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. IF ANY OF THE
FOLLOWING RISKS OCCUR, OUR BUSINESS, FINANCIAL CONDITION, OR RESULTS OF
OPERATIONS COULD BE MATERIALLY ADVERSELY AFFECTED.
OUR FUTURE GROWTH DEPENDS ON EXPANSION OF INTERNATIONAL REVENUES AND WE WILL BE
SUBJECT TO INCREASED RISKS IN THE INTERNATIONAL MARKETPLACE
We estimate that our Inovoject(R) system inoculates more than 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 United States and Canada in order to realize significant overall
revenue growth. In 2000, sales outside of the United States accounted for 29% of
our consolidated revenues, up from 23% in 1999 and 20% in 1998. 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 United States and Canada depends on gaining market acceptance of the
Inovoject(R) system and in ovo administration of biological products in markets
outside the United States and Canada to treat prevailing poultry diseases in
those 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;
o adverse changes in local investment or exchange control regulations,
potential restrictions on the flow of international capital, and the possibility
of expropriation or confiscatory taxation or price controls; and
o economic and political conditions beyond our control, including
country-specific conditions such as political instability, government corruption
and civil unrest.
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 some 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 and time-consuming clinical
trials to demonstrate safety and effectiveness 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 we may not be able to contract for the manufacture of new products at a
cost or in quantities necessary to make them commercially viable;
o regulatory approval of these products may not be obtained or may be
obtained only with lengthy delays;
o we may not be able to secure additional financing that may be needed to
bring a potential product to market;
o we may experience unexpected safety or efficacy concerns with respect
to marketed products, whether or not scientifically justified, leading to
adverse public reaction, product recalls, withdrawals or declining sales;
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;
o we may be unable to accurately predict market requirements and evolving
standards; and
o we may not be able to attract and retain sufficient numbers of
qualified development personnel.
We have developed and commercialized a technology using our proprietary viral
neutralizing factor ("VNF(R)"). Our Bursaplex(R) product uses this technology.
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.
2
As of July, 2001 we have submitted a registration application for Newplex(TM),
our in ovo Newcastle Disease vaccine, to the United States Department of
Agriculture (USDA). Although this product has been submitted for registration
there is no assurance that the USDA approval will be obtained.
There can be no assurance that we will successfully complete the development and
commercialization of any new products or that such products, if commercialized,
will meet revenue and profit expectations.
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 in ovo
delivery method, either within or outside the United States, may be developed
and gain commercial acceptance. The poultry biological business is especially
competitive and dominated by a few very large companies with an established
global presence. 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. We may not be successful in establishing or maintaining
technological competitiveness. Increased competition could mean lower prices for
our products, reduced demand for our products and a corresponding reduction in
our ability to recover development, engineering and manufacturing costs. Any of
these developments could have an adverse effect on our business, results of
operations and financial condition.
WE DO NOT MANUFACTURE ANY OF OUR PRODUCTS AND ARE CURRENTLY DEPENDENT ON A
SINGLE CONTRACT MANUFACTURER FOR INOVOJECT(R) SYSTEMS, FOR VNF(R) PRODUCTION,
AND FOR BURSAPLEX(R) PRODUCTION
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 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. There are a number of risks associated with our
dependence on third-party manufacturers including:
o reduced control over delivery schedules;
o quality assurance;
3
o manufacturing yields and costs;
o the potential lack of adequate capacity during periods of excess
demand;
o limited warranties on products supplied to us; and
o increases in prices and the potential misappropriation of our
intellectual property.
If our third party manufacturers fail to provide us with an adequate supply of
finished products, our business would be harmed. Except for our contract with
SPAFAS for production of VNF(R), we have no long-term contracts or arrangements
with any of our vendors that guarantee product availability or the continuation
of particular payment terms. In addition, we are currently dependent on a
single contract manufacturer for several of our key products as described below.
Although we believe our relationship with each of the manufacturers is good, we
cannot assure you that we will continue to maintain good relationships with them
or that they will continue to exist.
Inovoject(R) System
We rely on one contract manufacturer to fabricate all of our Inovoject(R)
systems. While other machine fabricators exist and have constructed limited
numbers of Inovoject(R) systems, we do not currently have alternative sources
for production of the Inovoject(R) system. If our current fabricator is unable
to carry out its manufacturing obligations to our satisfaction, we may be unable
to obtain alternative manufacturing, or to obtain such manufacturing on
commercially reasonable terms or on a timely basis. Any delays in the
manufacturing process may adversely impact our ability to meet commercial
demands for the Inovoject(R) system installations and delay receipt of revenues
from those installations.
