| AMERICAN EQUITY INVESTMENT LIFE HOLDING CO ITEM 1A RISK FACTORS We face competition from companies that have greater financial resources, broader arrays of products, higher ratings and stronger financial performance, which may impair our ability to retain existing customers, attracts new customers and maintain our profitability and financial strength |
| We operate in a highly competitive industry |
| Many of our competitors are substantially larger and enjoy substantially greater financial resources, higher ratings by rating agencies, broader and more diversified product lines and more widespread agency relationships |
| Our annuity products compete with index, fixed rate and variable annuities sold by other insurance companies and also with mutual fund products, traditional bank investments and other retirement funding alternatives offered by asset managers, banks and broker-dealers |
| Our insurance products compete with those of other insurance companies, financial intermediaries and other institutions based on a number of factors, including premium rates, policy terms and conditions, service provided to distribution channels and policyholders, ratings by rating agencies, reputation and commission structures |
| While we compete with numerous other companies, we view the following as our most significant competitors: · Allianz Life Insurance Company of North America; · Midland National Life Insurance Company; · AmerUs Group Co |
| Our ability to compete depends in part on product pricing which is driven by our investment performance |
| We will not be able to accumulate and retain assets under management for our products if our investment results underperform the market or the competition, since such underperformance likely would result in asset withdrawals and reduced sales |
| Page 13 of 55 ______________________________________________________________________ We compete for distribution sources for our products |
| We believe that our success in competing for distributors depends on factors such as our financial strength, the services we provide to, and the relationships we develop with, these distributors and offering competitive commission structures |
| Our distributors are generally free to sell products from whichever providers they wish, which makes it important for us to continually offer distributors products and services they find attractive |
| If our products or services fall short of distributors’ needs, we may not be able to establish and maintain satisfactory relationships with distributors of our annuity and life insurance products |
| Our ability to compete in the past has also depended in part on our ability to develop innovative new products and bring them to market more quickly than our competitors |
| In order for us to compete in the future, we will need to continue to bring innovative products to market in a timely fashion |
| Otherwise, our revenues and profitability could suffer |
| National banks, with pre-existing customer bases for financial services products, may increasingly compete with insurers, as a result of legislation removing restrictions on bank affiliations with insurers |
| This legislation, the Gramm-Leach-Bliley Act of 1999, permits mergers that combine commercial banks, insurers and securities firms under one holding company |
| Until passage of the Gramm-Leach-Bliley Act, prior legislation had limited the ability of banks to engage in securities-related businesses and had restricted banks from being affiliated with insurance companies |
| The ability of banks to increase their securities-related business or to affiliate with insurance companies may materially and adversely affect sales of all of our products by substantially increasing the number and financial strength of our potential competitors |
| General economic conditions, including changing interest rates and market volatility, affect both the risks and the returns on both our products and our investment portfolio |
| The fair value of our investments and our investment performance, including yields and realization of gains or losses, may vary depending on economic and market conditions |
| Such conditions include the shape of the yield curve, the level of interest rates and recognized equity and bond indices, including, without limitation, the S&P 500 Index®, the Dow Jones IndexSM and the NASDAQ-100 Index® (the “Indices”) |
| Interest rate risk is our primary market risk exposure |
| Substantial and sustained increases and decreases in market interest rates can materially and adversely affect the profitability of our products, our ability to earn predictable returns, the fair value of our investments and the reported value of stockholders’ equity |
| From time to time, for business or regulatory reasons, we may be required to sell certain of our investments at a time when their fair value is less than the carrying value of these securities |
| Rising interest rates may cause declines in the value of our fixed maturity securities |
| With respect to our available for sale fixed maturity securities, such declines (net of income taxes and certain adjustments for assumed changes in amortization of deferred policy acquisition costs and deferred sales inducements) reduce our reported stockholders’ equity and book value per share |
| We have a portfolio of held for investment securities which consists principally of long duration bonds issued by US government agencies, the value of which is also sensitive to interest rate changes |
| We may also have difficulty selling our commercial mortgage loans because they are less liquid than our publicly traded securities |
| As of December 31, 2005, our commercial mortgage loans represented approximately 12dtta6prca of the value of our invested assets |
