SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________
FORM 10-Q
(Mark One)
__X__ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
_____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to ____________________
Commission file number 0-16079
AIR METHODS CORPORATION
------------------------------------------------------
(Exact name of Registrant as Specified in Its Charter)
Delaware 84-0915893
- ------------------------------- ------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
7301 South Peoria, Englewood, Colorado 80112
- ---------------------------------------- -----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (303) 792-7400
Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report: N/A
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. Yes X No
The number of shares of Common Stock, par value $.06, outstanding as
of October 30, 1998, was 8,276,843.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - September 30, 1998
and December 31, 1997 1
Consolidated Statements of Operations for the three and
nine months ended September 30, 1998 and 1997 3
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1998 and 1997 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 11
Item 3. Defaults upon Senior Securities 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
PART I: FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Air Methods Corporation and Subsidiary
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share amounts)
September 30, December 31,
1998 1997
------------------------------
Assets (unaudited)
- --------
Current assets:
Cash and cash equivalents $ 2,732 3,396
Current installments of notes receivable 64 58
Receivables, net:
Trade 7,140 6,766
Less allowance for doubtful accounts (1,145) (2,528)
----------- -----------
5,995 4,238
International franchise fee 85 145
Insurance 209 --
Other 181 681
----------- -----------
6,470 5,064
----------- -----------
Inventories 2,221 2,082
Work-in-process on medical interiors and product contracts 271 212
Costs and estimated earnings in excess of billings on
uncompleted contracts 236 1,120
Prepaid expenses and other 1,132 620
----------- -----------
Total current assets 13,126 12,552
----------- -----------
Equipment and leasehold improvements:
Flight and ground support equipment 57,822 54,540
Furniture and office equipment 2,465 2,287
----------- -----------
60,287 56,827
Less accumulated depreciation and amortization (15,713) (13,143)
----------- -----------
Net equipment and leasehold improvements 44,574 43,684
----------- -----------
Excess of cost over the fair value of net assets acquired,
net of accumulated amortization of $679 and $601 at
September 30, 1998 and December 31, 1997, respectively 1,902 1,957
Notes receivable, less current installments 625 673
Patent application costs and other assets, net of
accumulated amortization of $830 and $717 at September 30,
1998 and December 31, 1997, respectively 1,014 1,003
----------- -----------
$ 61,241 59,869
=========== ===========
(Continued)
See accompanying notes to consolidated financial statements.
1
Air Methods Corporation and Subsidiary
CONSOLIDATED BALANCE SHEETS, Continued
(Amounts in thousands, except share and per share amounts)
September 30, December 31,
1998 1997
--------------------------------
Liabilities and Stockholders' Equity (unaudited)
- ------------------------------------
Current liabilities:
Notes payable $ 708 729
Current installments of long-term debt 2,521 2,655
Current installments of obligations under capital leases 613 659
Accounts payable 1,471 1,050
Income taxes payable -- 156
Accrued overhaul and parts replacement costs 2,792 2,008
Deferred revenue 553 942
Deferred income taxes 255 159
Other accrued liabilities 1,949 1,285
------------ ----------
Total current liabilities 10,862 9,643
Long-term debt, less current installments 19,399 19,680
Obligations under capital leases, less current installments 2,451 2,816
Accrued overhaul and parts replacement costs 4,540 4,837
Deferred income taxes 674 944
Other liabilities 869 736
------------ ----------
Total liabilities 38,795 38,656
------------ ----------
Stockholders' equity:
Preferred stock, $1 par value. Authorized 5,000,000 shares,
none issued -- --
Common stock, $.06 par value. Authorized 16,000,000 shares;
issued 8,271,843 and 8,173,705 shares at September 30, 1998 and
December 31, 1997, respectively 494 489
Additional paid-in capital 49,999 49,783
Accumulated deficit (28,047) (29,059)
------------ ----------
Total stockholders' equity 22,446 21,213
------------ ----------
$ 61,241 59,869
============ ==========
See accompanying notes to consolidated financial statements.
