| RESTORATION HARDWARE INC ITEM 1A RISK FACTORS We face a variety of risks that may affect our operations or financial results and many of those risks are driven by factors that we cannot control or predict |
| The following discussion addresses those risks that management believes are the most significant, although there may be other risks that could arise, or may prove to be more significant than expected, that may affect our operations or financial results |
| Our success depends upon consumer responses to our product offerings; if we fail to successfully anticipate changes in consumer trends or consumers otherwise do not respond to our product offerings, our results of operations may be adversely affected |
| Our success depends on consumer responses to our product offerings and our ability to anticipate and respond to changing merchandise trends and consumer demands in a timely manner |
| If, for example, consumers do not respond to our product offering or we misjudge market trends, we may significantly overstock unpopular products and be forced to take significant inventory markdowns, which would have a negative impact on our operating results |
| Conversely, shortages of popular items could result in loss of potential sales revenue and have a material adverse effect on our operating results |
| We believe there is a lifestyle trend toward increased interest in home renovation and interior decorating, and we further believe we are benefiting from such a trend |
| If this trend fails to continue to 5 ______________________________________________________________________ directly benefit us or if there is an overall decline in the trend, we could experience an adverse decline in consumer interest in our major product lines |
| Moreover, our products must appeal to a broad range of consumers whose preferences cannot always be predicted with certainty and may change between sales seasons |
| If we misjudge either the market for our merchandise or our customers’ purchasing habits, we may experience a material decline in sales or be required to sell inventory at reduced margins |
| We could also suffer a loss of customer goodwill if we do not maintain a high level of quality control and service procedures or if we otherwise fail to ensure satisfactory quality of our products |
| These outcomes may have a material adverse effect on our business, operating results and financial condition |
| In addition, a material decline in sales and other adverse conditions resulting from our failure to accurately anticipate changes in merchandise trends and consumer demands could cause us to close underperforming stores |
| While we believe that we benefit in the long run financially by closing underperforming stores and reducing nonproductive costs, the closure of such stores would subject us to additional increased short-term costs including, but not limited to, employee severance costs, charges in connection with the impairment of assets and costs associated with the disposition of outstanding lease obligations |
| At January 28, 2006, we did not expect, and therefore did not reserve for, any store closures |
| Our success is highly dependent on improvements to our planning, order acceptance and fulfillment and supply chain processes |
| Our product mix is increasingly dependent upon the efficiency of our supply chain infrastructure and order acceptance and fulfillment processes |
| Our in store customer sales have recently consisted of higher percentages of merchandise that must be shipped to the customer or is custom ordered as we have refined our product offerings |
| Such transactions put additional pressure on our order acceptance and fulfillment processes |
| An important part of our efforts to achieve efficiencies, cost reductions and sales growth is the identification and implementation of improvements to our planning, logistical and distribution infrastructure and our supply chain, including merchandise ordering, transportation and receipt processing |
| An inability to improve our planning and supply chain processes or to take full advantage of supply chain opportunities could result in loss of potential sales revenue, increase our costs and have a material adverse effect on our operating results |
| Because our revenue is subject to seasonal fluctuations, significant deviations from projected demand for products in our inventory during a selling season could have a material adverse effect on our financial condition and results of operations |
| Our business is highly seasonal |
| We make decisions regarding merchandise well in advance of the season in which it will be sold, particularly for the holiday selling season |
| The general pattern associated with the retail industry is one of peak sales and earnings during the holiday season |
| Due to the importance of the holiday selling season, the fourth quarter of each fiscal year has historically contributed, and we expect it will continue to contribute, a disproportionate percentage of our net revenue and our gross profit for the entire fiscal year |
| In anticipation of increased sales activity during the fourth quarter, we incur significant additional expenses both prior to and during the fourth quarter |
| These expenses may include acquisition of additional inventory, catalog preparation and mailing, advertising, in-store promotions, seasonal staffing needs and other similar items |
| If, for any reason, our sales were to fall below our expectations in the fourth quarter, our business, financial condition and annual operating results may be materially adversely affected |
| Increased catalog and other marketing expenditures without increased revenue may have a negative impact on our operating results |
| Over the past several fiscal years, we have substantially increased the amount that we spend on catalog and other marketing costs, and we expect to continue to invest at these increased levels in the current fiscal year and in the future |
