EXHIBIT 99
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN
THIS REPORT, YOU SHOULD CONSIDER THE FOLLOWING FACTORS CAREFULLY IN EVALUATING
US AND OUR BUSINESS BEFORE MAKING AN INVESTMENT DECISION. ADDITIONAL RISKS AND
UNCERTAINTIES NOT PRESENTLY KNOWN TO US, THAT WE CURRENTLY DEEM IMMATERIAL OR
THAT ARE SIMILAR TO THOSE FACED BY OTHER COMPANIES IN OUR INDUSTRY OR BUSINESS
IN GENERAL, SUCH AS COMPETITIVE CONDITIONS, MAY ALSO IMPAIR OUR BUSINESS
OPERATIONS. IF ANY OF THE FOLLOWING RISKS OCCUR, OUR BUSINESS, FINANCIAL
CONDITION, OR RESULTS OF OPERATIONS COULD BE MATERIALLY ADVERSELY AFFECTED. IN
THAT EVENT, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, IN WHICH CASE
THE VALUE OF YOUR INVESTMENT MAY DECLINE AS WELL. YOU SHOULD ALSO REFER TO
"FORWARD-LOOKING STATEMENTS" IN THIS REPORT AND OUR OTHER REPORTS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION.
OUR FUTURE GROWTH DEPENDS ON EXPANSION OF INTERNATIONAL REVENUES
We estimate that our INOVOJECT(R) system inoculates over 80% of all eggs
produced for the North American broiler poultry market. Given this market
penetration, we expect diminished growth in the number of system installations
and only modest system revenue growth in this market. For this reason, we must
expand our INOVOJECT(R) system installations and product sales in markets
outside the U.S. and Canada in order to realize significant overall revenue
growth. In 1998, sales outside of North America accounted for 20% of our
consolidated revenues, up from 15% in 1997 and 14% in 1996. Lack of market
acceptance of our INOVOJECT(R) system and in ovo ("in the egg") products in
these markets would adversely affect our revenue growth. Revenue growth outside
the U.S. and Canada depends on a number of factors, including the following:
o gaining market acceptance of the INOVOJECT(R) system and in ovo
administration of biological products in markets outside the U.S. and
Canada to treat prevailing poultry diseases in those markets;
o obtaining regulatory approval of the INOVOJECT(R) system and products in
those markets and the timing of such approval; and
o the extent of start-up costs required to enter new markets.
International sales are also subject to a variety of risks, including risks
arising from the following:
o currency fluctuations, trading restrictions, tariffs, trade barriers and
taxes; and
o economic and political conditions beyond our control, including
country-specific conditions.
OUR FUTURE GROWTH ALSO DEPENDS ON THE DEVELOPMENT AND MARKET ACCEPTANCE OF NEW
PRODUCTS
In addition to international expansion, we need to develop and market
new products in order to continue to generate increased revenues and growth of
our business. We currently are developing, both independently and in
collaboration with others, various products which address poultry health and
performance needs. Some of these products are being designed to be delivered in
ovo through the INOVOJECT(R) system, and some may also be administered via
injection after hatching. These products are in various stages of development.
There is no guarantee that any new products will be successfully developed and
marketed. In addition, we have not initiated the regulatory approval process for
any of these potential products, and we cannot assure you that regulatory
approval will be obtained. Our inability to develop new products or any delay in
our development of them may adversely affect our revenue growth. Because of a
number of factors, a new product may not reach the market without lengthy
delays, if at all. Some of the factors which may affect our development and
marketing of new products include the following:
o our research and evaluations of compounds and new technologies may not
yield product opportunities;
o potential products may involve extensive clinical trials and the results
of such trials are uncertain;
o potential products may require collaborative partners and we may be
unable to identify partners or enter into arrangements on terms
acceptable to us;
o regulatory approval of these products may not be obtained or may be
obtained only with lengthy delays; and
o marketing products developed jointly with other parties may require
royalty payments or other payments by us to our co-developers, which may
adversely affect our profitability.