2
Air Methods Corporation and Subsidiary
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except share and per share amounts)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------------------------
1998 1997 1998 1997
----------------------------------------------------
Revenue:
Flight revenue $ 11,409 9,809 32,245 23,507
Sales of medical interiors and products 947 834 2,517 2,370
Parts and maintenance sales and services 307 234 1,003 379
International franchise revenue 58 112 204 326
Gain on disposition of assets, net -- -- 878 --
----------------------------------------------------
12,721 10,989 36,847 26,582
----------------------------------------------------
Operating expenses:
Flight centers 3,595 2,742 10,159 6,596
Aircraft operations 4,004 2,897 10,205 7,524
Aircraft rental 459 285 1,333 1,053
Medical interiors and products sold 582 833 2,156 2,505
Cost of parts and maintenance sales and services 253 158 795 245
Depreciation and amortization 1,079 995 3,161 2,662
Bad debt expense 929 688 1,847 688
Loss on disposition of assets, net 19 40 -- 41
General and administrative 1,502 1,224 4,658 3,237
----------------------------------------------------
12,422 9,862 34,314 24,551
----------------------------------------------------
Operating income 299 1,127 2,533 2,031
Other income (expense):
Interest expense (549) (556) (1,716) (1,182)
Interest and dividend income 69 48 168 222
Other, net (7) (36) 27 (30)
----------------------------------------------------
Net income (loss) $ (188) 583 1,012 1,041
====================================================
Basic and diluted income (loss) per common share $ (.02) .07 .12 .13
====================================================
Weighted average number of common shares
outstanding - basic 8,228,980 8,119,735 8,194,978 8,113,587
====================================================
Weighted average number of common shares
outstanding - diluted 8,228,980 8,236,844 8,460,753 8,160,125
====================================================
See accompanying notes to consolidated financial statements.
3
Air Methods Corporation and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Nine Months Ended September 30,
1998 1997
-------------------------------
(unaudited) (unaudited)
Cash flows from operating activities:
Net income $ 1,012 1,041
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization expense 3,161 2,662
Common stock options issued for services 45 --
Bad debt expense 1,847 688
Loss (gain) on retirement and sale of equipment, net (878) 41
Changes in assets and liabilities:
Decrease (increase) in prepaid and other current assets (520) 111
Increase in receivables (3,253) (825)
Increase in inventories (139) (133)
Decrease (increase) in work-in-process on medical interiors and costs
in excess of billings 825 (207)
Increase in accounts payable, other accrued liabilities, and income
taxes payable 755 2
Increase (decrease) in deferred revenue and other liabilities (256) 175
Increase (decrease) in accrued overhaul and parts replacement costs 487 (642)
-------------------------------
Net cash provided by operating activities 3,086 2,913
-------------------------------
Cash flows from investing activities:
Acquisition of net assets of Mercy Air Service, Inc. and Helicopter
Services, Inc:
Receivables -- (3,154)
Equipment and leasehold improvements -- (12,090)
Debt assumed -- 10,853
Accrued liabilities assumed -- 1,477
Excess of cost over fair value of net assets acquired -- (125)
Other, net -- (125)
Acquisition of equipment and leasehold improvements (5,851) (1,395)
Proceeds from retirement and sale of equipment 2,967 48
Decrease (increase) in notes receivable, patent development costs and
other assets (105) 1,937
-------------------------------
Net cash used by investing activities (2,989) (2,574)
-------------------------------
Cash flows from financing activities:
Issuance of common stock for cash 210 47
Retirement of common stock (34) --
Net payments under short-term notes payable (21) (311)
Proceeds from issuance of debt 6,657 2,877
Payments of long-term debt (7,072) (1,241)
Payments of capital lease obligations (501) (932)
-------------------------------
Net cash provided (used) by financing activities (761) 440
-------------------------------
Increase (decrease) in cash and cash equivalents (664) 779
Cash and cash equivalents at beginning of period 3,396 2,058
-------------------------------
Cash and cash equivalents at end of period $ 2,732 2,837
===============================
See accompanying notes to consolidated financial statements.
