| Before making an investment decision, you should carefully consider the risk factors set forth below |
| We will not be able to achieve significant increases in our revenues if HPV screening is not increasingly accepted by physicians and laboratories |
| Our growth and success depend upon continued increasing acceptance by physicians and laboratories of HPV screening as a necessary part of the standard of care for cervical cancer screening and, more specifically, of our HPV test products as a primary cervical cancer screening method, in conjunction with Pap tests, independent of Pap tests, and in conjunction with the implementation of HPV vaccinations |
| Pap tests have been the principal means of cervical cancer screening since the 1940s |
| Technological advances designed to improve quality control over sample collection and preservation and to reduce the Pap test’s susceptibility to human error may increase physician reliance on the Pap test and solidify its market position as the most widely used screen for cervical cancer |
| Currently, approximately 60 million Pap tests are performed annually in the United States and we believe that 60 to 100 million are performed annually in the rest of the world |
| Women with normal Pap tests do not undergo follow-up treatment beyond routine Pap testing |
| Follow-up testing and treatment is based on the classification of the Pap test result |
| An equivocal, or ASC-US (Atypical Squamous Cells of Undetermined Significance), classification is given to Pap test results that cannot be definitively classified as either normal or abnormal; this classification occurs in approximately 5prca to 7prca of all cases |
| HPV testing applies a new gene-based technology and testing approach that is different from the cytology (reviewing cells under a microscope) approach of the Pap test |
| We have expended, and need to continue to spend, significant resources to educate physicians and laboratories about the patient benefits that can result from using our HPV test products in addition to the Pap test, and to assist laboratory customers in learning how to perform our HPV test products |
| Using our HPV test products along with the Pap test for primary screening in the United States may be seen by some of these customers as adding unnecessary expense to the generally accepted cervical cancer screening methodology and we frequently need to provide information to counteract this impression on a case-by-case basis |
| To date, we have been able to grow our US revenues from sales of our HPV test products from approximately dlra24cmam354cmam000 in fiscal 2002 to approximately dlra111cmam746cmam000 in fiscal 2006 |
| We believe that with these efforts we have captured approximately 18prca of the HPV testing market |
| If we are not successful in executing our marketing strategies, we may not be able to significantly grow our market share for HPV testing, and we will not be able to continue to grow our revenues |
| During fiscal 2006 we expanded our direct-to-consumer awareness marketing programs because we believe a well educated female population will work with their health care providers to increase the use of The Digene HPV Test |
| The campaign to date involved national print advertisement and focused television advertising in ten locations, Atlanta, Baltimore, Philadelphia, Boston, Chicago, Houston, Dallas, New York City, San Francisco and Washington, DC We plan to continue our direct-to-consumer awareness campaign in fiscal 2007, and to move into other markets in fiscal 2007 |
| If we are not successful in executing this marketing program, we may not be able to significantly increase the sales of our HPV tests to the extent we desire |
| received FDA approval for a vaccine against HPV types 16 and 18, the high-risk HPV types associated with approximately 70prca of cervical cancer cases |
| We anticipate that GlaxoSmithKline will receive FDA approval for an HPV vaccine product during our fiscal 2007 |
| We are working with our physician and laboratory customers and with others to develop and establish the role HPV screening will play in the standard of care for HPV vaccination |
| If we are not successful in this endeavor, we may not be able to significantly grow the market for HPV screening or increase our HPV test revenues |
| 27 _________________________________________________________________ Our products for the diagnosis of the presence of chlamydia and gonorrhea compete with other FDA-cleared products that detect the presence of such infectious diseases |
| Our marketing activities focus on providing information regarding the accuracy and objective nature of these diagnostic tests, but such activities are time-consuming and expensive |
| We believe the best way to increase our revenues from these products is to educate laboratories and physicians about the ability to run such tests from the same patient sample collected for HPV testing |
| If we are not successful in executing our marketing strategy we do not expect to significantly grow our revenues from these products |
| We have the only fully commercialized and FDA-approved test for the detection of HPV, which provides us with a competitive advantage that may be adversely impacted if other companies develop and commercialize alternative HPV tests |