| As a result, if we misjudge the directions or trends in our market, we may expend large amounts of cash that generate little return on investment, which would have a negative effect on our operating results |
| 6 ______________________________________________________________________ Our quarterly results fluctuate due to a variety of factors and are not a meaningful indicator of future performance |
| Our quarterly results have fluctuated in the past and may fluctuate significantly in the future, depending upon a variety of factors, including, among other things, the mix of products sold, the timing and level of markdowns, promotional events, store openings, closings, seasonality, remodelings or relocations, shifts in the timing of holidays, timing of catalog releases or sales, timing of delivery of orders, competitive factors and general economic conditions |
| Accordingly, our profits or losses may fluctuate |
| Moreover, in response to competitive pressures, we may take certain pricing or marketing actions that could have a material adverse effect on our business, financial condition and results of operations |
| Therefore, we believe that period-to-period comparisons of our operating results are not necessarily meaningful and cannot be relied upon as indicators of future performance |
| If our operating results in any future period fall below the expectations of securities analysts or investors, or if our operating results do not meet the guidance that we issue from time to time, the market price of our shares of common stock would likely decline |
| Fluctuations in comparable store sales may cause our revenue and operating results from period-to-period to vary |
| A variety of factors affect our comparable store sales including, among other things, the general retail sales environment, our ability to efficiently source and distribute products, changes in our merchandise mix, promotional events, the impact of competition, the timing of delivery of orders and our ability to execute our business strategy efficiently |
| Past comparable store sales results may not be indicative of future results |
| As a result, the unpredictability of our comparable store sales may cause our revenue and operating results to vary from quarter to quarter, and an unanticipated decline in comparable store sales may cause our stock price to fluctuate |
| We depend on a number of key vendors to supply our merchandise and provide critical services, and the loss of any one of our key vendors may result in a loss of sales revenue and significantly harm our operating results |
| Our performance depends on our ability to purchase our merchandise in sufficient quantities at competitive prices |
| Our smaller vendors generally have limited resources, production capacities and operating histories, and some of our vendors have limited the distribution of their merchandise in the past |
| We have no long-term purchase contracts or other contractual assurances of continued supply, pricing or access to new products, and any vendor or distributor could discontinue selling to us at any time |
| We may not be able to acquire desired merchandise in sufficient quantities on terms acceptable to us in the future, or be able to develop relationships with new vendors to expand our offerings or replace discontinued vendors |
| Our inability to acquire suitable merchandise in the future or the loss of one or more key vendors and our failure to replace any one or more of them may have a material adverse effect on our business, results of operations and financial condition |
| In addition, a single vendor supports our point-of-sale, merchandise management and warehouse management systems |
| We also rely on the same vendor for software support |
| A failure by this vendor to adequately support our management information systems in the future could have a material adverse effect on our business, results of operations and financial condition |
| We routinely purchase products from new vendors, many of whom are located abroad |
| We cannot assure you that they will be reliable sources of our products |
| Moreover, a number of these manufacturers and suppliers are small and undercapitalized firms that produce limited numbers of items |
| Given their limited resources, these firms might be susceptible to production difficulties, quality control issues and problems in delivering agreed-upon quantities on schedule |
| We cannot assure you that we will be able, if 7 ______________________________________________________________________ necessary, to return products to these suppliers and manufacturers and obtain refunds of our purchase price or obtain reimbursement or indemnification from them if their products prove defective |
| These suppliers and manufacturers also may be unable to withstand a downturn in the US or worldwide economy |
| Significant failures on the part of these suppliers or manufacturers could have a material adverse effect on our operating results |
| In addition, many of these suppliers and manufacturers require extensive advance notice of our requirements in order to produce products in the quantities we desire |
| This long lead time requires us to place orders far in advance of the time when certain products will be offered for sale, thereby exposing us to risks relating to shifts in customer demands and trends, and any downturn in the US economy |
| Operational difficulties in any of our distribution and order acceptance and fulfillment operations would materially affect our operating results |
| A growing percentage of our business depends upon the successful operation of our distribution and order acceptance and fulfillment services either because the business is generated through our Catalog and Internet channels or because the customer’s purchase in the store must be completed through a shipment of product to the customer |