| If we require significant amounts of cash on short notice, we may have difficulty selling these loans at attractive prices or in a timely manner, or both |
| A key component of our net income is the investment spread |
| A narrowing of investment spreads may adversely affect operating results |
| Although we have the right to adjust interest crediting rates (referred to as “participation”, “asset fee” or “cap” rates for index annuities) on most products, changes to crediting rates may not be sufficient to maintain targeted investment spreads in all economic and market environments |
| In general, our ability to lower crediting rates is subject to a minimum crediting rate filed Page 14 of 55 ______________________________________________________________________ with and approved by state regulators |
| In addition, competition and other factors, including the potential for increases in surrenders and withdrawals, may limit our ability to adjust or maintain crediting rates at levels necessary to avoid the narrowing of spreads under certain market condition |
| Our policy structure generally provides for resetting of policy crediting rates at least annually and imposes withdrawal penalties for withdrawals during the first three to 17 years a policy is in force |
| Our spreads may be compressed in declining interest rate environments |
| A substantial portion of our fixed income securities have call features and are subject to redemption currently or in the near future |
| We have reinvestment risk related to these redemptions to the extent we cannot reinvest the net proceeds in assets with credit quality and yield characteristics similar to or better than those of the redeemed bonds |
| As indicated above, we have a certain ability to mitigate this risk by lowering interest crediting rates subject to minimum crediting rates in the policy terms |
| Managing the investment spread on our index annuities is more complex than it is for fixed rate annuity products |
| Index products are credited with a percentage (known as the “participation rate”) of gains in the Indices |
| Some of our index products have an annual asset fee which is deducted from the amount credited to the policy |
| In addition, caps are set on some products to limit the maximum amount which may be credited on a particular product |
| To fund the earnings to be credited to the index products, we purchase options on the Indices |
| The price of such options generally increases with increases in the volatility in the Indices and interest rates, which may either narrow the spread or cause us to lower participation rates |
| Thus, the volatility of the Indices adds an additional degree of uncertainty to the profitability of the index products |
| We attempt to mitigate this risk by resetting participation rates and asset fees annually and adjusting the applicable caps |
| Our investment portfolio is also subject to credit quality risks which may diminish the value of our invested assets and affect our sales, profitability and reported book value per share |
| We are subject to the risk that the issuers of our fixed maturity securities and other debt securities (other than our US agency securities), and borrowers on our commercial mortgages, will default on principal and interest payments, particularly if a major downturn in economic activity occurs |
| At December 31, 2005, 84dtta8prca of our invested assets consisted of fixed maturity securities, of which 1dtta3prca were below investment grade |
| At December 31, 2005, there were no delinquencies in our commercial mortgage loan portfolio |
| An increase in defaults on our fixed maturity securities and commercial mortgage loan portfolios could harm our financial strength and reduce our profitability |
| We use derivative instruments to fund the annual credits on our index annuities |
| We purchase derivative instruments, consisting primarily of one-year call options, from a number of counterparties |
| Our policy is to acquire such options only from counterparties rated “A-” or better by a nationally recognized rating agency |
| If, however, our counterparties fail to honor their obligations under the derivative instruments, we will have failed to provide for crediting to policyholders related to the appreciation in the applicable indices |
| Any such failure could harm our financial strength and reduce our profitability |
| Our reinsurance program involves risks because we remain liable with respect to the liabilities ceded to reinsurers if the reinsurers fail to meet the obligations assumed by them |
| Our life insurance subsidiaries cede insurance to other insurance companies through reinsurance |
| In particular, American Equity Life has entered into two coinsurance agreements with EquiTrust, an affiliate of Farm Bureau covering 70prca of certain of our fixed rate and index annuities issued from August 1, 2001 through December 31, 2001, 40prca of those contracts for 2002 and 2003 and 20prca of those contracts issued from January 1, 2004 to July 31, 2004, when the agreement was suspended by mutual consent of the parties |
| As a result of the suspension, new business is no longer ceded to EquiTrust unless and until the parties mutually agree to resume the coinsurance of new business |
| At December 31, 2005, the aggregate policy benefit reserve transferred to EquiTrust was approximately dlra2dtta0 billion |
| EquiTrust has been Page 15 of 55 ______________________________________________________________________ assigned a financial strength rating of “A” by AM Best Company |
| We remain liable with respect to the policy liabilities ceded to EquiTrust should it fail to meet the obligations assumed by it |
