| ALLIANCE DATA SYSTEMS CORP Item 1A Risk Factors Risk Factors Risks Related to General Business Operations Our 10 largest clients represented 43dtta1prca of our consolidated revenue in 2005, and the loss of any of these clients could cause a significant drop in our revenue |
| We depend on a limited number of large clients for a significant portion of our consolidated revenue |
| Our 10 largest clients represented approximately 43dtta1prca of our consolidated revenue during the year ended December 31, 2005, with Limited Brands and its retail affiliates representing approximately 17dtta7prca of our 2005 consolidated revenue |
| Our contract with Limited Brands and its retail affiliates expires in 2012 |
| A decrease in revenue from any of our significant clients for any reason, including a decrease in pricing or activity, or a decision to either utilize another service provider or to no longer outsource some or all of the services we provide, could have a material adverse effect on our consolidated revenue |
| Our 10 largest clients in this segment represented approximately 48dtta7prca of our Transaction Services revenue in 2005 |
| Limited Brands and its retail affiliates were the largest Transaction Services client in 2005, representing approximately 13dtta6prca of this segment’s 2005 revenue |
| Our contracts with Limited Brands and its retail affiliates expire in 2012 |
| Credit Services |
| Our two largest clients in this segment represented approximately 44dtta1prca of our Credit Services revenue in 2005 |
| Limited Brands and its retail affiliates represented approximately 30dtta5prca, and Redcats represented approximately 13dtta6prca of our Credit Services revenue in 2005 |
| Our contracts with Limited Brands and its retail affiliates expire in 2012, and our contract with Redcats expires in 2013 |
| Marketing Services |
| Our 10 largest clients in this segment represented approximately 61dtta1prca of our Marketing Services revenue in 2005 |
| BMO Bank of Montreal, Canada Safeway, Shell Canada and Amex Bank of Canada were the four largest Marketing Services clients in 2005, representing approximately 44dtta6prca of our 2005 Marketing Services revenue |
| BMO Bank of Montreal represented approximately 24dtta6prca of this segment’s 2005 revenue |
| Our contract with BMO Bank of Montreal expires in 2009 |
| Competition in our industries is intense and we expect it to intensify |
| The markets for our products and services are highly competitive, and we expect competition to intensify in each of those markets |
| Many of our current competitors have longer operating histories, stronger brand names and greater financial, technical, marketing and other resources than we do |
| We cannot assure you that we will be able to compete successfully against our current and potential competitors |
| The markets for the services that we offer may fail to expand or may contract and this could negatively impact our growth and profitability |
| Our growth and continued profitability depend on acceptance of the services that we offer |
| If demand for transaction, credit or marketing services decreases, the price of our common stock could fall and you could lose value in your investment |
| We cannot guarantee that retailers will continue to use loyalty and database marketing strategies |
| Changes in technology may enable merchants and retail companies to directly process transactions in a cost-efficient manner without the use of our services |
| Additionally, downturns in the economy or the performance of retailers may result in a decrease in the demand for our marketing strategies |
| Further, if our customers make fewer sales of their products and services, we will have fewer transactions to process, resulting in lower revenue |
| Any decrease in the demand for our services for the reasons discussed above or any other reasons could have a material adverse effect on our growth and revenue |
| 13 _________________________________________________________________ [75]Table of Contents We cannot assure you that we will effectively integrate acquisitions or realize their full benefits, and future acquisitions may result in dilutive equity issuances or increases in debt |
| Historically, we have completed several acquisitions each year |
| We expect to continue to seek selective acquisitions as an element of our growth strategy |
| If we are unable to successfully integrate completed or any future acquisitions, we may incur substantial costs and delays or other operational, technical or financial problems, any of which could harm our business and impact the trading price of our common stock |
| In addition, the failure to successfully integrate any future acquisition may divert management’s attention from our core operations or could harm our ability to timely meet the needs of our customers |
| To finance future acquisitions, we may need to raise funds either by issuing equity securities or incurring debt |
| If we issue additional equity securities, such sales could reduce the current value of our stock by diluting the ownership interest of our stockholders |
| Failure to safeguard our databases and consumer privacy could affect our reputation among our clients and their customers, and may expose us to legal claims from consumers |