| The distribution functions for our stores as well as all of our furniture orders are currently handled from our facilities in Hayward and Tracy, California and Baltimore, Maryland |
| Operational difficulties such as a significant interruption in the operation of any of these facilities may delay shipment of merchandise to our stores and our customers, damage our reputation or otherwise have a material adverse effect on our financial condition and results of operations |
| Moreover, a failure to successfully coordinate the operations of these facilities could also have a material adverse effect on our financial condition and results of operations |
| Separately, significant disruptions to the operations of the third party vendor who handles, among other things, the distribution and fulfillment functions for our direct-to-customer business on an outsourced basis could be expected to have similar negative consequences |
| Labor activities could cause labor relations difficulties for us |
| As of January 28, 2006, we had approximately 3cmam800 full and part-time employees, and while we believe our relations with our employees are generally good, we cannot predict the effect that any future organizational activities will have on our business and operations |
| If we were to become subject to work stoppages, we could experience disruption in our operations and increases in our labor costs, either of which could materially adversely affect our business, financial condition or results of operations |
| We are dependent on external funding sources, including the terms of our revolving credit facility, which may not make available to us sufficient funds when we need them |
| We have significantly relied and may rely in the future on external funding sources to finance our operations and growth |
| Any reduction in cash flow from operations could increase our external funding requirements to levels above those currently available to us |
| While we currently have in place a dlra150dtta0 million revolving credit facility, the amount available under this facility will be less than the stated amount (i) if there is a shortfall in the availability of eligible collateral to support the borrowing base and reserves as established by the terms of the revolving credit facility and (ii) at times when we are not in compliance with the requirements of the fixed charge coverage ratio for us to access incremental advances under the credit facility when the remaining availability for additional borrowing under the facility is less than 10prca of the applicable borrowing base for the line of credit at the time |
| We currently believe that our cash flow from operations and funds available under our revolving credit facility will satisfy our capital and operating requirements for at least the next 12 months |
| However, the weakening of, or other adverse developments concerning our sales performance or adverse developments concerning the availability of credit under our revolving credit facility due to covenant limitations or other factors could limit the overall amount of funds available to us |
| 8 ______________________________________________________________________ Our revolving credit facility provides for incremental advances with availability determined from the application of a higher advance rate on eligible inventory and eligible accounts receivables |
| In order to obtain these incremental advances, we are required to maintain a minimum fixed charge coverage ratio if the remaining availability for additional borrowing under the facility is less than 10prca of the applicable borrowing base for the line of credit at the time |
| Our revolving credit facility also contains a clause which allows our lenders to forego additional advances should they determine there has been a material adverse change in our operations, business, properties, assets, liabilities, condition or prospects or a condition or event that is reasonably likely to result in a material adverse change in our financial position or prospects reasonably likely to result in a material adverse effect on our business, condition (financial or otherwise), operations, performance or properties taken as a whole |
| However, our lenders have not notified us of any indication that a material adverse effect exists at January 28, 2006 or that a material adverse change has occurred |
| We believe that no material adverse change has occurred and we believe that we will continue to borrow on the line of credit subject to its terms and conditions of availability in order to fund our operations over the term of the revolving credit facility which expires in June 2009 |
| We do not anticipate any changes in our business practices that would result in any determination that there has been a material adverse effect in our operations, business, properties, assets, liabilities, condition or prospects |
| However, we cannot be certain that our lenders will not make such a determination in the future |
| We may experience cash flow shortfalls in the future and we may otherwise require additional external funding beyond the amounts available under our revolving credit facility |
| However, we cannot assure you that we will be able to raise funds on favorable terms, if at all, or that future financing requirements would not be dilutive to holders of our capital stock |
| In the event that we are unable to obtain additional funds on acceptable terms or otherwise, we may be unable or determine not to take advantage of new opportunities or defer on taking other actions that otherwise may be important to our operations |
| Additionally, we may need to raise funds to take advantage of unanticipated opportunities |