| As of December 31, 2005, Farm Bureau beneficially owned approximately 9dtta9prca of our common stock |
| In addition, we have entered into other type of reinsurance transactions including indemnity and financial reinsurance |
| Should any of these reinsurers fail to meet the obligations assumed under such reinsurance, we remain liable with respect to the liabilities ceded |
| We may experience volatility in net income due to accounting standards for derivatives |
| The Financial Accounting Standards Board issued Statement of Financial Accounting Standards (“SFAS”) Nodtta 133, which became effective for us on January 1, 2001 |
| Under SFAS Nodtta 133, as amended, all derivative instruments (including certain derivative instruments embedded in other contracts) are recognized in the balance sheet at their fair values and changes in fair value are recognized immediately in earnings |
| This impacts the items of revenue and expense we report on our index business as follows: · We must mark to market the purchased call options we use to fund the annual index credits on our index annuities based upon quoted market prices from related counterparties |
| We record the change in fair value of these options as a component of our revenues |
| Included within the change in fair value of the options is an element reflecting the time value of the options, which initially is their purchase cost declining to zero at the end of their one-year lives |
| The change in fair value of derivatives also includes proceeds received at expiration of the one-year option terms and gains or losses recognized upon early termination |
| For the years ended December 31, 2005, 2004 and 2003, the change in fair value of derivatives was $(18dtta0) million, dlra28dtta7 million and dlra52dtta5 million, respectively |
| · Under SFAS Nodtta 133, the future annual index credits on our index annuities are treated as a “series of embedded derivatives” over the expected life of the applicable contracts |
| We are required to estimate the fair value of policy liabilities for index annuities, including the embedded derivatives, by valuing the “host” (or guaranteed) component of the liabilities and projecting (i) the expected index credits on the next policy anniversary dates and (ii) the net cost of annual options we will purchase in the future to fund index credits |
| Our estimates of the fair value of these embedded derivatives are based on assumptions related to underlying policy terms (including annual participation rates, asset fees, cap rates and minimum guarantees), index values, notional amounts, strike prices and expected lives of the policies |
| The change in fair value of embedded derivatives generally increases with increases in volatility in the Indices and interest rates |
| The change in fair value of the embedded derivatives will not correspond to the change in fair value of the purchased options because the purchased options are one-year options while the options valued in the fair value of embedded derivatives cover the expected life of the contracts which typically exceed 10 years |
| The change in fair value of embedded derivatives related to our index annuities included in the consolidated statements of income was dlra26dtta4 million, $(8dtta6) million and dlra66dtta8 million for the years ended December 31, 2005, 2004 and 2003, respectively |
| · We adjust the amortization of deferred policy acquisition costs and deferred sales inducements to reflect the impact of the items discussed above |
| Amortization of deferred policy acquisition costs and deferred sales inducements decreased by dlra12dtta3 million for the year ended December 31, 2005, increased by dlra6dtta4 million for the year ended December 31, 2004 and decreased by dlra1dtta7 million for the year ended December 31, 2003 as a result of the application of SFAS Nodtta 133 |
| The application of SFAS Nodtta 133 in future periods to our index annuity business may cause substantial volatility in our reported net income |
| Page 16 of 55 ______________________________________________________________________ If we do not manage our growth effectively, our financial performance could be adversely affected; our historical growth rates may not be indicative of our future growth |
| We have experience rapid growth since our formation in December 1995 |
| For the year ended December 31, 2005, our deposits from sales of new annuities were dlra2dtta9 billion |
| Our work force has grown from approximately 65 employees and 4cmam000 independent agents as of December 31, 1997 to approximately 270 employees and 52cmam000 independent agents as of December 31, 2005 |
| We intend to continue to grow by recruiting new independent agents, increasing the productivity of our existing agents, expanding our insurance distribution network, developing new products, expanding into new product lines, becoming licensed in all 50 states and continuing to develop new incentives for our sales agents |
| Future growth will impose significant added responsibilities on our management, including the need to identify, recruit, maintain and integrate additional employees, including management |
| There can be no assurance that we will be successful in expanding our business or that our systems, procedures and controls will be adequate to support our operations as they expand |
| In addition, due to our rapid growth and resulting increased size, it may be necessary to expand the scope of our investing activities to asset classes in which we historically have not invested or have not had significant exposure |
| If we are unable to adequately manage our investments in these classes, our financial condition or operating results in the future could be less favorable than in the past |
