| AIR METHODS CORP ITEM 1A RISK FACTORS |
| 4 ITEM 1A RISK FACTORS Our actual operating results may differ materially from those described in forward-looking statements as a result of various factors, including but not limited to, those discussed in "e Outlook for 2006 "e and those described below |
| - - Flight volume - All CBM revenue and approximately 38prca of HBM revenue is dependent upon flight volume |
| Approximately 38prca of our total operating expenses also vary with the number of hours flown |
| Poor visibility, high winds, and heavy precipitation can affect the safe operation of aircraft and therefore result in a reduced number of flight hours due to the inability to fly during these conditions |
| Prolonged periods of adverse weather conditions could have an adverse impact on our operating results |
| Typically, the months from November through February tend to have lower flight volume due to weather conditions and other factors, resulting in lower CBM operating revenue during these months |
| Flight volume for CBM operations can also be affected by the distribution of calls among competitors by local government agencies and the entrance of new competitors into a market |
| 4 - - Collection rates - We respond to calls for air medical transport without pre-screening the creditworthiness of the patient |
| The CBM division invoices patients and their insurers directly for services rendered and recognizes revenue net of estimated contractual allowances |
| The level of bad debt expense is driven by collection rates on these accounts |
| Changes in estimated contractual allowances and bad debts are recognized based on actual collections in subsequent periods |
| Collectibility is affected by the number of uninsured or indigent patients transported and is, therefore, primarily dependent upon the health of the US economy |
| A significant or sustained downturn in the US economy could have an adverse impact on our bad debt expense |
| In addition, there is no assurance that we will be able to maintain historical collection rates after the implementation of price increases for CBM transports |
| - - Leveraged balance sheet - We are obligated under debt facilities providing for up to approximately dlra99dtta8 million of indebtedness, of which approximately dlra71dtta7 million was outstanding (net of dlra3dtta2 million of cash) at December 31, 2005 |
| If we fail to meet our payment obligations or otherwise default under the agreements governing indebtedness, the lenders under those agreements will have the right to accelerate the indebtedness and exercise other rights and remedies against us |
| These rights and remedies include the rights to repossess and foreclose upon the assets that serve as collateral, initiate judicial foreclosure against us, petition a court to appoint a receiver for us, and initiate involuntary bankruptcy proceedings against us |
| If lenders exercise their rights and remedies, our assets may not be sufficient to repay outstanding indebtedness, and there may be no assets remaining after payment of indebtedness to provide a return on common stock |
| - - Restrictive debt covenants - Our senior credit facility contains restrictive financial and operating covenants, including restrictions on our ability to incur additional indebtedness, to exceed certain annual capital expenditure limits, and to engage in various corporate transactions such as mergers, acquisitions, asset sales and the payment of cash dividends |
| These covenants may restrict future growth through the limitation on capital expenditures and acquisitions, and may adversely impact our ability to implement our business plan |
| Failure to comply with the covenants defined in the agreement or to maintain the required financial ratios could result in an event of default and accelerate payment of the principal balances due under the senior credit facility |
| Given factors beyond our control, such as interruptions in operations from unusual weather patterns not included in current projections, there can be no assurance that we will be able to remain in compliance with financial covenants in the future, or that, in the event of non-compliance, we will be able to obtain waivers from the lenders, or that to obtain such waivers, we will not be required to pay lenders significant cash or equity compensation |
| - - Employee unionization - In September 2003, our pilots voted to be represented by a collective bargaining unit and negotiations on a collective bargaining agreement began in early 2004 |
| In November 2005, we provided the union a settlement offer which was modified and tentatively accepted by the union in March 2006, subject to ratification by the union membership and approval by our board of directors |
| The settlement offer included changes to base salary and overtime pay and to our contribution to defined contribution retirement plans (401k plans) |
| If ratified by the union membership prior to March 31, 2006, the agreement will be effective January 1, 2006, through April 30, 2009 |
| Under our proposed settlement, pay for overtime shifts would increase from regular pay rates to 1dtta5 times regular pay rates |
| Under one plan, we contribute 2prca of gross pay for all eligible employees and match 60prca of the employees &apos contributions up to 6prca of their gross pay |
| Under the other plan, we match 30prca of the employees &apos contributions up to 6prca of their gross pay |
| In the proposed settlement, we will contribute up to 5dtta6prca of gross pay to both 401k plans, depending on the level of each employeeapstas participation |
| The estimated impact of the proposed change in base salary is dlra3dtta4 million in the year of implementation |
| Because the impact of changes to overtime pay and to the 401k plan contributions is dependent upon staffing levels and employee participation in the 401k plans, the effect on our financial statements cannot presently be fully quantified |
| There can be no assurance that our offer will be accepted by the union or that we will not be subject to a work stoppage if the parties are unable to come to an agreement |