We have developed and commercialized a technology using our proprietary viral
neutralizing factor ("VNF(R)") which permits a single-dose immunization of an
egg embryo effective for the life of the bird. Our Bursaplex(R) product uses
this technology. The United States Department of Agriculture ("USDA") has
approved the Bursaplex(R) vaccine for in ovo and post-hatch use. However,
Bursaplex(R) has only recently been sold in commercial quantities, and there is
no assurance that the product will continue to be sold in commercial quantities
even if it is shown to be effective.
2
ECONOMIC FACTORS AFFECTING OUR CUSTOMERS MAY ADVERSELY AFFECT OUR FINANCIAL
RESULTS
Our revenues come from purchases by the poultry producing industry. If there is
a general economic decline in that industry, our operations and financial
condition could be materially and adversely affected. Also, domestic and global
economic factors beyond our control may adversely impact our customers and, as a
result, our revenues and earnings. Examples of these factors include the
following:
o fluctuations in the price of poultry feed;
o export demand for U.S. poultry products; and
o the extent to which our cost of products and operating expenses increase
faster than contractual price adjustments with our customers.
For example, if rising poultry feed prices increase the production costs of
commercial poultry producers, these producers may reduce production. This
decreased production could adversely impact our revenues, since a principal
component of our revenues is fees charged to customers for the number of eggs
injected with the INOVOJECT(R) system.
IF WE LOSE THE PROTECTION OF OUR PATENTS AND PROPRIETARY RIGHTS, OUR FINANCIAL
RESULTS COULD SUFFER
Some of our products and processes used to produce our products involve
proprietary rights, including patents. Some of the technologies employed in
these processes are owned by us, and some are owned by others and exclusively
licensed to us. The INOVOJECT(R) system utilizes a process that was patented by
the USDA. We hold an exclusive license to this primary patent which expires in
2002. We have supplemented the USDA patent with additional U.S. and foreign
patents covering specific design features of the INOVOJECT(R) system.
We believe that patent protection of materials or processes we develop and any
products that may result from the research and development efforts of us and our
licensors are important to the possible commercialization of our products. The
loss of the protection of these patents and proprietary rights could adversely
affect our business and our competitive position in the market.
The patent position of companies such as ours generally is highly uncertain and
involves complex legal and factual questions. Some of the reasons for this
uncertainty include the following:
o To date no consistent regulatory policy has emerged regarding the
breadth of claims allowed in biotechnology patents. So, there can be no
assurance that patent applications relating to our products or
technology will result in patents being issued
3
or that, if issued, the patents will afford protection against
competitors with similar technology;
o Some patent licenses held by us may be terminated upon the occurrence of
specified events or become non-exclusive after a specified period;
o Companies that obtain patents claiming products or processes that are
necessary for or useful to the development of our products could bring
legal actions against us claiming infringement, though we currently are
not the subject of any patent infringement claim;
o We may not have the financial resources necessary to enforce any patent
rights we may hold;
o We may be required to obtain licenses from others to develop,
manufacture or market our products. We may not be able to obtain these
licenses on commercially reasonable terms, and the patents underlying
the licenses may not be valid and enforceable; and
o We rely upon unpatented, proprietary technology, which we may not be
able to protect fully if others independently develop substantially
equivalent proprietary information or techniques, properly gain access
to our proprietary technology, or disclose this technology to others.
We attempt to protect our proprietary materials and processes by relying on
trade secret laws and non-disclosure and confidentiality agreements with our
employees and other persons with access to our proprietary materials or
processes or who have licensing or research arrangements with us. We plan to
continue to use these protections in the future. Despite these protections,
others may independently develop or obtain access to these materials or
processes that may adversely affect our competitive position.
We have been involved in the patent litigation summarized below:
Embrex v. Service Engineering Corporation and Edward G. Bounds, Jr.