| An important feature of our marketing and credit services is our ability to develop and maintain individual consumer profiles |
| As part of our AIR MILES Reward Program, database marketing program and private label credit card program, we maintain marketing databases containing information on consumers’ account transactions |
| Although we have extensive security procedures, our databases may be subject to unauthorized access |
| If we experience a security breach, the integrity of our marketing databases could be affected |
| Security and privacy concerns may cause consumers to resist providing the personal data necessary to support our profiling capability |
| The use of our loyalty, database marketing or private label credit card programs could decline if any compromise of security occurred |
| Any public perception that we released consumer information without authorization could subject us to legal claims from consumers and adversely affect our client relationships |
| Loss of data center capacity, interruption of telecommunication links, or inability to utilize proprietary software of third-party vendors could affect our ability to timely meet the needs of our clients and their customers |
| Our ability to protect our data centers against damage from fire, power loss, telecommunications failure and other disasters is critical |
| In order to provide many of our services, we must be able to store, retrieve, process and manage large databases and periodically expand and upgrade our capabilities |
| Any damage to our data centers, any failure of our telecommunication links that interrupts our operations or any impairment of our ability to use software used by or licensed to us could adversely affect our ability to meet our clients’ needs and their confidence in utilizing us for future services |
| As a result of our significant Canadian operations, our reported financial information will be affected by fluctuations in the exchange rate between the US and Canadian dollars |
| A significant portion of our Marketing Services revenue is derived from our operations in Canada, which transacts business in Canadian dollars |
| Therefore, our reported financial information from quarter-to-quarter will be affected by changes in the exchange rate between the US and Canadian dollars over the relevant periods |
| We do not hedge any of our net investment exposure in our Canadian subsidiary |
| The hedging activity related to our securitization trusts subjects us to off-balance sheet counterparty risks relating to the creditworthiness of the commercial banks with whom we enter into hedging transactions |
| In order to execute our hedging strategies, our securitization trusts have entered into interest rate derivative contracts with commercial banks |
| These banks are otherwise known as counterparties |
| It is our policy to enter into such contracts with counterparties that are deemed to be creditworthy |
| However, if macro- or micro-economic events were to negatively impact the respective banks, the banks might not be able to honor their obligations to the securitization trusts and we might suffer a loss related to our residual interest in the securitization trusts |
| 14 _________________________________________________________________ [76]Table of Contents Our failure to protect our intellectual property rights may harm our competitive position, and litigation to protect our intellectual property rights or defend against third party allegations of infringement may be costly |
| Third parties may infringe or misappropriate our trademarks or other intellectual property rights, which could have a material adverse effect on our business, financial condition or operating results |
| The actions we take to protect our trademarks and other proprietary rights may not be adequate |
| Litigation may be necessary to enforce our intellectual property rights, protect our trade secrets or determine the validity and scope of the proprietary rights of others |
| We cannot assure you that we will be able to prevent infringement of our intellectual property rights or misappropriation of our proprietary information |
| Any infringement or misappropriation could harm any competitive advantage we currently derive or may derive from our proprietary rights |
| Third parties may assert infringement claims against us |
| Any claims and any resulting litigation could subject us to significant liability for damages |
| An adverse determination in any litigation of this type could require us to design around a third party’s patent or to license alternative technology from another party |
| In addition, litigation is time-consuming and expensive to defend and could result in the diversion of our time and resources |
| Any claims from third parties may also result in limitations on our ability to use the intellectual property subject to these claims |
| If we are required to pay state taxes on transaction processing, it could negatively impact our profitability |
| Transaction processing companies may be subject to state taxation of certain portions of their fees charged to merchants for their services |
| If we are required to pay such taxes and are unable to pass this tax expense through to our merchant clients, these taxes would negatively impact our profitability |