| We also may need to raise funds to respond to changing business conditions or unanticipated competitive pressures |
| If we fail to raise sufficient additional funds, we may be required to delay or abandon some of our planned future expenditures or aspects of our current operations |
| Because our business requires a substantial level of liquidity, we are dependent upon a revolving credit facility with certain restrictive covenants that limit our flexibility |
| Our business requires substantial liquidity in order to finance inventory purchases, the employment of sales personnel for the peak holiday period, mailings of catalogs and other advertising costs for the holiday buying season and other similar advance expenses |
| As described above, we currently have in place a revolving credit facility that provides for an overall commitment of dlra150dtta0 million |
| Over the past several years, we have entered into modifications, amendments and restatements of this revolving credit facility, primarily to address changes in the requirements applicable to us under the revolving credit facility documents, and, most recently, to increase the stated amount of commitment under the facility amongst other things |
| Covenants in the revolving credit facility include, among others, ones that limit our ability to incur additional debt, make liens, make investments, consolidate, merge or acquire other businesses, sell assets, pay dividends or other distributions, and enter into transactions with affiliates |
| In addition, the incremental advance portion of our revolving credit facility includes a fixed charge coverage ratio covenant that is expected to limit our ability to access incremental advances during certain months of the year |
| Although we have been able to obtain incremental advances when needed to provide the capital required for our business to date, there may be times in the future when the terms and conditions of availability for our line of credit, including the restrictions applicable to the incremental advance provisions, would limit our ability 9 ______________________________________________________________________ to access working capital as and to the extent we require for the operation of our business, potentially having an adverse affect on our results of operation |
| These covenants restrict numerous aspects of our business |
| The revolving credit facility also includes a borrowing base formula (which includes an adjustment to the advance rate against eligible inventory and eligible accounts receivable for incremental advances as described above) to address the availability of credit at any given time based upon numerous factors, including the value of eligible inventory and eligible accounts receivable, in each case, subject to the overall aggregate cap on borrowings |
| Consequently, for purposes of the borrowing base formula, the value of eligible inventory and eligible accounts receivable may limit our ability to borrow under the revolving credit facility |
| We have drawn upon the revolving credit facility in the past and we expect to draw upon it in the future |
| Failure to comply with the terms of the revolving credit facility would entitle the secured lenders to prevent us from further borrowing, and upon acceleration by the lenders, they would be entitled to begin foreclosure procedures against our assets, including accounts receivable, inventory, general intangibles, equipment, goods, and fixtures |
| The secured lenders would then be repaid from the proceeds of such foreclosure proceedings, using all available assets |
| Only after such repayment and the payment of any other secured and unsecured creditors would the holders of our capital stock receive any proceeds from the liquidation of our assets |
| Our ability to comply with the terms of the revolving credit facility may be affected by events beyond our control |
| Future increases in interest and other expense may impact our future operations |
| High levels of interest and other expense have had in the past, and could have in the future, negative effects on our operations |
| An increase in the variable interest rate under our revolving credit facility, coupled with an increase in our outstanding debt, could result in material amounts otherwise available for other business purposes being used to pay for interest expense |
| Our ability to continue to meet our future debt and other obligations and to minimize our average debt level depends on our future operating performance and on economic, financial, competitive and other factors |
| In addition, we may need to incur additional indebtedness in the future |
| We cannot assure you that our business will generate sufficient cash flow or that future financings will be available to provide sufficient proceeds to meet our needs or obligations or to service our total debt |
| We are subject to trade restrictions and other risks associated with our dependence on foreign imports for our merchandise |
| During fiscal 2005, we purchased approximately 62prca of our merchandise directly from vendors located abroad |
| As an importer, our future success will depend in large measure upon our ability to maintain our existing foreign supplier relationships and to develop new ones |
| While we rely on our long-term relationships with our foreign vendors, we have no long-term contracts with them |
| Additionally, many of our imported products are subject to existing duties, tariffs and quotas that may limit the quantity of some types of goods which we may import into the United States of America |