4
Notes to Consolidated Financial Statements
(1) Basis of Presentation
The accompanying consolidated financial statements include the
accounts of Air Methods Corporation, a Delaware corporation,
and its wholly owned subsidiary, Mercy Air Service, Inc.
("Mercy"). The Company acquired Mercy on July 30, 1997. All
significant intercompany balances and transactions have been
eliminated in consolidation.
In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments
(consisting of only normal recurring accruals) necessary to
present fairly the consolidated financial statements for the
respective periods. Interim results are not necessarily
indicative of results for a full year. The consolidated
financial statements should be read in conjunction with the
Company's audited consolidated financial statements and notes
thereto for the year ended December 31, 1997.
(2) Income (Loss) per Share
Basic earnings per share and basic and diluted loss per share
are computed by dividing net income or loss by the weighted
average number of common shares outstanding during the period.
Diluted earnings per share is computed by dividing net income
by all dilutive potential common shares outstanding during the
period.
(3) Stockholders' Equity
Changes in the stockholders' equity for the nine months ended
September 30, 1998, consisted of the following (amounts in
thousands except share amounts):
Nine Months Ended
September 30, 1998
--------------------------
Shares
Outstanding Amount
--------------------------
Balance at January 1, 1998 8,148,099 $ 21,213
Issuance of common shares for options
exercised 92,638 210
Common stock options issued for services
rendered -- 45
Retirement of common shares (10,000) (34)
Net income -- 1,012
----------- ----------
Balance at September 30, 1998 8,230,737 $ 22,446
=========== ==========
As of September 30, 1998, the Company's total accumulated deficit
was $28,047,000. Of that amount, $20,467,000 relates to Cell
Technology, a predecessor company, which was involved in the
research and development of a biological response modifier.
5
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E
of the Securities Exchange Act of 1934, as amended. For this purpose,
statements contained herein that are not statements of historical fact
may be deemed to be forward-looking statements. Without limiting the
foregoing, the words "believes", "expects", "anticipates", "plans",
"estimates", and similar words and expressions are intended to
identify such statements. These forward-looking statements include
statements concerning the size, structure and growth of the Company's
flight services and products markets, the continuation and/or renewal
of flight service contracts, the acquisition of new and profitable
Products Division contracts, the expansion of Mercy Air Service, Inc.
("Mercy") operations, continued royalty revenue from the Company's
Brazilian franchise ("Unimed Air"), and other matters. The actual
results that the Company achieves may differ materially from those
discussed in such forward-looking statements due to the risks and
uncertainties described below, as well as in the Company's annual
report on Form 10-K.
The Company's Flight Services Division provides air medical transport
services to hospital customers across the United States under 22
operating agreements. The Products Division designs, manufactures, and
installs aircraft interior systems and other aerospace products for
both domestic and international customers. Mercy, the Company's wholly
owned subsidiary, is an independent provider of air medical
transportation services in southern California and the Las Vegas
region; its operations include medical staffing and direction,
dispatch and communications, medical billing and collections, and
aircraft operation and maintenance.
Results of Operations
The Company reported a net loss of $188,000 and net income of
$1,012,000 for the three and nine months ended September 30, 1998,
respectively, compared to net income of $583,000 and $1,041,000 for
the three and nine months ended September 30, 1997, respectively. The
change in the operating results is primarily attributable to costs
invested in the start-up of new operations for the Flight Services
Division and Mercy and an increase in maintenance for on-condition
aircraft parts. On-condition aircraft parts do not have a prescribed
overhaul or retirement interval but are replaced or repaired as
needed. Start-up costs for the new locations include flight and
medical crew salaries and training and aircraft ownership expenses,
such as interest and lease expense.