Biological Products
We obtain all of our requirements for the active ingredient in VNF(R)
(Viral Neutralizing Factor) from SPAFAS, Inc. ("SPAFAS"), a subsidiary of
Charles River Laboratories, Inc. Under our agreement with SPAFAS, we maintain
appropriate inventory levels and place orders with SPAFAS to allow us to satisfy
anticipated customer demand for VNF(R). The manufacture of our VNF(R) product
generally must be performed in licensed facilities or under approved regulatory
methods. The regulatory approval granted by the USDA for Bursaplex(R) in January
1997 specifically covers the vaccine produced with SPAFAS-manufactured VNF(R).
Although there are other manufacturers who are capable of manufacturing VNF(R),
we do not currently have alternative sources for production of VNF(R).
We obtain all of our requirements for Bursaplex(R) from Merial Select, Inc.
("Select"), a Merck and Aventis company. The manufacture of Bursaplex(R) must
be performed in licensed facilities or under approved regulatory methods.
Although there are other manufacturers who are capable of manufacturing IBD
products, we do not currently have alternative sources for production of
Bursaplex(R).
4
If either SPAFAS or Select is unable to carry out its manufacturing
obligations (described immediately above) to our satisfaction, we may be unable
to obtain alternative manufacturing, or to obtain such manufacturing on
commercially reasonable terms or on a timely basis. A change of supplier for
the Company could adversely affect our future operating results due to the time
it would take a new supplier to obtain regulatory approval by the USDA of its
production process or manufacturing facilities. We could also be sued for breach
under various contracts under which we are obligated to supply VNF(R) or
Bursaplex(R) to third parties. If the terms of regulatory approvals in any
foreign countries are only effective as to a product manufactured with SPAFAS
VNF(R) or Bursaplex(R) as manufactured by Select, a change of manufacturer may
also result in the need to reapply for approval in those countries and in the
need to suspend sales of a product in those countries until new approvals could
be secured based on the replacement manufacturer. Any delays in securing new
approvals would have an adverse effect on our revenues and growth prospects. We
cannot guarantee that we would be able to secure new approvals in every country
or that such approvals would be granted in a timely fashion.
WE ARE DEPENDENT ON DISTRIBUTORS IN CERTAIN MARKETS
We market and distribute our Inovoject(R) system principally by leasing and
licensing the systems directly to hatcheries. In some markets, such as Japan,
we instead rely upon distributors for the Inovoject(R) system. We also rely on
third parties to market certain biological products, such as products containing
VNF(R), and we may enter into other arrangements in the future. There can be no
assurance that we can maintain these relationships on terms acceptable to us.
The loss of any of these relationships could adversely affect our operating
results. There are a number of risks associated with our dependence on
distributors and other third parties including:
o reduced control over marketing and sales efforts and in turn the extent
of resulting market penetration or acceptance;
o reduced control over distribution and related customer satisfaction;
and
o potential delays in distribution associated with securing new
distributors, if current relationships are not maintained.
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;
5
o market demand for poultry products, including the supply and pricing of
alternative proteins; 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 by the Inovoject(R) system.
POULTRY HEALTH AND DISEASE FACTORS AFFECTING OUR CUSTOMERS MAY ADVERSELY AFFECT
OUR FINANCIAL RESULTS
Any widespread poultry health problem or disease outbreak could have a negative
impact on global poultry production. Revenues and earnings derived from both the
US and international poultry industry could be materially and adversely
affected. In addition, the emergence of new disease variants, serotypes and
strains in the domestic and/or global markets may reduce the efficacy of our
biological products and result in reduced revenues and earnings.
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 21% of our consolidated 2000 revenues. Our top three customers,
including Tyson, accounted for approximately 34% of our consolidated 2000
revenues, which is down from 38% in 1999. We expect a similar level of customer
concentration to continue in future years. The poultry market is highly
concentrated, with the largest poultry producers dominating the market. For
example, in 2000, Tyson supplied approximately 23% of all broilers grown in the
United States. 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) system revenues since our fees are based on the number of
eggs injected.
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. We own some of the technologies employed
in these processes, and some are owned by others and licensed to us. The
Inovoject(R) system utilizes a process that was patented
6
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 our licensors and
us 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 or that, if issued, the patents will afford
protection against competitors with similar technology;
o Patent applications in the United States are maintained in secrecy
until patents issue so we may not be aware that technology we use or
independently discover is covered by the pending patent application of a third
party.
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 Issuance of a valid patent does not prevent other companies from using
alternative, non-infringing technology so we cannot be sure that any of our
patents (or patents issued to others and licensed to us) will provide
significant commercial protection;
o We may not have the financial resources necessary to obtain patent
protection in some countries or to enforce any patent rights we may hold;
o The laws of some foreign countries may not protect proprietary rights
to the same extent as the laws of the United States, and many companies have
encountered significant problems in protecting their proprietary rights in these
foreign countries;
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 also rely upon unpatented, proprietary technology, which we may not
be able to protect fully if others independently develop substantially
equivalent proprietary information or techniques, improperly gain access to our
proprietary technology, or disclose this technology to others.