| Risks Particular to Transaction Services In 2005, our Transaction Services segment derived approximately 44dtta7prca of its revenue from servicing cardholder accounts for the Credit Services segment |
| If the Credit Services segment suffered a significant client loss, our revenue and profitability attributable to the Transaction Services segment could be materially and adversely affected |
| Our Transaction Services segment performs card processing and servicing activities for cardholder accounts generated by our Credit Services segment |
| During 2005, our Transaction Services segment derived dlra313dtta0 million, or 44dtta7prca of its revenues, from these services for our Credit Services segment |
| The financial performance of our Transaction Services segment, therefore, is linked to the activities of our Credit Services segment |
| If the Credit Services segment were to lose a significant client, our revenue and profitability attributable to the Transaction Services segment could be materially and adversely affected |
| Risks Particular to Credit Services If we are unable to securitize our credit card receivables due to changes in the market, the unavailability of credit enhancements, an early amortization event or for other reasons, we would not be able to fund new credit card receivables, which would have a negative impact on our operations and earnings |
| Since January 1996, we have sold substantially all of the credit card receivables originated by our private label credit card bank, World Financial Network National Bank, to WFN Credit Company, LLC and WFN Funding Company II, LLC, which in turn sold them to World Financial Network Credit Card Master Trust, World Financial Network Credit Card Master Note Trust and World Financial Network Credit Card Master Trust III, which we refer to as the WFN Trusts, as part of our securitization program |
| This securitization program is the primary vehicle through which World Financial Network National Bank finances our private label credit card receivables |
| We have approximately dlra450dtta0 million of asset-backed notes that will come due in 2006 |
| If World Financial Network National Bank were not able to regularly securitize the receivables it originates, our ability to grow or even maintain our credit services business 15 _________________________________________________________________ [77]Table of Contents would be materially impaired |
| World Financial Network National Bank’s ability to effect securitization transactions is impacted by the following factors, some of which are beyond our control: • conditions in the securities markets in general and the asset-backed securitization market in particular; • conformity in the quality of credit card receivables to rating agency requirements and changes in those requirements; and • our ability to fund required overcollateralizations or credit enhancements, which we routinely utilize in order to achieve better credit ratings to lower our borrowing costs |
| Once World Financial Network National Bank securitizes receivables, the agreement governing the transaction contains covenants that address the receivables’ performance and the continued solvency of the retailer where the underlying sales were generated |
| In the event such a covenant or other similar covenant is breached, an early amortization event could be declared, in which case the trustee for the securitization trust would retain World Financial Network National Bank’s interest in the related receivables, along with the excess interest income that would normally be paid to World Financial Network National Bank, until such time as the securitization investors are fully repaid |
| The occurrence of an early amortization event would significantly limit, or even negate, our ability to securitize additional receivables |
| Increases in net charge-offs beyond our current estimates could have a negative impact on our operating income and profitability |
| The primary risk associated with unsecured consumer lending is the risk of default or bankruptcy of the borrower, resulting in the borrower’s balance being charged-off as uncollectible |
| We rely principally on the customer’s creditworthiness for repayment of the loan and therefore have no other recourse for collection |
| We may not be able to successfully identify and evaluate the creditworthiness of cardholders to minimize delinquencies and losses |
| An increase in defaults or net charge-offs beyond historical levels will reduce the net spread available to us from the securitization master trust and could result in a reduction in finance charge income or a write-down of the interest-only strip |
| General economic factors, such as the rate of inflation, unemployment levels and interest rates, may result in greater delinquencies that lead to greater credit losses among consumers |
| In addition to being affected by general economic conditions and the success of our collection and recovery efforts, our delinquency and net credit card receivable charge-off rates are affected by the credit risk of our private label credit card receivables and the average age of our various private label credit card account portfolios |
| The average age of our private label credit card receivables affects the stability of delinquency and loss rates of the portfolio |