| Our dependence on foreign imports also makes us vulnerable to risks associated with products manufactured abroad, including, among other things, risks of damage, destruction or confiscation of products while in transit to our distribution centers located in the United States of America, changes in import duties, tariffs and quotas, loss of “most favored nation” trading status by the United States of America in relation to a particular foreign country, work stoppages including without limitation as a result of events such as longshoremen strikes, transportation and other delays in shipments including without limitation as a result of heightened security screening and inspection processes or other port-of-entry limitations or restrictions in the United States of America, freight cost increases, economic uncertainties, including inflation, foreign government regulations, and political unrest and trade restrictions, including the United States of America retaliating 10 ______________________________________________________________________ against protectionist foreign trade practices |
| Furthermore, some or all of our foreign vendors’ operations may be adversely affected by political, financial or other instabilities that are particular to their home countries, including without limitation local acts of terrorism or economic, environmental or health and welfare-related crises, which may in turn result in limitations or temporary or permanent halts to their operations, restrictions on the transfer of goods or funds and/or other trade disruptions |
| If any of these or other factors were to render the conduct of business in particular countries undesirable or impractical, our financial condition and results of operations could be materially adversely affected |
| While we believe that we could find alternative sources of supply, an interruption or delay in supply from our foreign sources, or the imposition of additional duties, taxes or other charges on these imports, could have a material adverse effect on our business, financial condition and results of operations unless and until alternative supply arrangements are secured |
| Moreover, products from alternative sources may be of lesser quality and/or more expensive than those we currently purchase, resulting in reduction or loss of our profit margin on such items |
| As an importer we are subject to the effects of currency fluctuations related to our purchases of foreign merchandise |
| While most of our purchases outside of the United States of America currently are settled in US dollars, it is possible that a growing number of them in the future may be made in currencies other than the US dollar |
| Historically, we have not hedged our currency risk and we do not currently anticipate doing so in the future |
| However, because our financial results are reported in US dollars, fluctuations in the rates of exchange between the US dollar and other currencies may decrease our sales margins or otherwise have a material adverse effect on our financial condition and results of operations in the future |
| Rapid growth in our direct-to-customer business may not be sustained and may not generate a corresponding increase in profits to our business |
| Increased activity in our direct-to-customer business could result in material changes in our operating costs, including increased merchandise inventory costs and costs for paper and postage associated with the distribution and shipping of catalogs and products |
| Although we intend to attempt to mitigate the impact of these increases by improving sales revenue and efficiencies, we cannot assure you that we will succeed in mitigating expenses with increased efficiency or that cost increases associated with our direct-to-customer business will not have an adverse effect on the profitability of our business |
| Additionally, while we outsource to a third party the fulfillment of our direct-to-customer division, including customer service and non-furniture distribution, the third party may not have the capacity to accommodate our growth |
| This lack of capacity may result in delayed customer orders and deficiencies in customer service, both of which may adversely affect our reputation, cause us to lose sales revenue and limit or counter recent growth in our direct-to-customer business |
| We depend on key personnel and could be affected by the loss of their services because of the limited number of qualified people in our industry |
| The success of our business will continue to depend upon our key personnel, including our Chairman, President, and Chief Executive Officer, Gary Friedman |
| We recently announced the intention of our Chief Operating Officer to resign and that we have commenced a search for a new Chief Operating Officer |
| Competition for qualified employees and personnel in the retail industry is intense |
| The process of locating personnel with the combination of skills and attributes required to carry out our goals is often lengthy |
| Our success depends to a significant degree upon our ability to attract, retain and motivate qualified management, marketing and sales personnel, in particular store managers, and upon the continued contributions of these people |
| We cannot assure you that we will be successful in attracting and retaining qualified executives and personnel |
| In addition, our employees may voluntarily terminate their 11 ______________________________________________________________________ employment with us at any time |
| We do not maintain any key man life insurance |
| The loss of the services of key management personnel, employee turnover in important areas of our business or our failure to attract additional qualified personnel or effectively handle management transitions could have a material adverse effect on our business, financial condition and results of operations |
| Regulatory changes may increase our costs |
| Changes in the laws, regulations and rules affecting public companies may increase our expenses in connection with our compliance with these new requirements |
| Compliance with these new requirements could also result in continued diversion of management’s time and attention, which could prove to be disruptive to normal business operations |