7
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 but we cannot be sure that these
agreements will not be breached or that we would have adequate remedies for any
breach. Even with these protections, others may independently develop or obtain
access to these materials or processes which may adversely affect our
competitive position.
If we are sued for infringing the patent or other proprietary rights of a third
party, we could incur substantial costs and diversion of management and
technical personnel, whether or not the litigation is ultimately determined in
our favor.
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 U.S. 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
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.
8
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 U.S. Court of Appeals for the Federal Circuit
seeking a reversal of the Judgment. In July 2000, the United States Court of
Appeals for the Federal Circuit affirmed the district court's decision to award
to Embrex litigation expenses plus interest valued at approximately $1.5
million. In addition, the appeals court upheld the finding that Service
Engineering Corporation and Edward Bounds had willfully infringed all asserted
claims of the Sharma Patent. However, the appeals court vacated the award of
direct infringement damages finding that the district court erroneously awarded
direct damages without proper evidence to support the award. Therefore, the
appeals court remanded that award ($500,000 which was trebled) to the district
court for further proceedings for determination of a reasonable royalty for the
infringement of the patented method by Service Engineering Corporation and
Edward G. Bounds, Jr. These proceedings were opened on August 28, 2000 and are
proceeding.
Machining Technologies, Inc. v. Embrex
On April 15, 1999, Machining Technologies, Inc. of Hebron, Maryland served on us
a Complaint for Declaratory Judgment against us in the U.S. 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 believed that this action
was without legal basis. On June 4, 1999, we filed a motion to dismiss this
action. On March 7, 2000, the U.S. District Court for the District of Maryland
granted our motion to dismiss this action and ordered this case closed.
THE LOSS OF KEY COLLABORATORS 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. In addition, disagreements may arise with
these third parties which could delay or lead to the termination of the
development or commercialization of new products, or result in litigation or
arbitration, which would be time consuming and expensive. Thus, there is no
assurance that we will develop any new products or generate any revenues from
these collaborative agreements.
WE ARE SUBJECT TO AN INHERENT RISK OF PRODUCT LIABILITY
9
The development, manufacture, distribution and marketing of our products involve
an inherent risk of product liability claims and associated adverse publicity.
These claims may be made even with respect to those products that are
manufactured in licensed and approved facilities or that otherwise possess
regulatory approval for commercial sale. These claims could expose us to
significant liabilities that could prevent or interfere with the development and
marketing of our products. Product liability claims could require us to spend
significant time and money in litigation or pay significant damages. Although
we currently maintain liability insurance, which we believe is adequate to cover
the Company's potential exposure in this area, there can be no assurance that
the coverage limits of our policies will be adequate. Such insurance is
expensive, difficult to obtain and may not continue to be available on
acceptable terms or at all.
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. The primary emphasis of these requirements is to assure
the safety and effectiveness of our products. While the use of the Inovoject(R)
system is not subject to regulatory approval in the United States, 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
United States 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, costly and uncertain 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. Changes in the policies of
U.S. and foreign regulatory bodies could increase the time required to obtain
regulatory approval for each new product. 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 or by our collaborative partners will receive
regulatory approval without lengthy delays, if at all. Even when approved,
regulators may impose limitations on the uses for which the product may be
marketed and may continue to review a product after approving it for marketing.
Regulators may impose restrictions and sanctions, including banning the
continued sale of the product, if they discover problems with the product or its
manufacturer.
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. We must
obtain approval from appropriate regulators before we can sell our products in a
particular jurisdiction.
10
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;
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. There can be no assurance that we will be able to continue to attract
and retain qualified staff. The departure of any key executive or our inability
to recruit and retain key scientific or management personnel could have an
adverse affect on our business, results of operations or financial condition.
Our ability to replace key individuals may be difficult and may take an extended
period of time because of the limited number of individuals in the biotechnology
industry with the breadth of skills and experience required to develop and
commercialize products successfully. Competition to hire from this limited pool
is intense, and we may be unable to hire, train, retain or motivate such
individuals. 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. This amount may not be sufficient to compensate us for
the loss of his services.
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 our operating
results.
WE HAVE ANTI-TAKEOVER DEFENSES THAT COULD DISCOURAGE OR DELAY A TAKEOVER
11
Provisions of our certificate of incorporation and bylaws could have the effect
of discouraging or delaying an acquisition of our company. For example, 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.
12