| An older private label credit card portfolio generally drives a more stable performance in the portfolio |
| At December 31, 2005, 61dtta9prca of the total number of our securitized accounts with outstanding balances and 58dtta0prca of the amount of our outstanding securitized receivables were for accounts with origination dates greater than 24 months old |
| We cannot assure you that our pricing strategy can offset the negative impact on profitability caused by increases in delinquencies and losses |
| Any material increases in delinquencies and losses beyond our current estimates could have a material adverse impact on us and the value of our net retained interests in loans that we sell through securitizations |
| Changes in the amount of payments and defaults by cardholders on credit card balances may cause a decrease in the estimated value of interest-only strips |
| The estimated fair value of interest-only strips depends upon the anticipated cash flows of the related credit card receivables |
| A significant factor affecting the anticipated cash flows is the rate at which the underlying principal of the securitized credit card receivables is reduced |
| Other assumptions used in estimating the value of the interest-only strips include estimated future credit losses and a discount rate commensurate with the risks involved |
| The rate of cardholder payments or defaults on credit card balances may be affected by a variety of economic factors, including interest rates and the availability of alternative financing, most of which are not within our control |
| A decrease in interest rates could cause cardholder 16 _________________________________________________________________ [78]Table of Contents payments to increase, thereby requiring a write down of the interest-only strips |
| If payments from cardholders or defaults by cardholders exceed our estimates, we may be required to decrease the estimated value of the interest-only strips through a charge against earnings |
| Interest rate increases could significantly reduce the amount we realize from the spread between the yield on our assets and our cost of funding |
| An increase in market interest rates could reduce the amount we realize from the spread between the yield on our assets and our cost of funding |
| A rise in market interest rates may indirectly impact the payment performance of consumers or the value of, or the amount we could realize from the sale of interest-only strips |
| At December 31, 2005, we had dlra4dtta1 billion of debt, including dlra3dtta3 billion of off-balance sheet debt from our securitization program |
| • At December 31, 2005, 69dtta8prca of our dlra4dtta1 billion of debt was fixed or effectively fixed through swap agreements |
| • At December 31, 2005, 63dtta1prca of our total debt, or 79dtta2prca of our off-balance sheet debt, was locked at a current effective interest rate of 4dtta6prca through interest rate swap agreements with notional amounts totaling dlra2dtta6 billion |
| Of the remaining 20dtta8prca of our off-balance sheet debt, we have variable rate private label credit cards that are equal to or greater than the variable rate debt |
| • At December 31, 2005, approximately 6dtta7prca of our total debt, or 32dtta8prca of our on-balance sheet debt, was subject to fixed rates with a weighted average interest rate of 4dtta2prca |
| Assuming we do not take any counteractive measures, a 1dtta0prca increase in interest rates would result in an annual decrease to pretax income of approximately dlra5dtta6 million related to our on-balance sheet debt |
| The foregoing sensitivity analysis is limited to the potential impact of an interest rate increase of 1dtta0prca on cash flows and fair values, and does not address default or credit risk |
| We expect growth in our credit services segment to result from new and acquired private label credit card programs whose credit card receivable performance could result in increased portfolio losses and negatively impact our net retained interests in loans securitized |
| We expect an important source of growth in our private label credit card operations to come from the acquisition of existing private label credit card programs and initiating private label credit card programs with retailers who do not currently offer a private label credit card |
| Although we believe our pricing and models for determining credit risk are designed to evaluate the credit risk of existing programs and the credit risk we are willing to assume for acquired and start-up programs, we cannot assure you that the loss experience on acquired and start-up programs will be consistent with our more established programs |
| The failure to successfully underwrite these private label credit card programs may result in defaults greater than our expectations and could have a material adverse impact on us and the value of our net retained interests in loans securitized |
| Current and proposed regulation and legislation relating to our credit services could limit our business activities, product offerings and fees charged |
| Various Federal and state laws and regulations significantly limit the credit services activities in which we are permitted to engage |