| Further, although recently deemphasized, we have utilized reinsurance in the past to support our growth |
| The future availability of reinsurance is uncertain |
| Our failure to manage growth effectively, or our inability to recruit, maintain and integrate additional qualified employees and independent agents, could have a material adverse effect on our business, financial condition or results of operations |
| In addition, due to our rapid growth, our historical growth rates are not likely to accurately reflect our future growth rates or our growth potential |
| We cannot assure you that our future revenues will increase or that we will continue to be profitable |
| We must retain and attract key employees or else we may not grow or be successful |
| We are dependent upon our executive management for the operation and development of our business |
| Our executive management team includes: · David J Noble, Chairman, Chief Executive Officer, President and Treasurer; · John M Matovina, Vice Chairman; · Kevin R Wingert, President of American Equity Life; · James R Gerlach, Executive Vice President; · Terry A Reimer, Executive Vice President; · Debra J Richardson, Senior Vice President; and · Wendy L Carlson, General Counsel and Chief Financial Officer |
| Although we have change in control agreements with members of our executive management team, we do not have employment contracts with any of the members of our executive management team |
| Although none of our executive management team has indicated that they intend to terminate their employment with us, there can be no assurance that these employees will remain with us for any particular period of time |
| If we are unable to attract and retain national marketing organizations and independent agents, sales of our products may be reduced |
| We distribute our annuity products through a variable cost distribution network which included over 70 national marketing organizations and approximately 52cmam000 independent agents as of December 31, Page 17 of 55 ______________________________________________________________________ 2005 |
| We must attract and retain such marketers and agents to sell our products |
| Insurance companies compete vigorously for productive agents |
| W e compete with other life insurance companies for marketers and agents primarily on the basis of our financial position, support services, compensation and product features |
| Such marketers and agents may promote products offered by other life insurance companies that may offer a larger variety of products than we do |
| Our competitiveness for such marketers and agents also depends upon the long-term relationships we develop with them |
| If we are unable to attract and retain sufficient marketers and agents to sell our products, our ability to compete and our revenues would suffer |
| We may require additional capital to support sustained future growth which may not be available when needed or may be available only on unfavorable terms |
| Our long-term strategic capital requirements will depend on many factors including the accumulated statutory earnings of our life insurance subsidiaries and the relationship between the statutory capital and surplus of our life insurance subsidiaries and (i) the rate of growth in sales of our products; and (ii) the levels of credit risk and/or interest rate risk in our invested assets |
| To support long-term capital requirements, we may need to increase or maintain the statutory capital and surplus of our life insurance subsidiaries through additional financings, which could include debt, equity, financial reinsurance and/or other surplus relief transactions |
| Such financings, if available at all, may be available only on terms that are not favorable to us |
| If we cannot maintain adequate capital, we may be required to limit growth in sales of new annuity products, and such action could adversely affect our business, financial condition or results of operations |
| Changes in state and federal regulation may affect our profitability |
| We are subject to regulation under applicable insurance statutes, including insurance holding company statutes, in the various states in which our life insurance subsidiaries write insurance |
| Our life insurance subsidiaries are domiciled in New York and Iowa |
| We are currently licensed to sell our products in 49 states and the District of Columbia |
| Insurance regulation is intended to provide safeguards for policyholders rather than to protect shareholders of insurance companies or their holding companies |
| Regulators oversee matters relating to trade practices, policy forms, claims practices, guaranty funds, types and amounts of investments, reserve adequacy, insurer solvency minimum amounts of capital and surplus, transactions with related parties, changes in control and payment of dividends |
| State insurance regulators and the National Association of Insurance Commissions (“NAIC”) continually reexamine existing laws and regulations, and may impose changes in the future |
| Our life insurance subsidiaries are subject to the NAIC’s risk-based capital requirements which are intended to be used by insurance regulators as an early warning tool to identify deteriorating or weakly capitalized insurance companies for the purpose of initiating regulatory action |
| Our life insurance subsidiaries also may be required, under solvency or guaranty laws of most states in which they do business, to pay assessments up to certain prescribed limits to fund policyholder losses or liabilities or insolvent insurance companies |