In September 1996, we filed a patent infringement suit against Service
Engineering Corporation and Edward G. Bounds, Jr. in the United States District
Court for the Eastern District of North Carolina. We made the following claims
against the defendants:
o Their development of an in ovo injection device, designed to compete
with our patented INOVOJECT(R) injection method, infringes at least one
claim of the U.S. Patent No. 4,458,630 exclusively licensed to us for
the in ovo injection of vaccines into an avian embryo (the "Sharma
Patent"); and
4
o They violated the terms of a Consent Judgment and Settlement Agreement
entered into with us in November 1995 in which prior litigation was
concluded with Service Engineering Corporation and Edward G. Bounds, Jr.
agreeing not to engage in future activities violating the Sharma Patent.
o We sought injunctive relief to prevent infringement of the Sharma Patent
as well as monetary damages.
In November 1996, Service Engineering Corporation and Edward G. Bounds, Jr.
responded to our suit by asserting various affirmative defenses and denying the
substantive claims in our complaint.
This suit concluded on July 30, 1998 with a jury verdict in favor of us, which
verdict:
o fully upheld the validity of all claims of the Sharma Patent, finding
that the defendants had willingly infringed all asserted claims of the
patent;
o found that the defendants had breached the 1995 Consent Judgment and
Settlement Agreement and that the breach was not in good faith; and
o awarded us damages of $500,000 plus litigation expenses and court costs.
The Court entered a Judgment in favor of us on September 28, 1998, which
included a monetary award of $2,612,885 and an injunction prohibiting the
defendants from practicing methods claimed in, or otherwise infringing, the
Sharma Patent. On October 28, 1998, Service Engineering Corporation and Edward
G. Bounds, Jr. filed a notice of appeal in the United States Court of Appeals
for the Federal Circuit seeking a reversal of the Judgment. We plan to oppose
the appeal, but there is no assurance that we will collect any or all of the
monetary award.
Embrex v. IGI, Inc.
In November 1996, we filed a patent infringement suit against IGI, Inc. in the
United States District Court for the Eastern District of North Carolina, where
we:
o Alleged that IGI, Inc., through its activities with Service Engineering
Corporation and Edward G. Bounds, Jr., was engaging in activities that
constitute infringement of the Sharma Patent; and
o Sought injunctive relief to prevent infringement of the Sharma Patent
and sought monetary damages.
In January 1997, IGI, Inc. responded to our patent infringement suit by
asserting various affirmative defenses and denying the substantive allegations
in our complaint. This suit concluded in January 1998 by agreement between us
and IGI, Inc. Pursuant to this agreement,
5
we and IGI, Inc. dismissed all pending claims against each other, and IGI, Inc.
agreed to abide by the terms of a royalty-bearing sublicense to the Sharma
Patent for avian vaccination.
Service Engineering Corporation and Edward G. Bounds, Jr. v. United States
Department of Agriculture
In March 1997, Service Engineering Corporation and Edward G. Bounds, Jr. filed
suit against the United States Department of Agriculture in the United States
District Court for the District of Maryland with respect to its grant to us of
an exclusive license for the Sharma Patent.
The complaint made the following claims:
o The USDA did not adequately comply with statutory and regulatory
requirements in making the grant to us of an exclusive license to the
Sharma Patent, the revision of the exclusive license in 1991 and again
in 1994, which extended the period of exclusivity, originally set to
terminate on December 31, 1996, through the patent expiration date;
o The USDA wrongly refused to grant Plaintiffs a license of the Sharma
Patent. The Plaintiffs claim this refusal occurred in December 1996
(after we filed the suit described above), and that the USDA refused to
do so because the USDA said that the license was not available and that
the Plaintiffs had no basis for relief; and
o The USDA wrongfully consented to our bringing suit against the
Plaintiffs.
Plaintiffs have asked the Court for the following relief:
o To set aside the extension of the exclusive license, the USDA's grant of
permission for us to sue Service Engineering Corporation, Edward G.