Flight revenue increased $1,600,000, or 16.3%, and $8,738,000, or
37.2%, for the three and nine months ended September 30, 1998,
respectively, compared to 1997. The increase is due to flight revenue
of $4.2 million and $11.1 million generated by Mercy's operations in
the three and nine months ended September 30, 1998, respectively. The
quarter ended September 30, 1997, included only two months of revenue,
or $2.7 million, from Mercy's operations. Revenue for Mercy for the
quarter ended September 30, 1998, also included $512,000 from
operations in the Las Vegas market which were begun in the second
quarter. Flight revenue from the Company's hospital agreements
remained relatively constant in 1998 as compared with the three and
nine months ended September 30, 1997, due to annual price increases in
the contracts and the addition of two new contracts since September
30, 1997, offset in part by a reduction in flight volume during the
nine months ended September 30, 1998, and by the expiration of a
contract in May 1998. Revenue flight hours on continuing contracts
decreased 1% in the nine months ended September 30, 1998, but
increased 13% in the third quarter, as compared to 1997.
Sales of medical interiors and products increased $113,000, or 13.5%,
and $147,000, or 6.2%, for the three and nine months ended September
30, 1998. In the third quarter of 1998 the Company recognized revenue
of $487,000 from the manufacture of medical interior systems for two
Bell 214ST helicopters and $158,000 from the design of a Spinal Cord
Injury Transport System (SCITS) for the U.S. Air Force. Third quarter
revenue also included $189,000 from the production of electrical
system components for the U. S. Air Force HH-60G helicopter, for a
total of $765,000 in revenue from this project in the nine months
ended September 30, 1998. Revenue for the nine months ended September
30, 1998, also included $407,000 from the manufacture and installation
of a medical interior for a Bell 407 helicopter and $268,000 from the
design and integration of avionics and communications systems for a
special-use police helicopter. Revenue recorded in the comparable nine-
month period in 1997 consisted primarily of $1.4 million from the
design and manufacture of four multi-mission medical interior systems
for the U.S. Army UH-60Q helicopter, $344,000 from the manufacture of
electrical system components for the U.S. Air Force HH-60G helicopter,
and $116,000 from the installation of a Bell 407 interior.
6
The cost of medical interiors decreased 30.1% and 13.9% for the three
and nine months ended September 30, 1998, as compared to the previous
year. The decrease in cost of medical interiors in 1998 reflects the
completion of the developmental phase of the multi-mission interior
for the UH-60Q helicopter in 1997. The Company has not invested in any
similar developmental costs in 1998; the only developmental project
currently in process, the SCITS program, is a cost reimbursable
contract. All other significant projects in process or completed
during the year, with the exception of the electrical system
components and the avionics installation, represent adaptations of the
multi-mission or modular medical interiors.
The increase in parts and maintenance sales and services in the three
and nine months ended September 30, 1998, compared to the comparable
periods of 1997 is due to the acquisition of Mercy. Mercy provides
helicopter maintenance services and parts to customers primarily in
Southern California. Cost of parts and maintenance sales and services
also increased correspondingly in 1998.
International franchise fees decreased $54,000, or 48.2%, and
$122,000, or 37.4%, for the three and nine months ended September 30,
1998, compared to the three and nine months ended September 30, 1997.
The decrease is due to a decline in the number of subscribers as the
Brazilian franchise eliminated services to two cities and one state
since 1997. In 1998 the franchise has reduced its subscription rates
to remain competitive and has seen membership levels stabilize.
In the nine months ended September 30, 1998, the Company recognized
net gains totaling $878,000 on the disposition of assets. Gains
included $870,000 from an insurance settlement for one of the
Company's helicopters destroyed in an accident in January 1998.