| Such laws and regulations, among other things, limit the fees and other charges that we can impose on consumers, limit or prescribe certain other terms of our products and services, require specified disclosures to consumers, or require that we maintain certain licenses, qualifications and minimum capital levels |
| In some cases, the precise application of these statutes and regulations is not clear |
| In addition, numerous legislative and regulatory proposals are advanced each year which, if adopted, could have a material adverse effect on our profitability or further restrict the manner in which we conduct our activities |
| The failure to comply with, or adverse changes in, the laws or regulations to which our business is subject, or adverse changes in their interpretation, could have a material adverse 17 _________________________________________________________________ [79]Table of Contents effect on our ability to collect our receivables and generate fees on the receivables, thereby adversely affecting our profitability |
| If our bank subsidiaries fail to meet certain bank criteria, we may become subject to regulation under the Bank Holding Company Act, which would force us to cease all of our non-banking activities and thus cause a drastic reduction in our profits and revenue |
| If either of our depository institution subsidiaries failed to meet the criteria for the exemption from the definition of “bank” in the Bank Holding Company Act under which it operates (which exemptions are described below), and if we did not divest such depository institution upon such an occurrence, we would become subject to regulation under the Bank Holding Company Act |
| This would require us to cease certain of our activities that are not permissible for companies that are subject to regulation under the Bank Holding Company Act |
| One of our depository institution subsidiaries, World Financial Network National Bank, is a limited-purpose national credit card bank located in Ohio |
| World Financial Network National Bank is not a “bank” as defined under the Bank Holding Company Act because it is in compliance with the following requirements: • it engages only in credit card operations; • it does not accept demand deposits or deposits that the depositor may withdraw by check or similar means for payment to third parties; • it does not accept any savings or time deposits of less than dlra100cmam000, except for deposits pledged as collateral for its extensions of credit; • it maintains only one office that accepts deposits; and • it does not engage in the business of making commercial loans |
| Our other depository institution subsidiary, World Financial Capital Bank, is a Utah industrial bank that is authorized to do business by the State of Utah and the Federal Deposit Insurance Corporation |
| World Financial Capital Bank is not a “bank” as defined under the Bank Holding Company Act because it is an industrial bank in compliance with the following requirements: • it is an institution organized under the laws of a state which, on March 5, 1987, had in effect or had under consideration in such state’s legislature a statute which required or would require such institution to obtain insurance under the Federal Deposit Insurance Act |
| • it does not accept demand deposits that the depositor may withdraw by check or similar means for payment to third parties |
| While the consequences of being subject to regulation under the Bank Holding Company Act would be severe, we believe that the risk of becoming subject to such regulation is minimal as a result of the precautions we have taken in structuring our business |
| If our industrial bank fails to meet the terms of the Federal Deposit Insurance Corporation or State of Utah Orders, we may be subject to termination of our industrial bank |
| Our industrial bank, World Financial Capital Bank, is authorized to do business by the State of Utah and the Federal Deposit Insurance Corporation |
| World Financial Capital Bank is subject to capital ratios and paid-in capital minimums and must maintain adequate allowances for loan losses and operate within its three-year business plan |
| While the consequence of losing the World Financial Capital Bank authority to do business would be significant, we believe that the risk of such loss is minimal as a result of the precautions we have taken and the management team we have in place |
| 18 _________________________________________________________________ [80]Table of Contents Risks Particular to Marketing Services If actual redemptions by AIR MILES collectors are greater than expected, our profitability could be adversely affected |
| A portion of our revenue is based on our estimate of the number of AIR MILES reward miles that will go unused by the collector base |
| The percentage of unredeemed reward miles is known as “breakage” in the loyalty industry |
| AIR MILES reward miles currently do not expire |
| We experience breakage when reward miles are not redeemed by collectors for a number of reasons, including: • loss of interest in the program or sponsors; • collectors moving out of the program area; and • death of a collector |
| If actual redemptions are greater than our estimates, our profitability could be adversely affected due to the cost of the excess redemptions |