| Other employee groups may also elect to be represented by unions in the future |
| 5 - - Employee recruitment and retention - An important aspect of our operations is the ability to hire and retain employees who have advanced aviation, nursing, and other technical skills |
| In addition, hospital contracts typically contain minimum certification requirements for pilots and mechanics |
| Employees who meet these standards are in great demand and are likely to remain a limited resource in the foreseeable future |
| If we are unable to recruit and retain a sufficient number of these employees, the ability to maintain and grow the business could be negatively impacted |
| - - Governmental regulation - The air medical transportation services and products industry is subject to extensive regulation by governmental agencies, including the FAA, which impose significant compliance costs on us |
| In addition, reimbursement rates for air ambulance services established by governmental programs such as Medicare directly affect CBM revenue and indirectly affect HBM revenue from customers |
| Changes in laws or regulations, such as the minimum weather standards for flight acceptance which are expected to change in 2006, or in reimbursement rates could have a material adverse impact on our cost of operations or revenue from flight operations |
| Periodically the FAA issues airworthiness directives covering one or more models of aircraft |
| Although we believe that our aircraft are currently in compliance with all FAA-issued airworthiness directives, additional airworthiness directives likely will be issued in the future and may result in additional operating costs or make a particular model of aircraft uneconomical to operate |
| In January 2005 we experienced two fatal accidents which either have been investigated or are currently under investigation by the National Transportation Safety Board |
| We are not aware of any regulatory action resulting from the conclusion or progress of these investigations |
| In recent years, the accident rate for the entire air medical transportation industry has exceed historical levels, leading to increased scrutiny from government regulatory agencies |
| Such increased scrutiny could result in new regulations and increases in the cost of compliance with regulations |
| - - Compliance with corporate governance and public disclosure regulations - New laws, regulations, and standards relating to corporate governance and public disclosure-including the Sarbanes-Oxley Act of 2002, new SEC regulations, and NASDAQ National Market rules-are subject to varying interpretations in many cases due to lack of specificity |
| Their application may evolve over time as new guidance is provided by regulatory and governing bodies, which may result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices |
| Our efforts to maintain high standards of corporate governance and public disclosure in compliance with evolving laws and regulations have resulted in, and are likely to continue to result in, increased general and administrative expenses and a diversion of managementapstas time and attention from revenue-generating activities to compliance activities |
| In particular, compliance with Section 404 of the Sarbanes-Oxley Act of 2002, which requires us to include management and auditor reports on internal controls as part of our annual report, has required commitment of significant financial and managerial resources |
| In addition, board members, the chief executive officer, and the chief financial officer could face an increased risk of personal liability in connection with the performance of their duties |
| As a result, we may have difficulty attracting and retaining qualified board members and executive officers |
| If efforts to comply with new or changed laws, regulations, and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, our reputation may be harmed |
| - - Internal controls - We are required by Section 404 of the Sarbanes-Oxley Act of 2002 to include management and auditor reports on internal controls as part of our annual report |
| Management concluded that internal control over financial reporting was effective at December 31, 2005, and our independent auditors attested to that conclusion |
| There can be no assurance that material weaknesses in internal controls over financial reporting will not be discovered in the future or that we and our independent auditors will be able to conclude that internal control over financial reporting is effective in the future |
| Although it is unclear what impact failure to comply fully with Section 404 or the discovery of a material weakness in internal controls over financial reporting would have on us, it may subject us to regulatory scrutiny and result in additional expenditures to meet the requirements, a reduced ability to obtain financing, or a loss of investor confidence in the accuracy of our financial reports |
| 6 - - Competition - HBM operations face significant competition from several national and regional air medical transportation providers for contracts with hospitals and other healthcare institutions |
| In addition to the national and regional providers, CBM operations also face competition from smaller regional carriers and alternative air ambulance providers such as sheriff departments |
| Operators generally compete on the basis of price, safety record, accident prevention and training, and the medical capability of the aircraft |
| Our competition in the aircraft interior design and manufacturing industry comes primarily from three companies based in the United States and three in Europe |
| Competition is based mainly on product availability, price, and product features, such as configuration and weight |
| There can be no assurance that we will be able to continue to compete successfully for new or renewing contracts in the future |
| - - Fuel costs - Fuel accounted for 2dtta5prca of total operating expenses for the year ended December 31, 2005 |
| Both the cost and availability of fuel are influenced by many economic and political factors and events occurring in oil-producing countries throughout the world, and fuel costs fluctuate widely |