Flight center costs--consisting primarily of pilot, mechanic, and
medical crew salaries and fringe benefits-- increased 31.1% and 54.0%
for the three and nine months ended September 30, 1998, respectively,
compared to 1997. Flight center costs related to Mercy's operations
totaled $1,197,000 and $3,037,000 for the three and nine months ended
September 30, 1998. The third quarter of 1997 included only two months
of expenses, or $574,000 for Mercy's operations. Flight center costs
for Mercy also increased $292,000 in the third quarter due to the
expansion of operations into three new locations. Without the effect
of the Mercy acquisition, flight center costs increased 10.6% and
18.3% for the three and nine months, respectively, as a result of the
addition of two new hospital contracts since September 1997 and merit
pay increases in salaries. The change in flight center costs for the
nine-month period also reflects an increase in workers compensation
expense due to the expected impact of the helicopter accident on the
Company's workers compensation insurance rates through June 30, 1998.
Aircraft operating expenses increased 38.2% and 35.6% for the three
and nine months ended September 30, 1998, respectively, in comparison
to the three and nine months ended September 30, 1997. Aircraft
operating expenses consist of fuel, insurance, and maintenance costs
and generally are a function of the size of the fleet, the type of
aircraft flown, and the number of hours flown. Expenses for Mercy's
operations totaled $1,152,000 and $3,106,000 for the three and nine
months ended September 30, 1998, compared to $428,000 for two months
in 1997. Expenses for Mercy in 1998 reflect the effect of adding two
aircraft to service the expansion of operations into new locations.
Absent the impact of the Mercy transaction, aircraft operating
expenses increased 15.5% in the third quarter of 1998, but remained
unchanged for the nine months ended September 30, 1998, compared to
1997. Costs attributable to the five aircraft added to the Company's
fleet since last year totaled approximately $217,000 and $394,000 for
the three and nine months ended September 30, 1998. The Company's
fleet, including the Mercy aircraft, also experienced increased
maintenance expenditures for on-condition aircraft parts. Expenses for
the nine months ended September 30, 1998, also reflect a reduction in
hull and liability insurance rates effective July 1, 1997.
Aircraft rental expense increased 61.1% and 26.6% for the three and
nine months ended September 30, 1998, respectively, compared to 1997.
Lease expense related to three aircraft added to the Company's fleet
since September 30, 1997, totaled approximately $100,000 and $212,000
for the three and nine months ended September 30, 1998. The increase
in rental expense also reflects the addition of Mercy's fleet in the
third quarter of 1997, offset in part by the elimination of rental
expense for a helicopter previously leased from Mercy.
7
Depreciation and amortization expense increased 8.4% and 18.7% for the
three and nine months ended September 30, 1998, respectively. The
addition of Mercy's aircraft and equipment increased depreciation by
$80,000 and $462,000 during the three and nine months, respectively.
Excluding the impact of the Mercy acquisition, depreciation and
amortization expense remained relatively unchanged during 1998.
Bad debt expense is estimated during the period the related services
are performed based on historical experience for Mercy's operations.
The provision is adjusted as required based on actual collections in
subsequent periods. Bad debt expense increased 35.0% and 168.5% for
the three and nine months ended September 30, 1998, respectively,
compared to 1997, reflecting the impact of three and nine months of
activity for Mercy compared to two months in 1997. Mercy bills
patients and their insurers directly for services rendered rather than
billing hospital customers.
Increases of 22.7% and 43.9% in general and administrative expenses
for the three and nine months ended September 30, 1998, respectively,
compared to the three and nine months ended September 30, 1997,
reflect the impact of the Mercy transaction. Excluding Mercy's
expenses, general and administrative expenses would have increased
8.5% and 11.5% for the three and nine months, respectively. This
increase is primarily due to changes in administrative and human
resources staffing to manage the expanded employee base with the
acquisition of Mercy and the addition of new hospital contracts.
General and administrative expenses for the nine months in 1998 also
included approximately $100,000 for the Company's additional safety
training and review programs implemented during the year in response
to the helicopter accident.