Bounds, Jr. and IGI, Inc. for patent infringement, the USDA's refusal to
grant to Service Engineering Corporation a non-exclusive license to the
Sharma Patent and the USDA's refusal to act favorably upon Service
Engineering Corporation's appeal from the refusal to grant it a
non-exclusive license;
o To issue an order requiring the USDA, prior to granting any exclusive
license under the Sharma Patent, including by extending the term of a
pre-existing exclusive license, to observe the procedures set forth
under laws and regulations governing the grant of licenses to patents
owned by the USDA, and to remand the matter to the USDA to take action
in accordance with the order; and
o To recover attorneys' fees and costs from the USDA.
The USDA has filed motions to dismiss plaintiffs' complaint, and plaintiffs have
filed motions for summary judgment. Those motions are pending before the Court.
The outcome of this litigation is uncertain and there is no assurance that its
resolution will be favorable to us.
6
Machining Technologies, Inc. v. Embrex
On February 5, 1999, we learned that Machining Technologies, Inc. of Hebron,
Maryland had filed a Complaint for Declaratory Judgment against us in the United
States District Court for the District of Maryland. Machining Technologies, Inc.
seeks a declaration that the Sharma Patent is not infringed, invalid and/or not
enforceable. Machining Technologies, Inc. was a manufacturer of egg injection
machine parts to Edward G. Bounds, Jr. and Service Engineering Corporation. We
believe that this action is without legal basis. We plan to file a motion to
dismiss this action if and when Machining Technologies, Inc. serves the
Complaint on us, though there is no assurance that this action will be dismissed
by the Court.
THE LOSS OF KEY CUSTOMERS COULD ADVERSELY AFFECT OUR FINANCIAL RESULTS
Historically, a significant portion of our revenues has come from a relatively
small number of customers. Tyson Foods, Inc. ("Tyson") accounted for
approximately 27% of our consolidated 1998 revenues. Our top three customers,
including Tyson, accounted for approximately 42% of our consolidated 1998
revenues. We expect this customer concentration to continue in future years. The
poultry market is highly concentrated, with the largest poultry producers
dominating the market. For example, in 1998, Tyson supplied approximately 24% of
all broilers grown in the U.S.
The concentration of our revenues with these large customers makes us
particularly dependent on factors affecting those customers. If we lose a large
customer and fail to add new customers to replace lost revenues, our operating
results will be materially and adversely affected. Also, if these customers
reduce the number of eggs they produce at hatcheries, we will receive lower
INOVOJECT(R) revenues since our fees our based on the number of eggs injected.
THE LOSS OF KEY SUPPLIERS AND OTHER KEY PARTIES COULD ADVERSELY AFFECT OUR
FINANCIAL RESULTS
We currently conduct our operations with various third party collaborators,
licensors or licensees. We plan to continue developing these relationships and
believe our present and future collaborators, licensors and licensees will
perform their obligations under their agreements with us, based on an economic
motivation to succeed. However, financial or other difficulties facing these
parties may affect the amount and timing of funds and other resources devoted by
the parties under these agreements. Thus, there is no assurance that we will
generate any revenues from these agreements.
We currently do not have large scale facilities for the production of our
INOVOJECT(R) system and biological products and do not plan to develop these
facilities in the foreseeable future. Therefore, we will rely principally upon
relationships with contract manufacturers. There can be
7
no assurance that we can maintain manufacture and supply agreements on terms and
at costs acceptable to us.
We have various relationships with manufacturers and suppliers, including those
described below. The loss of any of these relationships could adversely affect
our operating results, as described below:
INOVOJECT(R) System
o A manufacturer of INOVOJECT(R) systems, which is the sole contract
manufacturer of INOVOJECT(R) systems, with which we have a relationship.