| Although we have the only fully commercialized and FDA-approved test for the detection of HPV, a significant portion of our HPV-related intellectual property is in the public domain, subject to patents that will begin to expire in the next few years or not licensed to us on a sole and exclusive basis |
| As a result, we believe other companies are developing or will develop HPV detection tests in the next few years |
| For example, F Hoffman-La Roche Ltd |
| (Roche) has publicly announced its ongoing development of a test for the detection of HPV and in April 2004 announced that it launched such test in Europe |
| In February 2005, Roche announced an agreement with Gen-Probe Incorporated to supply HPV DNA probes to Gen-Probe for its HPV test kits |
| In June 2002, Institut Pasteur announced that it had transferred its HPV intellectual property estate to Roche, which included an assignment of the cross license between Digene and Institut Pasteur |
| Based upon the HPV types to which Roche has announced that it acquired access as a result of the transfer by Institut Pasteur, the HPV types covered by Roche’s own patents and the HPV types that are publicly available, and despite our continuing exclusive right to certain high risk HPV types, we believe Roche may have the ability to develop a HPV test that would be competitive with our HPV test products in our principal markets |
| Roche has substantially greater resources than we do |
| We may not be able to compete successfully against Roche if it markets a HPV test competitive with our HPV test |
| Ventana Medical Systems, Inc |
| is selling an in situ diagnostic test for the detection of HPV We believe Ventana’s activities infringe our intellectual property and we have initiated patent infringement litigation against Ventana |
| If we are not successful in such litigation, and if Ventana obtains FDA approval for a test competitive with our HPV test products, we may lose significant HPV testing revenue to Ventana |
| We are also aware that a significant number of laboratory organizations and other companies are developing and using internally developed, or “home-brew,” HPV tests |
| These tests, although not approved by the FDA or similar non-US regulatory authorities, do offer an alternative to our HPV test products that could limit the laboratory customer base for our product |
| We are monitoring these activities |
| We are dependent on a relatively small number of national laboratories for a significant portion of our sales to laboratory customers |
| We supply our HPV test products to national laboratories, such as Quest Diagnostics and LabCorp pursuant to standard, non-exclusive fixed term contracts |
| A significant customer could decide to 28 _________________________________________________________________ terminate or not renew its existing contract with us |
| The loss of one or more significant customers could have a material adverse effect on our business |
| Changes in our senior management team could impact our ability to successfully operate and grow our business |
| During fiscal 2007 both our current Chief Executive Officer, and our current President, Chief Operating Officer and Chief Financial Officer will leave Digene |
| The Nominating and Corporate Governance Committee of our Board of Directors is currently conducting a search for a new Chief Executive Officer |
| Such changes in our senior management team, and the activities associated with identifying and selecting a new Chief Executive Officer could divert management attention from our core business, and could have a negative impact on our ability to implement our strategic objectives and grow our business |
| We are highly dependent on the remaining principal members of our management staff |
| Loss of additional key personnel would likely impede achievement of our research and development, operational, or strategic objectives |
| To be successful, we must attract qualified replacements for our departing executives, retain key employees and attract additional qualified employees |
| We may encounter difficulties expanding our manufacturing operations as demand for our products increases, which would negatively impact our revenues |
| We depend on a single facility for the manufacture of all of our diagnostic test kits and any temporary stoppage at that site would have a material adverse effect on our business |
| If product sales increase, we will have to scale-up our manufacturing processes and facilities |
| We may encounter difficulties in scaling-up manufacturing processes and may be unsuccessful in overcoming such difficulties |
| In such circumstances, our ability to meet product demand may be impaired or delayed |
| We have a single manufacturing facility located in Gaithersburg, Maryland |
| This facility is subject, on an ongoing basis, to a variety of quality systems regulations, international quality standards and other regulatory requirements, including current good manufacturing practices requirements of the FDA We may encounter difficulties maintaining or expanding our manufacturing operations in accordance with these regulations and standards, which could result in a delay or termination of manufacturing or an inability to meet product demand |
| We face risks inherent in operating as a single facility for the manufacture of our products |