Interest expense decreased 1.3% in the third quarter but increased
45.2% for the nine months ended September 30, 1998, compared with the
same periods in 1997. Interest expense related to new debt incurred in
the acquisition of Mercy totaled approximately $263,000 for the third
quarter of 1998 and $818,000 for the nine-month period ended September
30, 1998, compared to $188,000 in the quarter and nine months ended
September 30, 1997. The impact of debt related to the Mercy
transaction was offset during the third quarter of 1998 by the
refinancing of notes totaling approximately $5.2 million at reduced
interest rates and by the pay-down of long-term debt and capital lease
obligations.
Interest income decreased 24.3% in the nine months ended September 30,
1998, compared to the same period in 1997, primarily due to the
settlement at the acquisition date of notes receivable to the Company
from Mercy. The decrease was offset in the third quarter by interest
income earned on a note receivable from the Company's Brazilian
franchise.
Financial Condition
Cash and cash equivalents decreased $664,000 from $3,396,000 at
December 31, 1997, to $2,732,000 at September 30, 1998. Net working
capital decreased from $2,909,000 to $2,264,000 over the same period.
The decreases reflect the Company's investment in additional
equipment, including new aircraft medical interiors, to support its
expanded operations, as well as the pay-down of long-term debt and
capital lease obligations. The Company's cash position was also
affected by financing accounts receivable for Mercy's new programs.
Mercy bills patients and their insurers directly for services
rendered.
The Company has an unused $2 million line of credit to supplement
other working capital sources, if necessary.
Outlook 1998
During the first quarter of 1998, the Company renewed three of its
hospital operating agreements and elected not to pursue renewal of the
fourth contract expiring in 1998. The helicopter assigned to that
contract was redeployed as part of Mercy's operations to expand its
presence in San Diego. Flight volume for the Company's existing
contracts is expected to remain consistent with historical levels
during the fourth quarter of 1998. In addition, the Company began
operations in the fourth quarter under a three-year operating
agreement with a new hospital customer. Operating royalties generated
by Unimed Air, the Company's Brazilian franchise, are expected to
remain consistent with those earned earlier in 1998.
8
In the second quarter of 1998 the Company expanded Mercy's operations
to include the Las Vegas, as well as the Los Angeles and San Diego,
air ambulance market. In the third quarter the Company opened a second
base for Mercy's operations in San Diego county and entered into a
joint venture agreement to provide air ambulance services in the Santa
Barbara region. Under the agreement, Mercy will provide medical
staffing, dispatch, marketing, and medical billing and collection
functions. The Company and its partner will share equally in the net
income of the joint venture. The Company expects flight volume for
Mercy's operations at previously existing bases to remain consistent
with levels attained in previous years during the fourth quarter.
In the fourth quarter of 1998, the Company expects to complete the
production and installation of medical interior systems for two Bell
214ST helicopters to be operated in the Persian Gulf and to continue
design work on SCITS. Work on the developmental phase of this contract
is expected to continue through 1999. The Company also expects to
deliver a patient loading system for a Bell 407 helicopter during the
fourth quarter of 1998. The multi-mission medical interior system
developed by the Company for the U.S. Army UH-60Q helicopter completed
the final operational test conducted by the Army in the fourth quarter
of 1998. The Army is expected to issue a "Type Classification"
certificate in the first quarter of 1999 which will allow the Company
to market the product to other entities. Authorization to produce and
deliver additional multi-mission medical interior systems for the U.S.
Army is expected in 1999. Orders for these units have not yet been
received, and there is no assurance that the work will be performed or
units delivered in 1999 or in future periods.
The second and third quarters of 1998 included costs to re-manufacture
electrical systems components for the U.S. Air Force HH-60G helicopter
pursuant to modifications directed by the customer. The components
requiring rework were originally produced by a subcontractor to the
Company. Revenue remaining to be recognized on the project in the
fourth quarter is expected to be equal to the estimated cost to
complete the re-manufacturing process. The Company is evaluating legal
alternatives in pursuing cost recovery from its subcontractor for the
project. In addition, the Company is negotiating with its customer to
resolve reimbursement issues associated with costs incurred by both
parties in the rework process.