| Recently the price per barrel of oil has been at an all-time high |
| We cannot predict the future cost and availability of fuel |
| The unavailability of adequate fuel supplies could have an adverse effect on our cost of operations and profitability |
| Generally, our HBM customers pay for all fuel consumed in medical flights |
| However, our ability to pass on increased fuel costs for CBM operations may be limited by economic and competitive conditions and by reimbursement rates established by Medicare, Medicaid, and insurance providers |
| We do not currently have any agreements in place to hedge our fuel costs |
| - - Aviation industry hazards and insurance limitations - Hazards are inherent in the aviation industry and may result in loss of life and property, thereby exposing us to potentially substantial liability claims arising out of the operation of aircraft |
| We may also be sued in connection with medical malpractice claims arising from events occurring during a medical flight |
| Under HBM operating agreements, hospital customers have agreed to indemnify us against liability arising out of medical malpractice claims and to maintain insurance covering such liability, but there can be no assurance that a hospital will not challenge the indemnification rights or will have sufficient assets or insurance coverage for full indemnity |
| In CBM operations, our personnel perform medical procedures on transported patients, which may expose us to significant direct legal exposure to medical malpractice claims |
| We maintain general liability aviation insurance, aviation product liability coverage, and medical malpractice insurance, and believe that the level of coverage is customary in the industry and adequate to protect against claims |
| However, there can be no assurance that it will be sufficient to cover potential claims or that present levels of coverage will be available in the future at reasonable cost |
| A limited number of hull and liability insurance underwriters provide coverage for air medical operators |
| A significant downturn in insurance market conditions could have a material adverse effect on our cost of operations |
| Approximately 41prca of any increases in hull and liability insurance may be passed through to our HBM customers according to contract terms |
| In addition, the loss of any aircraft as a result of accidents could cause both significant adverse publicity and interruption of air medical services to client hospitals, which could adversely affect our operating results and relationship with such hospitals |
| The January 2005 accidents did not have a material impact on our hull and liability insurance rates as renewed in July 2005 |
| However, in the year ended December 31, 2005, we recorded an increase in expense of dlra790cmam000 for the self-insured portion of workers compensation premiums as a result of the accidents |
| - - Foreign ownership - Federal law requires that United States air carriers be citizens of the United States |
| For a corporation to qualify as a United States citizen, the president and at least two-thirds of the directors and other managing officers of the corporation must be United States citizens and at least 75prca of the voting interest of the corporation must be owned or controlled by United States citizens |
| If we are unable to satisfy these requirements, operating authority from the Department of Transportation may be revoked |
| Furthermore, under certain loan agreements, an event of default occurs if less than 80prca of the voting interest is owned or controlled by United States citizens |
| As of December 31, 2005, we were aware of one foreign person who, according to public securities filings, is believed to hold approximately 4dtta4prca of outstanding Common Stock, although that foreign person has not been subject to those filing requirements since November 29, 2005, and may presently hold up to, but not more than, 5prca of outstanding Common Stock without having to file an amendment under applicable securities law |
| Because we are unable to control the transfer of our stock, we are unable to assure that we can remain in compliance with these requirements in the future |
| 7 - - Dependence on third party suppliers - We currently obtain a substantial portion of our helicopter spare parts and components from Bell and AEC, because our fleet is composed primarily of Bell and AEC aircraft, and maintain supply arrangements with other parties for our engine and related dynamic components |
| Based upon the manufacturing capabilities and industry contacts of Bell, AEC, and other suppliers, we believe we will not be subject to material interruptions or delays in obtaining aircraft parts and components but do not have an alternative source of supply for Bell, AEC, and certain other aircraft parts |
| Failure or significant delay by these vendors in providing necessary parts could, in the absence of alternative sources of supply, have a material adverse effect on us |
| Because of our dependence upon Bell and AEC for helicopter parts, we may also be subject to adverse impacts from unusually high price increases which are greater than overall inflationary trends |
| In addition, increases in spare parts prices from aircraft manufacturers tend to be higher for aircraft which are no longer in production |
| Increases in our monthly and hourly flight fees billed to our HBM customers may be limited to changes in the consumer price index |
| As a result, an unusually high increase in the price of parts may not be fully passed on to our HBM customers |
| The ability to pass on price increases for CBM operations may be limited by reimbursement rates established by Medicare, Medicaid, and insurance providers and by other market considerations |
| - - Department of Defense funding - Several of the projects which have historically been significant sources of revenue for the Products Division, including HH-60L and MEV systems, are dependent upon Department of Defense funding |
| Failure of the US Congress to approve funding for the production of additional HH-60L or MEV units could have a material adverse impact on Products Division revenue |