| We do not have alternative production plans in place or alternative facilities available if we experience prolonged facility failure at our Gaithersburg, Maryland manufacturing facility |
| These risks include unforeseen manufacturing delays or stoppage due to equipment, raw material supply disruption, regulatory, environmental or other factors, and the resulting inability to meet customer orders on a timely basis |
| We may not be able to successfully integrate future acquisitions |
| We continually explore opportunities to acquire related businesses, some of which could be material to us |
| Our ability to continue to grow may depend upon identifying and successfully acquiring attractive companies, effectively integrating such companies, achieving cost efficiencies and managing these businesses as part of our company |
| We may not be able to effectively integrate acquired companies and successfully implement appropriate operational, financial and management systems and controls to achieve the benefits expected to result from these acquisitions |
| Our effort to integrate these businesses could be affected by a number of factors beyond our control, such as regulatory developments, general economic conditions, increased competition, the loss of customers resulting from the acquisitions and the assumption of unknown liabilities |
| In addition, the process of integrating these businesses could cause an 29 _________________________________________________________________ interruption of, or loss of momentum in, the activities of our existing business and the loss of key personnel and customers |
| The diversion of management’s attention and any delays or difficulties encountered in connection with the integration of these businesses could negatively impact our business if any of the above adverse effects were to occur |
| Further, the benefits that we anticipate from any future acquisitions may not develop |
| Future acquisitions may harm our operating results, dilute our stockholders’ equity and create other financial difficulties for us |
| We may in the future pursue acquisitions that we believe could provide us with new technologies, products or service offerings, or enable us to obtain other competitive advantages |
| Acquisitions by us may involve some or all of the following financial risks: • use of significant amounts of cash; • potential dilutive issuances of equity securities; • incurrence of debt or amortization expenses related to certain intangible assets; and • future impairment charges related to diminished fair value of businesses acquired as compared to the price we pay for them |
| We may not be successful in overcoming the risks described above or any other problems associated with future acquisitions |
| Any of these risks and problems could materially harm our business, prospects and financial condition |
| Additionally, we cannot guarantee that any companies we may acquire will achieve anticipated revenues or operating results |
| If more third-party health insurance payors do not adequately reimburse for our HPV test products, the use of our HPV test products may not increase, thus negatively affecting our ability to grow our revenues |
| A significant portion of the sales of our products in the United States and other markets depend, in large part, on the availability of adequate reimbursement to users of our tests from government insurance plans, including Medicare and Medicaid in the United States, managed care organizations and private insurance plans |
| We believe we have nearly universal coverage from US government payors, third-party payors and managed care entities for our hc[2] HPV Test as a follow-up test to categorize equivocal Pap test results |
| In addition, government payors, third—party payors and managed care entities that provide health insurance coverage to over 225 million people in the United States currently authorize reimbursement for the use of our Digene HPV Test to adjunctively screen women age 30 and older to assess the presence or absence of significant, cancer-causing HPV types |
| We also seek reimbursement coverage in other countries where we market our products, particularly in Europe, and receipt of the necessary approvals is time-consuming and expensive |
| Reimbursement coverage for the Pap test is universal in the United States and in other markets where we sell our HPV test products |
| We have encountered delays in receipt of some European reimbursement approvals and public health funding, which has impacted our ability to grow revenues in these markets |
| Despite our success to date, third-party payors are often reluctant to reimburse healthcare providers for the use of medical tests such as our HPV test products that involve new technology |
| In addition, third-party payors are increasingly limiting reimbursement coverage for medical diagnostic 30 _________________________________________________________________ products and, in many instances, are exerting pressure on diagnostic product suppliers to reduce their prices |
| Thus, third-party reimbursement may not be consistently available or financially adequate to cover the cost of our products |
| This could limit our ability to sell our products, cause us to reduce the prices of our products or otherwise adversely affect our operating results |