While other machine fabricators exist and have constructed limited
numbers of INOVOJECT(R) systems, a change in manufacturers could cause a
delay in manufacturing and a possible delay in the timing of future
INOVOJECT(R) installations and revenues from those installations.
VNF(R) Product -- Bursaplex(R)
o Merial Select, Inc., which has exclusive rights to manufacture
Infectious Bursal Disease vaccines containing our proprietary VNF(R)
product marketed by us in North America, Latin America and Asia under
the trade name Bursaplex(R); and
o SPAFAS, Inc., the sole contract supplier of our VNF(R) product, which is
the only supplier that was included in the USDA's approval for in ovo
use of Bursaplex(R) .
Infectious Bursal Disease vaccines, including the Bursaplex(R) product
and the Bursamune(TM) product described below, and our VNF(R) product
generally must be manufactured in licensed facilities or under approved
regulatory methods. Although we believe that other manufacturers are
capable of manufacturing Infectious Bursal Disease vaccines and
producing products such as VNF(R), a change of suppliers could adversely
affect our future operating results due to the time it would take a new
supplier to obtain regulatory approval of our production process and/or
manufacturing facilities.
8
VNF(R) Product -- Bursamune(TM)
o Fort Dodge Animal Health ("Ft. Dodge"), a division of American Home
Products Corp., has rights to manufacture and market Infectious Bursal
Disease vaccines containing our VNF(R) product to be marketed in Europe,
the Middle East and Africa under the trade name Bursamune(TM).
The Bursamune(TM) product has not yet received regulatory approval. In
June 1997, Ft. Dodge announced that our application for U.K. in ovo
regulatory approval of Bursamune(TM) had been provisionally refused, and
that the U.K. regulatory authority requested that further data be
supplied. We have worked with Ft. Dodge, which is responsible for
obtaining the necessary approvals for Bursamune(TM) in both the U.K. and
other European Community markets, to respond to the U.K. regulatory
authority request for data with respect to Bursamune(TM). While we
anticipate that the regulatory review process will be completed during
the first half of 1999, there can be no assurances that this review will
occur by this time.
WE MAY NEED ADDITIONAL FINANCING AND, IF THE FINANCING IS UNAVAILABLE, OUR
OPERATING RESULTS COULD SUFFER
From our inception in May 1985 through December 31, 1998, we had cumulative
operating losses (accumulated deficit) of $36.1 million. Until the first quarter
of 1996, we had incurred operating losses since our inception. Although we have
been profitable since 1996, we cannot assure you that we will continue to
operate profitably.
Our ability to attain revenues sufficient to meet our cash requirements for
operations depends upon several factors, including the following:
o continued market acceptance of the INOVOJECT(R) system;
o our leasing of INOVOJECT(R) systems on lease terms acceptable to us; and
o the successful development and commercialization of additional products
by us and other suppliers of in ovo products that will be delivered
through the INOVOJECT(R) system.
The extent of our future revenues derived from INOVOJECT(R) system fees is
subject to many variables, including the following:
o whether additional lease agreements for INOVOJECT(R) systems are reached
with customers;
o the timing of any lease agreements;
9
o whether existing or new installation schedules are met;
o the extent to which customers use the INOVOJECT(R) system; and
o the market acceptance and regulatory approval of in ovo products.
Although we anticipate that our existing funds, as well as revenues from
operations, will sustain our existing operations for the foreseeable future,
there are no assurances that these funds will be sufficient. If additional funds
become necessary to sustain existing operations or anticipated growth, we will
need to seek additional financing. There can be no assurance that any financing
will be obtainable or that, if available, the financing will be on terms
favorable or acceptable to us.
GOVERNMENT REGULATION AND THE NEED FOR REGULATORY APPROVAL MAY ADVERSELY AFFECT
OUR BUSINESS
Regulatory approval required in various areas of our business may adversely
affect our operations. While the use of the INOVOJECT(R) system is not subject
to regulatory approval in the U.S., it may require regulatory approval by
foreign agencies. Also, research and development activities and the
investigation, manufacture and sale of poultry health and performance
enhancement products are subject to regulatory approval in the U.S. by either
the USDA or the United States Food & Drug Administration ("FDA") and state
agencies, as well as by foreign agencies.