| Further, the impact of these laws, regulations and rules and activities in response to them could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers, which could harm our business |
| Changes in general economic conditions affect consumer spending and may significantly harm our revenue and results of operations |
| The success of our business depends to a significant extent upon the level of consumer spending |
| A number of economic conditions affect the level of consumer spending on merchandise that we offer, including, among other things, the general state of the economy, general business conditions, the level of consumer debt, interest rates, rising oil prices, taxation and consumer confidence in future economic conditions |
| More generally, reduced consumer confidence and spending may result in reduced demand for discretionary items and luxury retail products, such as our products |
| Reduced consumer confidence and spending also may result in limitations on our ability to increase prices and may require increased levels of selling and promotional expenses |
| Adverse economic conditions and any related decrease in consumer demand for discretionary items such as those offered by us could have a material adverse effect on our business, results of operations and financial condition |
| We face an extremely competitive specialty retail business market |
| The retail market is highly competitive |
| We compete against a diverse group of retailers ranging from specialty stores to traditional furniture stores and department stores |
| Our product offerings also compete with a variety of national, regional and local retailers |
| We compete with these and other retailers for customers, suitable retail locations, suppliers, qualified employees and management personnel |
| Many of our competitors have significantly greater financial, marketing and other resources |
| Moreover, increased competition may result, and has resulted in the past, in potential or actual litigation between us and our competitors relating to such activities as competitive sales and hiring practices, exclusive relationships with key suppliers and manufacturers and other matters |
| As a result, increased competition may adversely affect our future financial performance, and we cannot assure you that we will be able to compete successfully in the future |
| We believe that our ability to compete successfully is determined by several factors, including, among other things, the breadth and quality of our product selection, effective merchandise presentation, customer service, pricing and store locations |
| Although we believe that we are able to compete favorably on the basis of these factors, we may not ultimately succeed in competing with other retailers in our market |
| Terrorist attacks, war, natural disasters and other catastrophic events may negatively impact all aspects of our operations, revenue, costs and stock price |
| Threats of terrorist attacks in the United States of America, as well as future events occurring in response to or in connection with them, including, without limitation, future terrorist attacks or threats against United States of America targets, rumors or threats of war, actual conflicts involving the United States of America or its allies, including the on-going US conflicts in Iraq and Afghanistan, further 12 ______________________________________________________________________ conflicts in the Middle East and in other developing countries, or military or trade disruptions affecting our domestic or foreign suppliers of merchandise, may impact our operations |
| Our operations also may be affected by natural disasters or other similar events, including floods, hurricanes, earthquakes, or fires |
| The potential impact of any of these events to our operations includes, among other things, delays or losses in the delivery of merchandise to us or our customers and decreased sales of the products we carry |
| Additionally, any of these events could cause consumer confidence and spending to decrease or result in increased volatility in the United States of America and worldwide financial markets and economies |
| Also, any of these events could result in economic recession in the United States of America or abroad |
| Any of these occurrences could have a significant impact on our operating results, revenue and costs and may result in the volatility of the future market price of our common stock |
| Our common stock price may be volatile |
| The market price of our common stock has fluctuated significantly in the past, and is likely to continue to be highly volatile |
| In addition, the trading volume in our common stock has fluctuated, and significant price variations can occur as a result |
| We cannot assure you that the market price of our common stock will not fluctuate or decline significantly in the future |
| In addition, the United States of America equity markets have from time to time experienced significant price and volume fluctuations that have particularly affected the market prices for the stocks of companies such as ours |
| These broad market fluctuations may materially adversely affect the market price of our common stock in the future |
| Variations in the market price of our common stock may be the result of changes in the trading characteristics that prevail in the market for our common stock, including low trading volumes, trading volume fluctuations and other similar factors that are particularly common among highly volatile securities |