| Because each third-party payor individually approves reimbursement, obtaining such approvals is a time-consuming and costly process that requires us to provide scientific and clinical support for the use of each of our products to each payor separately with no assurance that such approval will be obtained |
| This process can delay the broad market introduction of new products and could have a negative effect on our revenues and operating results |
| We may need to initiate lawsuits to protect or enforce our patents, which would be expensive and, if we lose, may cause us to lose some, if not all, of our intellectual property rights, and thereby impair our ability to compete |
| We rely on patents to protect a large part of our intellectual property |
| To protect or enforce our patent rights, we may initiate patent litigation against third parties, such as infringement suits or interference proceedings |
| These lawsuits could be expensive, take significant time and divert management’s attention from other business concerns |
| They would also put our patents at risk of being invalidated or interpreted narrowly, and our patent applications at risk of not issuing |
| We may also provoke these third parties to assert claims against us |
| Patent law relating to the scope of claims in the technology fields in which we operate is still evolving and, consequently, patent positions in our industry are generally uncertain |
| We cannot provide assurance that we would prevail in any of these suits or that the damages or other remedies awarded, if any, would be commercially valuable |
| During the course of these potential suits, there may be public announcements of the results of hearings, motions and other interim proceedings or developments in the litigation |
| Any public announcements related to these suits could cause our stock price to decline |
| We may inadvertently infringe upon the intellectual property rights of third parties, which could expose us to expensive intellectual property litigation, impose a significant strain on our resources and prevent us from developing or marketing our products |
| There have been substantial litigation and other proceedings regarding patent and other intellectual property rights in the pharmaceutical and biotechnology industries because of the uncertainties and complex legal, scientific and factual questions related to the ownership and protection of intellectual property |
| We have received inquiries regarding possible patent infringements relating to, among other things, aspects of our Hybrid Capture technology |
| We believe that the patents of others to which these inquiries relate are either not infringed by our Hybrid Capture technology or are invalid |
| However, we may be subject to further claims that our technology, including our Hybrid Capture technology, or our products infringe the patents or proprietary rights of third parties |
| We may also be forced to initiate legal proceedings to protect our patent position or other proprietary rights |
| These proceedings are often expensive and time-consuming, even if we were to prevail |
| Single suppliers or a limited number of suppliers provide key components of our products |
| If these suppliers fail to supply these components, we may be unable to manufacture sufficient product to satisfy demand which would negatively impact our revenues |
| Several key components of our products come from, or are manufactured for us by, a single supplier or limited number of suppliers |
| This applies in particular to the following components, chemiluminescent substrates (used to create a chemical reaction that causes light in connection with our Hybrid Capture signal amplified molecular technology), our Rapid Capture System that serves as the 31 _________________________________________________________________ automation platform developed for large-scale diagnostic testing using the Hybrid Capture technology, the 96-well microplate used by laboratories to run our diagnostic test products, the Digene Microplate Luminometer that provides the results of all of our microplate-based diagnostic tests, and the collection tubes, plus the cervical sampler brushes we provide as part of cervical sampler kits that we sell with our HPV testing products |
| We have been able, to date, to enter into long-term contracts with these single source suppliers |
| In some cases, however, the supplier of a key component is not required to supply us with specified quantities over longer periods of time or set-aside part of its inventory for our forecasted requirements |
| We have not arranged for alternative supply sources for these components and it may be difficult to find alternative suppliers, if at all |
| If our products sales increase beyond the forecast levels, or if our suppliers are unable or unwilling to supply us components on a timely basis, we may be unable to satisfy product demand |
| In addition, if any of the components of our products are no longer available in the marketplace, we may be forced to further develop our products or technology to incorporate alternate components |
| The incorporation of new components into our products may require us to seek approvals from the FDA or foreign regulatory agencies prior to commercialization |