Obtaining regulatory approval is a lengthy and costly process. Approval by the
USDA generally takes 1 to 3 years, while approval by the FDA generally takes 5
or more years. Various problems may arise during the regulatory approval process
and may have an adverse impact on our operations. Delays in obtaining approval
may adversely affect the marketing of, and the ability to receive revenues and
royalties from, products developed by us. There is no assurance that any future
products developed by us will receive regulatory approval without lengthy
delays, if at all.
Pursuant to some of our licensing or joint development agreements, the licensees
or joint developers bear the costs associated with the regulatory approval
process for some products. We plan to continue to enter into these types of
agreements in the future. If we cannot generate sufficient funds from operations
or enter into licensing or joint development agreements to develop products, we
may not have the financial resources to complete the regulatory approval process
with respect to all or any of the products currently under development. Products
developed by us may not be marketed commercially in any jurisdiction in which
required approvals have not been obtained.
Other regulations apply or may apply to research and manufacturing activities,
including federal, state and local laws, regulations and recommendations
relating to the following:
o safe working conditions;
10
o laboratory and manufacturing practices; and
o use and disposal of hazardous substances used in conjunction with
research activities. It is difficult to predict the extent to which
these or other government regulations may adversely impact the
production and marketing of our products.
OUR INABILITY TO ATTRACT AND RETAIN KEY PERSONNEL COULD ADVERSELY AFFECT OUR
BUSINESS
We must continue to attract and retain experienced and highly educated
scientific and management personnel and advisors to be able to develop
marketable products and maintain a competitive research and technological
position. Competition for qualified employees among biotechnology companies is
intense, and the loss of key scientific or management personnel would adversely
affect us. There can be no assurance that we will be able to continue to attract
and retain qualified staff. Our inability to recruit and retain key personnel
could have an adverse affect on our business, results of operations or financial
condition. We have obtained insurance in the amount of $1,000,000 on the life of
Randall L. Marcuson, our President and Chief Executive Officer, of which we are
the sole beneficiary.
WE FACE RISKS CONCERNING YEAR 2000 ISSUES
We established a team to address the Year 2000 issue in June 1998. The team has
conducted an inventory and assessment of our computer hardware and software
systems, as well as embedded systems in our INOVOJECT(R) system, manufacturing
and laboratory equipment and office facilities, such as security and fire alarm
systems. The team is currently developing remediation, testing, and
implementation plans for imbedded systems, including the INOVOJECT(R) system. We
anticipate completing our test plans no later than May 1999. We expect to
complete all remediation, testing and implementation no later than October 1999.
To date, we have determined that our general ledger and primary financial
accounting software, a DOS-based application, uses only two digits to identify a
year in the date field. We are currently on schedule to replace this application
with a Year 2000-compliant Windows-based system by October 1999; however, we had
planned to make this upgrade irrespective of the Year 2000 problem in order to
meet the demands of our business. We are in the process of upgrading our
computer software and hardware systems as necessary to address both our
increased internal needs and the impact of the Year 2000 on our systems. Our
inability or the inability of our software or hardware vendors to upgrade our
systems in a manner that fully addresses our needs and the Year 2000 issue could
adversely impact our ability to produce the information necessary to manage our
business, communicate with our customers and prepare our financial statements.
We have surveyed nearly all of our customers and vendors through a Year 2000
questionnaire regarding the strategies, activities and contingency plans
undertaken by those parties to achieve
11
Year 2000 compliance. The information being received in response to the
questionnaire will assist us in assessing our readiness for the Year 2000 issue
and identify any potential negative impact to us from possible disruptions in
other parties' ability to do business with us after December 31, 1999. There is
no assurance that the systems of other parties on which we rely will be
compliant on a timely basis. The inability of our vendors and customers to fully
address the Year 2000 issue could have an adverse impact on our ability to
operate and manage the INOVOJECT(R) system at our customers' hatcheries, to
manage our business and to communicate with our customers and suppliers, any of
which could have a material adverse effect on our financial results.