There can be no assurance that the Company will continue to renew
operating agreements for the Flight Services Division, generate new
profitable contracts for the Products Division, or successfully expand
Mercy's operations. In addition, there can be no assurance that Unimed
Air will continue to generate royalties from operations. However,
based on the backlog of projects for the Products Division and the
anticipated level of flight activity for its hospital customers and
Mercy's operations, the Company expects to generate sufficient cash
flow to meet its operational needs throughout 1999.
Year 2000
Issues related to the Year 2000 result from computer hardware and
software systems using two digits rather than four to refer to a
calendar year. These systems may fail to process dates correctly after
December 31, 1999, and, as a result, system failure may occur. The
Company's management information systems (MIS) manager is coordinating
the review of all of the Company's hardware and software systems for
Year 2000 compliance. The majority of the Company's software has
already been updated for the Year 2000 with updates on the remaining
programs currently in process. Certain hardware systems will be
replaced to keep pace with technological changes as well as to ensure
Year 2000 compliance.
In addition, the Company will be conducting a survey of key suppliers
and customers beginning in the first quarter of 1999 to determine the
extent to which the Company is exposed to those third parties' failure
to remedy their Year 2000 compliance issues.
The Company does not expect the changes required for the Year 2000 to
have a material effect on its financial position or results of
operations. Because most of the software updates completed prior to
September 30, 1998, were covered by the Company's existing maintenance
contracts, the amounts expensed in the nine-month period were
immaterial. Total capitalized costs associated with hardware and
software upgrades were approximately $93,000 for the nine months ended
September 30, 1998, including costs associated with new systems which
will be Year 2000 compliant even though such compliance was not the
primary reason for installation.
9
The Company does not currently have in place any contingency plans if
Year 2000 issues are not resolved in time or go undetected.
The Company presently believes that planned hardware and software
upgrades will prevent significant operational problems for information
systems resulting from Year 2000 issues. However, if such upgrades are
not timely or properly implemented, the Year 2000 problem could affect
the ability of the Company to maintain its fleet, manufacture
products, procure materials, manage patient billings and collections,
or perform other functions, which may have a material adverse effect
on the Company's financial condition and results of operations.
Additionally, failure of third party suppliers or customers to become
Year 2000 compliant on a timely basis could create a need to change
suppliers or otherwise impair the Company's ability to procure spare
parts, materials, or services or to receive timely payment of accounts
receivable, any of which could have a material adverse effect on the
Company's financial condition and results of operations.
New Accounting Standards
Statement of Financial Accounting Standards No. 131, Disclosures about
Segments of an Enterprise and Related Information ("Statement 131"),
establishes standards for the way that public companies report
information about operating segments in annual financial statements
and requires that those companies report selected information about
operating segments in interim financial reports issued to
shareholders. Statement of Financial Accounting Standards No. 132,
Employers' Disclosures about Pensions and Other Post-retirement
Benefits ("Statement 132), revises employers' disclosures about
pension and other post-retirement benefit plans. Statement of
Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities ("Statement 133"), establishes
accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
and for hedging activities and is effective for fiscal years beginning
after June 15, 1999. Statement 131 and Statement 132 were adopted by
the Company as of January 1, 1998. The Company will present the
disclosures required by Statement 131 in its consolidated financial
statements for the year ending December 31, 1998, as applicable. The
adoption of Statement 132 had no impact on the Company's consolidated
financial statements.
10
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities
Not Applicable
Item 3. Defaults upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
AIR METHODS CORPORATION
Date: November 16, 1998 By \s\ Aaron D. Todd
On behalf of the Company, and as
Principal Financial and Accounting
Officer
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