| We could face increased competition from other loyalty programs, including Aeroplan, Air Canada’s frequent flyer program |
| As a result of increased competition in the loyalty market, including from Aeroplan, Air Canada’s frequent flyer program, we may experience greater competition in attracting and retaining sponsors in our AIR MILES Reward Program |
| The loss of our most active AIR MILES collectors could negatively impact our growth and profitability |
| Our most active AIR MILES reward miles collectors affect a disproportionately large percentage of our AIR MILES Reward Program revenue |
| We estimate that over half of the AIR MILES Reward Program revenues for 2006 will be associated with our AIR MILES collectors who participate most actively |
| The loss of a significant portion of these collectors, for any reason, could impact our ability to generate significant revenue from sponsors and loyalty partners |
| The continued attractiveness of our loyalty and rewards programs will depend in large part on our ability to remain affiliated with sponsors that are desirable to consumers and to offer rewards that are both attainable and attractive |
| Airline or travel industry disruptions, such as an airline insolvency, could negatively affect the AIR MILES Reward Program, our revenues and profitability |
| Air travel is one of the appeals of the AIR MILES Reward Program to collectors |
| As a result of airline insolvencies and restructurings, we may experience service disruptions that prevent us from fulfilling collectors’ flight redemption requests |
| If one of our existing airline suppliers sharply reduces its fleet capacity and route network, we may not be able to satisfy our collectors’ demands for airline tickets |
| Tickets from other airlines, if available, could be more expensive than a comparable ticket under our current supply agreements with existing suppliers, and the routes offered by the other airlines may be inadequate, inconvenient or undesirable to the redeeming collectors |
| As a result, we may experience higher air travel redemption costs and collector satisfaction with the AIR MILES Reward Program might be adversely affected |
| As a result of airline or travel industry disruptions, or as might result from political instability, terrorist acts or war, some collectors could determine that air travel is too dangerous or, given new airport regulations, too burdensome |
| Consequently, collectors might forego redeeming reward miles for air travel and therefore might not participate in the AIR MILES Reward Program to the extent they previously did, which could adversely affect our revenue from the program |
| A reduction in collector use of the program could impact our ability to attract new sponsors and loyalty partners and to generate revenue from current sponsors and loyalty partners |
| 19 _________________________________________________________________ [81]Table of Contents Legislation relating to consumer privacy may affect our ability to collect data that we use in providing our marketing services, which could negatively affect our ability to satisfy our clients’ needs |
| The enactment of legislation or industry regulations arising from public concern over consumer privacy issues could have a material adverse impact on our marketing services |
| Any such legislation or industry regulations could place restrictions upon the collection and use of information that is currently legally available, which could materially increase our cost of collecting some data |
| Legislation or industry regulation could also prohibit us from collecting or disseminating certain types of data, which could adversely affect our ability to meet our clients’ requirements |
| In the United States, the federal Gramm Leach Bliley Act makes it more difficult to collect and use information that has been legally available and may increase our costs of collecting some data |
| Regulations under this act give cardholders the ability to “opt out” of having information generated by their credit card purchases shared with other parties or the public |
| Our ability to gather and utilize this data will be adversely affected if a significant percentage of the consumers whose purchasing behavior we track elect to “opt out,” thereby precluding us from using their data |
| Under the regulations, we generally are required to refrain from sharing data generated by our new cardholders until such cardholders are given the opportunity to “opt out |
| ” In the United States, the federal Do-Not-Call Implementation Act makes it more difficult to telephonically communicate with customers |
| Regulations under this act give consumers the ability to “opt out,” through a national do-not-call list, a state do-not-call list or an internal do-not-call list which is required by the regulation, of having telephone calls placed to them by telemarketers who do not have an existing business relationship with the consumer |
| This act could limit our ability to provide services and information to our clients |
| Failure to comply with the terms of this act could have a negative impact to our reputation and subject us to significant penalties |
| In the United States, the federal Controlling the Assault of Non-Solicited Pornography and Marketing Act restricts our ability to send commercial electronic mail messages to customers |