We are in the process of developing contingency plans to address what would
happen if our execution of these plans were to fail to address the Year 2000
issue. These contingency plans may include the purchasing and redeployment to
various locations of additional materials and supplies needed to operate the
business and provide services and products to our customers, and the
preservation of perishable biological products in the event of electrical power
interruptions at our facilities.
We expect to incur no more than $500,000 in addressing Year 2000 issues,
including an estimated $20,000 spent to date. Our estimates regarding the cost
and timing of addressing the Year 2000 issue are based upon presently available
information and assumptions about future events. We cannot guarantee that our
assumptions will be correct or that our estimates will be achieved. Actual
results could differ materially from our expectations as a result of numerous
factors, including the continued availability of resources, the cooperation of
third parties, the ability to locate and correct all relevant computer codes,
unforeseen circumstances that would cause us to allocate our resources
elsewhere, and similar uncertainties.
IF WE CANNOT CONTINUE TO PROVIDE TIMELY SUPPORT AND MAINTENANCE TO OUR
CUSTOMERS, OUR BUSINESS MAY SUFFER
We are required to supply, support, and maintain large numbers of INOVOJECT(R)
systems at our customers' hatcheries on a timely basis at a reasonable cost to
us. There can be no assurance that we will be able to continue to provide these
services on a cost-effective basis. If we are unable to do so, our customers may
reduce their use of our products, which could adversely affect operating
results.
WE FACE RISKS OF RAPIDLY CHANGING TECHNOLOGY AND COMPETITION
We are involved in areas of technology which are subject to rapid and
significant technological change. Competitors include independent companies that
specialize in biotechnology as well as major chemical and pharmaceutical
companies, universities, and public and private research organizations. Many of
our competitors are well established and have substantially greater marketing,
financial, technological and other resources than us. A competitive delivery
method, either within or outside the United States, may be developed and gain
commercial acceptance.
12
Also, competitors may succeed in developing technologies and products that are
more effective than any which have been or are being developed by us or which
would render our technology and products obsolete or non-competitive.
THE ISSUANCE OF PREFERRED STOCK AND OUR SHAREHOLDER RIGHTS PLAN MAY DISCOURAGE A
TAKEOVER
The Board of Directors has the authority to issue up to 15,000,000 shares of
Preferred Stock in one or more series and to determine the designations,
preferences and relative rights and qualifications, limitations or restrictions
of the shares constituting any series of Preferred Stock, without any further
vote or action by the shareholders. The issuance of Preferred Stock by the Board
of Directors could affect the rights of the holders of Common Stock. For
example, an issuance could result in a class of securities outstanding that
would have preferences with respect to voting rights and dividends and in
liquidation over the Common Stock, and could (upon conversion or otherwise)
enjoy all of the rights applicable to Common Stock.
The authority of the Board of Directors to issue Preferred Stock potentially
could be used to discourage attempts by others to obtain control of us through
merger, tender offer, proxy contest or otherwise by making these attempts more
difficult to achieve or more costly. The Board of Directors may issue the
Preferred Stock without shareholder approval and with voting and conversion
rights which could adversely affect the voting power of the holders of Common
Stock. No agreements or understandings currently exist for the issuance of
Preferred Stock, and the Board of Directors has no present intention to issue
any Preferred Stock.
We adopted a shareholder rights plan which could have the effect of discouraging
a takeover of us. The rights plan, if triggered, would make it more difficult to
acquire us by, among other things, allowing existing shareholders to acquire
additional shares at a substantial discount, thus substantially inhibiting an
acquiror's ability to obtain control of us.
13