gas industry.
   Ø
    
    the supply of, and demand for, oil and natural gas and market expectations regarding supply and demand;Ø
    
    actions of OPEC, and Middle Eastern and other oil producing countries, to control prices or change production
levels;Ø
    
    general economic conditions in the United States and worldwide;Ø
    
    war, civil unrest or terrorist activities;Ø
    
    governmental regulation; andØ
    
    the price and availability of alternative fuels.
   33




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##### Table of Contents



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



Ø
    
    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;Ø
    
    increase our vulnerability to general adverse economic and industry conditions and limit our ability to
withstand competitive pressures;Ø
    
    limit our flexibility in planning for, or reacting to, changes in our business and future business
opportunities;Ø
    
    place us at a competitive disadvantage compared to our competitors that have less debt; andØ
    
    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



Item 5. OTHER INFORMATION
  
 Item 6. EXHIBITS AND REPORTS ON FORM 8-K
  3.1
    (i)
    Amended and Restated 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
June 30, 2006).(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).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.
 37




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##### Table of Contents



SIGNATURES
  PHI, Inc.November 9, 2006
    
    By:
    
    /s/ Al A. Gonsoulin

Al A. GonsoulinChairman and Chief Executive OfficerNovember 9, 2006
    
    By:
    
    /s/ Michael J. McCann

Michael J. McCannChief Financial Officer and Treasurer
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##### Table of Contents



EXHIBIT INDEX
 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.