| Although the federal government does not directly regulate the insurance business, federal legislation and administrative policies in several areas, including pension regulation, age and sex discrimination, financial services regulation, securities regulation and federal taxation, can significantly affect the insurance business |
| As increased scrutiny has been placed upon the insurance regulatory framework, a number of state legislatures have considered or enacted legislative proposals that alter, and in many cases increase, state authority to regulate insurance companies and holding company systems |
| In addition, legislation has been introduced in Congress which could result in the federal government assuming some role in the regulation of the insurance industry |
| The regulatory framework at the state and federal level applicable to our insurance products is evolving |
| The changing regulatory framework could affect the Page 18 of 55 ______________________________________________________________________ design of such products and our ability to sell certain products |
| Any changes in these laws and regulations could materially and adversely affect our business, financial condition or results of operations |
| Recently, suits have been brought against, and guilty pleas accepted from, participants in the insurance industry alleging certain illegal actions by these participants |
| Although we do not do business with the parties to the suits or those pleading guilty, are not involved in the suits at all and do not believe that our business practices are of the same nature as those the suits allege to have occurred, we cannot be certain of what ultimate effect the suits, as well as any increased regulatory oversight that might result from the suits, might have on the insurance industry as a whole, and thus on our business |
| Changes in federal income taxation laws, including recent reduction in individual income tax rates, may affect sales of our products and profitability |
| The annuity and life insurance products that we market generally provide the policyholder with certain federal income tax advantages |
| For example, federal income taxation on any increases in the contract values (ie the “inside build-up”) of these products is deferred until it is received by the policyholder |
| With other savings investments, such as certificates of deposit and taxable bonds, the increase in value is generally taxed each year as it is realized |
| Additionally, life insurance death benefits are generally exempt from income tax |
| From time to time, various tax law changes have been proposed that could have an adverse effect on our business, including the elimination of all or a portion of the income tax advantages described above for annuities and life insurance |
| If legislation were enacted to eliminate the tax deferral for annuities, such a change would have an adverse effect on our ability to sell non-qualified annuities |
| Non-qualified annuities are annuities that are not sold to an individual retirement account or other qualified retirement plan |
| In June 2001, the Economic Growth and Tax Relief Reconciliation Act of 2001 was enacted, which implement a staged reduction in individual federal income tax rates that began in 2001 |
| The enactment of the Jobs and Growth Tax Relief Reconciliation Act of 2003 accelerated such rate reductions |
| While the reduction in income tax rates is temporary (pre-2001 rates will return in 2011), the present value of the tax deferred advantage of annuities and life insurance products is less, which might hinder our ability to sell such products and/or increase the rate at which our current policyholders surrender their policies |
| We face risks relating to litigation, including the costs of such litigation, management distraction and the potential for damage awards, which may adversely impact our business |
| We are occasionally involved in litigation, both as a defendant and as a plaintiff |
| In addition, state regulatory bodies, such as state insurance departments, the SEC, the National Association of Securities Dealers, Inc, the Department of Labor, and other regulatory bodies regularly make inquiries and conduct examinations or investigations concerning our compliance with, among other things, insurance laws, securities laws, the Employee Retirement Income Security Act of 1974, as amended, and laws governing the activities of broker-dealers |
| Companies in the life insurance and annuity business have faced litigation, including class action lawsuits, alleging improper product design, improper sales practices and similar claims |
| We are currently a defendant in several purported class action lawsuits filed in state and federal courts alleging, among other things, improper sales practices |
| In these lawsuits, the plaintiffs are seeking, among other things, returns of premiums and other compensatory and punitive damages |
| We have reached a final settlement in one of these cases, the impact of which is expected to be immaterial |
| No class has been certified in any of the other pending cases at this time |
| Although we have denied all allegations in the lawsuits and intend to vigorously defend them, the lawsuits are in the early stages of litigation and neither the outcomes nor a range of possible outcomes can be determined at this time |
| Although we do not believe that these lawsuits will have a material adverse effect on our business, financial condition or results of Page 19 of 55 ______________________________________________________________________ operations, there can be no assurance that such litigation, or any future litigation, will not have such an effect, whether financially, through distraction of our management or otherwise |