| Variations also may be the result of changes in our business, operations or prospects, announcements or activities by our competitors, entering into new contractual relationships with key suppliers or manufacturers by us or our competitors, proposed acquisitions by us or our competitors, financial results that fail to meet our guidance or public market analysts’ expectations, changes in stock market analysts’ recommendations regarding us, other retail companies or the retail industry in general, and domestic and international market and economic conditions |
| Future sales of our common stock in the public market could adversely affect our stock price and our ability to raise funds in new equity offerings |
| We cannot predict the effect, if any, that future sales of shares of our common stock or the availability for future sale of shares of our common stock or securities convertible into or exercisable for our common stock will have on the market price of our common stock prevailing from time to time |
| For example, in connection with our March 2001 preferred stock financing, we filed a registration statement on Form S-3 with the Securities and Exchange Commission to register approximately 6dtta4 million shares of our common stock issued, or to be issued, upon the conversion of our Series A preferred stock to some of our stockholders |
| The registration statement was declared effective by the Securities and Exchange Commission on October 31, 2002 and may remain effective under certain circumstances until as long as March 2009 |
| During fiscal 2005, the remaining holders of the Series A preferred stock elected to convert their shares of Series A preferred stock into common stock |
| Sale, or the availability for sale, of substantial amounts of common stock by our existing stockholders pursuant to an effective registration statement or under Rule 144, through the exercise of registration rights or the issuance of shares of common stock upon the exercise of stock options, or the conversion of our preferred stock, or the perception that such sales or issuances could occur, could adversely affect prevailing market prices for our common stock and could materially impair our future ability to raise capital through an offering of equity securities |
| 13 ______________________________________________________________________ Newly adopted accounting regulations that require companies to expense stock options will result in a decrease in our earnings and our stock price may decline |
| The Financial Accounting Standards Board (“FASB”) recently adopted regulations that will eliminate the Company’s ability to account for share-based compensation transactions using the intrinsic method and would require that such transactions be accounted for using a fair-value-based method and be recognized as an expense in our Consolidated Statement of Operations |
| We are required to expense stock options effective in periods beginning after January 28, 2006 |
| For prior periods, we only disclosed such expenses on a pro forma basis in the Notes to our Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States of America |
| Effective with the beginning of the first quarter of fiscal 2006, we will adopt Statement of Financial Accounting Standards Nodtta 123 (R) (“SFAS 123(R)”) using the modified prospective method |
| Under this method, the unvested portions of previously granted share-based payments, as well as the fair value of awards granted after adoption are included in operating expenses over the appropriate service period |
| We have decided to use the Black Scholes model to estimate the fair value of our stock options, unless additional information becomes available in the future that indicates another model would be more appropriate for us, or if grants issued in future periods have characteristics that cannot be reasonably estimated using this model |
| Based on stock options granted to employees through January 28, 2006, we expect the adoption of SFAS 123(R) will increase first quarter expenses by approximately dlra1dtta3 million (dlra0dtta03 per share, basic) and increase full year fiscal 2006 expenses by approximately dlra4dtta0 million (dlra0dtta11 per share, basic) |
| We are subject to anti-takeover provisions and other terms and conditions that could delay or prevent an acquisition and could adversely affect the price of our common stock |
| Our Second Amended and Restated Certificate of Incorporation, as amended, and Amended and Restated Bylaws, certain provisions of Delaware law and the Certificate of Designation governing the rights, preferences and privileges of our preferred stock may make it difficult in some respects to cause a change in control of our Company and replace incumbent management |
| For example, our Second Amended and Restated Certificate of Incorporation, as amended, and Amended and Restated Bylaws provide for a classified board of directors |
| With a classified board of directors, at least two annual meetings of stockholders, instead of one, will generally be required to effect a change in the majority of the board |
| As a result, a provision relating to a classified board may discourage proxy contests for the election of directors or purchases of a substantial block of our common stock because its provisions could operate to prevent obtaining control of the board in a relatively short period of time |
| In addition our board of directors has the authority to fix the rights and preferences of, and to issue shares of, our preferred stock, which may have the effect of delaying or preventing a change in control of our Company without action by holders of our common stock |
| These provisions may create a potentially discouraging effect on, among other things, any third party’s interest in completing a merger, consolidation, acquisition or similar type of transaction with us |
| Consequently, the existence of these anti-takeover provisions may collectively have a negative impact on the price of our common stock, may discourage third-party bidders from making a bid for our Company or may reduce any premiums paid to our stockholders for their common stock |