| We are required to obtain and maintain royalty-bearing licenses to third party patents or patent applications, and loss of such licenses, or the need to obtain additional licenses, could materially adversely affect our ability to commercialize our products |
| We have in-licensed patents to a number of cancer-causing HPV types, which, together with the patents to cancer-causing HPV types that we own, provide us with a competitive advantage |
| We may lose this competitive advantage if these licenses terminate or if the patents licensed thereunder expire or are declared invalid |
| Our products and manufacturing processes require access to biological materials and other intellectual property that may be subject to patents and patent applications held by third parties |
| In addition, we have licenses to various patents covering intellectual property that we use in conjunction with applications of our Hybrid Capture technology |
| Third parties may have claims to these patents |
| An adverse outcome to such claims could subject us to significant liabilities to third parties or require us to obtain royalty-bearing licenses from third parties, cease sales of related products or revise the applications or products which employ the patented technology |
| Any licenses required for any such third party patents or proprietary rights may not be made available to us on commercially reasonable terms, if at all |
| Furthermore, we may be unable to make the necessary revisions to our applications or products |
| We may discover that we need to obtain rights to an additional patent in order to commercialize our products |
| We may be unable to obtain such rights on commercially reasonable terms or at all, which could adversely affect our ability to grow our business |
| We have incurred cumulative net losses to date and need to continue to spend substantial funds |
| We may not remain profitable and may need to seek additional financing |
| We have had substantial operating losses since incorporation in 1987 |
| We turned profitable during the fourth quarter of fiscal 2003, but prior to that we never earned a profit |
| At June 30, 2006, our accumulated deficit was approximately dlra53cmam874cmam000 |
| Previous losses have resulted principally from: • expenses associated with our research and development programs; • our sales and marketing activities in the United States and internationally; 32 _________________________________________________________________ • patent litigation costs and settlement and licensing expenses; and • other expenses, including administrative and facilities costs |
| We had net income of approximately dlra21cmam542cmam000, which included a deferred tax benefit of approximately dlra14cmam900cmam000, in fiscal 2004 |
| In fiscal 2005, we had a net loss of approximately dlra8cmam167cmam000, primarily due to payments made to settle ongoing litigation matters |
| We believe that our existing capital resources, together with the proceeds of our 2005 financing, will be sufficient to meet the anticipated cash needs of our current business for the foreseeable future |
| However, if we incur significant operating losses or if one or more of the events described in these Risk Factors actually occurs, we may have to obtain additional funds through equity or debt financing, strategic alliances with corporate partners and others, or through alternative sources |
| Any equity financing would dilute our then-current stockholders |
| We do not have any committed sources of additional financing |
| Additional funding, if necessary, may not be available on acceptable terms, if at all |
| If adequate funds are not available, we may have to delay, scale-back or eliminate aspects of our operations or attempt to obtain funds through arrangements with collaborative partners or others |
| This may result in the relinquishment of our rights to some of our technologies, product candidates, products or potential markets |
| The growth of our European operations has been slower than expected, and we may not achieve the desired increase in our profitability from such market |
| In 2002 we made the decision to establish our own sales, marketing, distribution, warehousing and customer support infrastructure in Europe for the sale of our HPV test products and other products |
| Other companies selling medical diagnostic products in Europe are larger and significantly better capitalized than we are, and have had established European operations for a significantly longer period than we have |
| We had previously used third-party distributors to distribute and market our products in Europe, and our product inventory, distribution and customer support services are still in the development process |
| Approximately dlra11cmam992cmam000, or 19prca, of our sales and marketing expenditures and approximately dlra5cmam779cmam000, or 22prca, of our general and administrative expenditures for fiscal 2006 related to our activities in Europe |
| During the same period, approximately dlra16cmam394cmam000, or 12prca, of our HPV testing revenues were from sales in Europe |
| We expect to continue to expend significant resources to grow and maintain our infrastructure as much as possible given the resources at our disposal, but such resources may not be sufficient to meaningfully increase our revenues in Europe |
| Our revenues and operating results could be hurt by our inability to successfully grow and maintain our distribution infrastructure or our inability to effectively market our products in Europe |