| The act requires that a customer provide consent prior to a commercial electronic mail message being sent to the customer and further restricts the transmission information (header/subject line) and content of the electronic mail message |
| Under the regulation, we generally are prohibited from issuing electronic mail or obtaining a benefit from an electronic mail message until such time as the customer has affirmatively granted permission for us to do so |
| Failure to comply with the terms of this act could have a negative impact to our reputation and subject us to significant penalties |
| In Canada, the Personal Information Protection and Electronic Documents Act requires organizations to obtain a consumer’s consent to collect, use or disclose personal information |
| Under this act, which took effect on January 1, 2001, the nature of the required consent depends on the sensitivity of the personal information, and the act permits personal information to be used only for the purposes for which it was collected |
| We allow our customers to voluntarily “opt out” from receiving either one or both promotional and marketing mail or promotional and marketing electronic mail |
| Heightened consumer awareness of, and concern about, privacy may result in customers “opting out” at higher rates than they have historically |
| This would mean that a reduced number of customers would receive bonus mile offers and therefore would collect fewer AIR MILES reward miles |
| Risks Related to Our Company The affiliated entities of Welsh Carson currently own a significant amount of our common stock |
| These stockholders may have interests that conflict with yours and may be able to control the election of directors and the approval of significant corporate transactions, including a change in control |
| As of February 28, 2006, the affiliated entities of Welsh Carson beneficially owned approximately 17dtta3prca of our outstanding common stock |
| Welsh Carson is able to exercise significant influence over matters requiring stockholder approval, including the election of directors, changes to our charter 20 _________________________________________________________________ [82]Table of Contents documents and significant corporate transactions |
| Welsh Carson may have interests that conflict with our interests or those of other stockholders |
| Welsh Carson’s continued concentrated ownership will make it difficult for another company to acquire us and for you to receive any related takeover premium for your shares unless Welsh Carson approves the acquisition |
| Delaware law and our charter documents could prevent a change of control that might be beneficial to you |
| Delaware law, as well as provisions of our certificate of incorporation and bylaws, could discourage unsolicited proposals to acquire us, even though such proposals may be beneficial to you |
| These provisions include: • a board of directors classified into three classes of directors with the directors of each class having staggered, three-year terms; • our board’s authority to issue shares of preferred stock without further stockholder approval; and • provisions of Delaware law that restrict many business combinations and provide that directors serving on staggered boards of directors, such as ours, may be removed only for cause |
| These provisions of our certificate of incorporation, bylaws and Delaware law could discourage tender offers or other transactions that might otherwise result in our stockholders receiving a premium over the market price for our common stock |
| Future sales of our common stock, or the perception that future sales could occur, may adversely affect our common stock price |
| As of February 28, 2006, we had an aggregate of 98cmam951cmam592 shares of our common stock authorized but unissued and not reserved for specific purposes |
| In general, we may issue all of these shares without any action or approval by our stockholders |
| We have reserved 21cmam003cmam000 shares of our common stock for issuance under our employee stock purchase plan and our long term incentive plans, of which 7cmam965cmam192 shares are issuable upon vesting of restricted stock awards, restricted stock units, and upon exercise of options granted as of February 28, 2006, including options to purchase approximately 3cmam921cmam897 shares exercisable as of February 28, 2006 or that will become exercisable within 60 days after February 28, 2006 |
| We have reserved for issuance 1cmam500cmam000 shares of our common stock, all of which remain issuable, under our 401(k) and Retirement Savings Plan |
| In addition, we may pursue acquisitions of competitors and related businesses and may issue shares of our common stock in connection with these acquisitions |
| Sales or issuances of a substantial number of shares of common stock, or the perception that such sales could occur, could adversely affect prevailing market prices of our common stock, and any sale or issuance of our common stock will dilute the percentage ownership held by our stockholders |
| Further, sales of a substantial number of shares of common stock by our largest stockholder, Welsh Carson, or the perception that such sales could occur, could also adversely affect prevailing market prices of our common stock |