| A downgrade in our credit or financial strength ratings may increase our future cost of capital and may reduce new sales, adversely affect relationships with distributors and increase policy surrenders and withdrawals |
| Currently, our senior unsecured indebtedness carries a “bb+” rating from AM Best and a “BB+” rating from Standard & Poor’s |
| Our ability to maintain such ratings is dependent upon the results of operations of our subsidiaries and our financial strength |
| If we fail to preserve the strength of our balance sheet and to maintain a capital structure that rating agencies deem suitable, it could result in a downgrading of the ratings applicable to our senior unsecured indebtedness |
| A downgrading would likely reduce the fair value of the common stock and may increase our future cost of capital |
| Financial strength ratings are important factors in establishing the competitive position of life insurance and annuity companies |
| In recent years, the market for annuities has been dominated by those insurers with the highest ratings |
| A ratings downgrade, or the potential for a ratings downgrade, could have a number of adverse effects on our business |
| For example, distributors and sales agents for life insurance and annuity products use the ratings as one factor in determining which insurer’s annuities to market |
| A ratings downgrade could cause those distributors and agents to seek alternative carriers |
| In addition, a ratings downgrade could materially increase the number of policy or contract surrenders we experience |
| Financial strength ratings generally involve quantitative and qualitative evaluations by rating agencies of a company’s financial condition and operating performance |
| Generally, rating agencies base their ratings upon information furnished to them by the insurer and upon their own investigations, studies and assumptions |
| Ratings are based upon factors of concern to agents, policyholders and intermediaries and are not directed toward the protection of investors and are recommendations to buy, sell or hold securities |
| American Equity Life has received financial strength ratings of “B++” (Very Good) with a stable outlook from AM Best Company and “BBB+” with a stable outlook from Standard & Poor’s |
| AM Best ratings currently range from “A++” (Superior) to “F” (In Liquidation), and include 16 separate ratings categories |
| Within these categories, “A++” (Superior) and “A+” (Superior) are the highest, followed by “A” (Excellent), “A-” (Excellent), “B++”(Very Good) and “B+”(Very Good) |
| Publications of AM Best indicate that the “B++” rating is assigned to those companies that, in AM Best’s opinion, have demonstrated a good ability to meet their ongoing obligations to policyholders |
| Standard & Poor’s insurer financial strength ratings currently range from “AAA” to “NR”, and include 21 separate ratings categories |
| Within these categories, “AAA” and “AA” are the highest, followed by “A” and “BBB” |
| Publications of Standard & Poor’s indicate that an insurer rated “BBB” or higher is regarded as having strong financial security characteristics, but is somewhat more likely to be affected by adverse business conditions than are higher rated insurers |
| AM Best and Standard & Poor’s review their ratings of insurance companies from time to time |
| There can be no assurance that any particular rating will continue for any given period of time or that it will not be changed or withdrawn entirely if, in their judgment, circumstances so warrant |
| If our ratings were to be downgraded for any reason, we could experience a material decline in the sales of our products and the persistency of our existing business |
| Our system of internal controls ensures the accuracy or completeness of our disclosures and a loss of public confidence in the quality of our internal controls or disclosures could have a negative impact on us |
| Section 404 of the Sarbanes-Oxley Act of 2002, or the SOA, requires us to provide an annual report on our internal controls over financial reporting, including an assessment as to whether or not our internal controls over financial reporting are effective |
| We are also required to have our auditors attest to our Page 20 of 55 ______________________________________________________________________ assessment and to opine on the effectiveness of our internal controls over financial reporting |
| We have in the past discovered, and may in the future discover areas of our internal controls that need remediation |
| If we determine that our remediation has been ineffective, or we identify additional material weaknesses in our internal controls over financial reporting, we could be subjected to additional regulatory scrutiny, future delays in filing our financial statements and a loss of public confidence in the reliability of our financial statements, which could have a negative impact on our liquidity, access to capital markets, and financial condition |
| In addition, we do not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud |
| The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs |
| Based on the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been or will be detected |
| These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple errors or mistakes |
| Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls |
| The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events |
| Therefore, a control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met |
| Also, while we document our assumptions and review financial disclosures with the audit committee of our board of directors, the regulations and literature governing our disclosures are complex and reasonable persons may disagree as to their application to a particular situation or set of circumstances |