| The decision to establish our own infrastructure in Europe has required us to establish multiple subsidiary corporations in Europe |
| This subjects us to the laws of multiple jurisdictions, including tax and employment laws, and the laws governing the import, storage and distribution of our products |
| Any failure to comply with these laws could have a material adverse impact on our business and operations |
| The time and expense needed to obtain regulatory approval and respond to changes in regulatory requirements could adversely affect our ability to commercially distribute our products and generate revenue therefrom |
| Each of our products and product candidates are medical devices subject to extensive regulation by the FDA under the Federal Food, Drug and Cosmetic Act |
| Governmental bodies in other countries also have medical device approval regulations which are becoming more extensive |
| Such regulations govern the majority of the commercial activities we perform, including the indications for which our products can be used, product development, product testing, product labeling, product storage, use of our 33 _________________________________________________________________ products with other products and the manufacturing, advertising and promotion of our products for the approved indications |
| Compliance with these regulations is expensive and time-consuming |
| With respect to our HPV test products, we were the first company to obtain approval of regulatory applications for HPV testing in the United States and in many countries in Europe (our principal markets), which adds to our expense and increases the degree of regulatory review and oversight |
| The expense of submitting regulatory approval applications in multiple countries as compared to our available resources impacts the decisions we make about entering new markets |
| Each medical device that we wish to distribute commercially in the United States will likely require either 510(k) clearance or pre-market approval from the FDA prior to marketing the device for in vitro-diagnostic use |
| Clinical trials related to our regulatory submissions take years to execute and are a significant expense for us |
| The 510(k) clearance pathway usually takes from three to twelve months, but can take longer |
| The pre-market approval pathway is much more costly, lengthy and uncertain |
| It generally takes from one to three years, but can also take longer |
| It took us more than four years to receive pre-market approval to offer our current generation HPV test product to test for the presence of the HPV in women with equivocal Pap test results and pre-market approval to use our Digene HPV Test as a primary adjunctive cervical cancer screening test to be performed in conjunction with the Pap test for women age 30 and older |
| With respect to our ongoing efforts, in April 2002, we submitted a PMA supplement with the FDA seeking approval of the use of our hc[2] HPV Test with TriPath Imaging, Inc |
| ’s SurePath Test Pack sample collection system |
| We worked with TriPath Imaging during fiscal 2004 to complete additional clinical studies and submitted the results of these studies to the FDA in August 2004 for pre-market approval |
| In February 2005, TriPath Imaging withdrew the PMA supplement after TriPath Imaging and the FDA agreed that additional clinical information and analysis would be required |
| In December 2005, TriPath Imaging resubmitted its PMAS supporting the use of SurePath specimens with the hc2 HR HPV Test |
| The FDA is currently reviewing such PMAS, and TriPath Imaging is responding to the FDA’s request for information |
| The regulatory time span increases our costs to develop new products and increases the risk that we will not succeed in introducing or selling new products in the United States |
| Our cleared or approved devices, including our diagnostic tests and related equipment, are subject to numerous post-market requirements |
| We are subject to inspection and marketing surveillance by the FDA to determine our compliance with regulatory requirements |
| If the FDA finds that we have failed to comply, it can institute a wide variety of enforcement actions, ranging from a public warning letter to more severe sanctions such as fines, injunctions and civil penalties, recall or seizure of our products, operating restrictions, partial suspension or total shutdown of production, denial of our requests for 510(k) clearance or pre-market approval of product candidates, withdrawal of 510(k) clearance or pre-market approval already granted; and criminal prosecution |
| Any enforcement action by the FDA may also affect our ability to commercially distribute our products in the United States |
| We may be sued for product liability claims or face product recalls for which our insurance may be inadequate |
| We may be found liable if any of our products causes injury or fails to accurately diagnose disease, ie, provides a “false negative” or “false positive” test result |
| We currently carry product liability insurance coverage with a combined single limit of dlra10cmam000cmam000 |
| This coverage may not be adequate to protect us against future product liability claims |
| Product liability insurance may not be available to us in the future on commercially reasonable terms, if at all |
| Our products are a complex interaction of biochemical reagents, and it is not uncommon for us to face manufacturing, raw material or supply chain problems |
| We have initiated product recalls from time 34 _________________________________________________________________ to time in the past and additional product recalls may be necessary from time to time in the future, either voluntarily on our part or at the direction of the FDA or other government agencies |
| Although none of our past product recalls have had a material adverse impact on our business, we believe future product recalls could have a material adverse affect on our business, financial condition or reputation |
| Our international sales are subject to currency, market and regulatory risks that are beyond our control |
| For fiscal 2006, we derived approximately 19prca of our consolidated revenues from the international sales of our products and services in foreign currencies and we expect that international sales will continue to account for a large portion of our sales |
| Changes in the rate of exchange of foreign currencies into United States dollars have and may hurt our revenues and results of operations |
| In particular, we sell products in, and derive revenues from, less economically developed countries |
| During such times, the value of local currency in such countries has decreased, sometimes dramatically, negatively impacting our average unit prices |
| In the past, this has adversely affected our revenues and operating results |
| Future economic and political instability in foreign countries may affect demand for our products and the value of the local currency, and thus, negatively affect our revenues and results of operations |
| The extent and complexity of medical products regulation are increasing worldwide, particularly in Europe, with regulation in some countries nearly as extensive as in the United States |
| Further, we must comply with import and export regulations when distributing our products to foreign nations |
| Each foreign country’s regulatory requirements for product approval and distribution are unique and may require the expenditure of substantial time, money and effort |
| As a result, we may not be able to successfully commercialize our products in foreign markets at or beyond the level of commercialization we have already achieved |
| Compliance with changing corporate governance and public disclosure regulations result in additional expenses |
| Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new US Securities and Exchange Commission regulations and NASDAQ Stock Market rules, are creating uncertainty for companies such as ours |
| To maintain high standards of corporate governance and public disclosure, we intend to invest all reasonably necessary resources to comply with evolving standards |
| These investments have resulted in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities |
| We have adopted anti-takeover provisions that may prevent or frustrate any attempt to replace or remove our current management by the stockholders or discourage bids for our common stock |
| These provisions may also affect the market price of our common stock |
| Our board of directors has the authority, without further action by the stockholders, to issue, from time to time, up to 1cmam000cmam000 shares of preferred stock in one or more classes or series and to fix the rights and preferences of such preferred stock |
| The board of directors could use this authority to issue preferred stock to discourage an unwanted bidder from making a proposal to acquire the company |
| Our certificate of incorporation also provides for staggered terms for members of the board of directors |
| This provision means it could take up to three years to replace our existing directors without the support of the board of 35 _________________________________________________________________ directors |
| Additionally, our bylaws establish an advance notice procedure for stockholder proposals and for nominating candidates for election as directors |
| These provisions of our certificate of incorporation and bylaws may prevent or frustrate any attempt to replace or remove our current directors or management by stockholders, which may have the effect of delaying, deterring or preventing a change in control transaction |
| Further, we are subject to provisions of Delaware corporate law, which, subject to limited exceptions, will prohibit us from engaging in any “business combination” with a person who, together with affiliates and associates, owns 15prca or more of our common stock, referred to as an interested stockholder, for a period of three years following the date that such person becomes an interested stockholder, unless the business combination is approved by our board of directors in a prescribed manner |
| Although we do not currently have a stockholder that meets the “interested stockholder” definition, these provisions of Delaware law may make business combinations more time consuming or expensive and have the impact of requiring our board of directors to agree with a proposal before it is accepted and presented to stockholders for consideration |
| These anti-takeover provisions might discourage bids for our common stock |