Back to GetFilings.com
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1999
Commission file number 000-19495
Embrex, Inc.
(Exact name of registrant as specified in its charter)
North Carolina 56-1469825
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
1035 Swabia Court, Durham, North Carolina 27703
(Address of principal executive offices) (Zip Code)
(919) 941-5185
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.01 Par Value Per Share (and Rights Attached Thereto)
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of February 25, 2000, the aggregate market value of the voting stock held by
non-affiliates was $114.3 million, based on a price per common share of $15.625
at the close of business on that date.
As of February 25, 2000, there were 8,006,361 shares of the registrant's common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Document Where Incorporated
Proxy Statement with respect to the Annual Part III
Meeting of Shareholders to be held on May 18,
2000, to be filed with the Securities
and Exchange Commission
INDEX
PAGE
PART I
ITEM 1. BUSINESS.....................................................1
ITEM 2. PROPERTIES...................................................7
ITEM 3. LEGAL PROCEEDINGS............................................7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..........9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS..........................................9
ITEM 6. SELECTED FINANCIAL DATA......................................9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..........................10
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..................13
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE..........................29
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...........29
ITEM 11. EXECUTIVE COMPENSATION.......................................29
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT...................................................29
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............29
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K..................................................30
SIGNATURES....................................................................37
PART I
ITEM 1. BUSINESS
GENERAL
Embrex, Inc. ("Embrex" or the "Company") develops and markets biological
delivery technology and biological products to increase the productivity and
profitability of the global poultry industry. The Company was incorporated in
1985 in North Carolina.
Embrex has developed and commercialized the Inovoject(R) system, a proprietary,
automated in-the-egg injection system which can inoculate 20,000 to 50,000 eggs
per hour and eliminates the need for manual, post-hatch injection of certain
vaccines. The Inovoject(R) system is designed to inject vaccines and other
compounds in precisely calibrated volumes into targeted compartments within the
egg. Embrex markets the Inovoject(R) system to commercial poultry producers,
charging a fee for each egg injected.
In addition to the Inovoject(R) system, Embrex has developed and is marketing
its Viral Neutralizing Factor ("VNF(R)") technology, useful in the development
of certain avian vaccines. The Company also has developed and is marketing
Bursaplex(R), a VNF(R)-based vaccine for protection against avian infectious
bursal disease ("IBD"). Embrex also is developing various other proprietary
pharmaceutical and biological products to improve bird health, reduce bird
production costs and provide other economic benefits to the poultry industry.
These products are in various stages of development, and some are being
developed in collaboration with major drug companies, the United States
Department of Agriculture (the "USDA"), and several leading universities in the
field of avian science. These products are being designed to be delivered
through the Inovoject(R) system, and some may also be administered after
hatching.
EXISTING PRODUCTS
Inovoject(R) Patented Egg Injection System
Embrex has developed and commercialized a proprietary, automated in-the-egg
injection system which can inoculate 20,000 to 50,000 eggs per hour and
eliminates the need for manual, post-hatch injection of certain vaccines. This
proprietary system, called Inovoject(R), is designed to inject vaccines and
other compounds in precisely calibrated volumes into targeted compartments
within the egg. Embrex markets the Inovoject(R) system to commercial poultry
producers, charging a fee for each egg injected.
In 1999, the Company converted a number of hatcheries to the Inovoject(R) system
and continued operating Inovoject(R) systems in hatcheries converted prior to
1999. The Company estimates that its Inovoject(R) system inoculates in excess of
80% of all eggs produced for the North American broiler poultry market and,
therefore, expects diminished growth in the number of system installations and
only modest Inovoject(R) system revenue growth in this market. Therefore, the
Company must expand its Inovoject(R) system installations and product sales in
markets outside North America in order to realize significant overall revenue
growth. The Company estimates that approximately 69% of the world broiler
production occurs outside the United States and Canada. Accordingly, the Company
is continuing to implement a strategy of marketing its Inovoject(R) system
outside North America.
During 1999, the Company placed a number of Inovoject(R) systems for trial and
on contract at locations outside the United States and Canada. The Company's
expansion outside the United States and Canada was focused initially on Europe,
the Middle East, and Africa. In the second half of 1997, the Company began
expansion efforts in Asia and, in 1998, in Latin America. At year end 1999, the
Company had Inovoject(R) systems either installed or on trial in 29 countries.
Overall, the placement of Inovoject(R) systems outside the United States and
Canada is dependent on market acceptance of various in ovo ("in the egg")
vaccines and obtaining regulatory approval of these vaccines in numerous
countries.
Certain poultry diseases are more prevalent in some geographic regions than in
others. For example, Marek's disease, for which the Inovoject(R) system
primarily is used in the United States, is not as widespread in Europe as in
North America. IBD (also known as Gumboro disease) is prevalent both in Northern
Europe and Asia and, to a lesser extent, in the United States. The Company
expects that the primary usage of its Inovoject(R) systems will vary
1
by geographic region according to the prevailing diseases as well as regulatory
approval and market acceptance of vaccines for in ovo delivery.
VNF(R) (Viral Neutralizing Factor)
Embrex has developed, patented and commercialized a Viral Neutralizing Factor
technology which permits single-dose immunization of the avian embryo effective
for the life of the bird. By using the VNF(R) technology to form an
antibody-vaccine virus complex, immunization is provided in a single step,
reducing or eliminating many of the multiple vaccinations carried out in the
industry. VNF(R) can temporarily neutralize a virulent vaccine virus without
impairing the virus' ability to stimulate an immune response. By using VNF(R) in
this manner, the virulent vaccine virus can be made into a safe and effective
vaccine which can be used in ovo or after hatching.
The VNF(R) technology is the subject of two issued U.S. patents, a pending U.S.
patent application, and several foreign patents and foreign patent applications.
The U.S. patents are owned by the University of Arkansas and exclusively
licensed to Embrex on a royalty basis for the life of the patents. Embrex also
is researching application of VNF(R) technology for other avian disease
vaccines, including Newcastle disease and infectious bronchitis, although there
is no assurance such research will result in product opportunities.
To date, the Company's research efforts with its VNF(R) technology have been
focused primarily on avian uses. Based on initial experimental data, the Company
now believes that the potential exists for VNF(R) to be used in several
non-primate species. A U.S. patent claiming the use of VNF(R) viral vaccines in
all non-primate animals was allowed in 1997 and issued in February 1999. The
Company is in the early stages of exploring collaborative relationships with
other companies for the development and licensing of VNF(R) for non-primate
uses. In August 1999, Embrex entered into a renewable research collaboration
with Boehringer Ingelheim Vetmedica, Inc., part of the Boehringer Ingelheim
worldwide group of companies, North Carolina State University, and The William
R. Kenan Institute for Engineering Technology and Science, with the objective of
developing VNF(R)-based vaccines for animal species other than poultry. Embrex
has not initiated any regulatory approval processes with respect to non-primate
uses of VNF(R) technology, nor is there any assurance that its efforts in this
area will result in products or other collaborative agreements.
Infectious Bursal Disease (IBD) Vaccines
VNF(R) technology is especially useful in vaccines against avian IBD, which
weakens a bird's immune system. Birds infected by IBD typically exhibit poor
growth or can succumb to other diseases because of a compromised immune system.
This disease is currently widespread in Northern Europe, Asia and, to a lesser
extent, in the United States To date, IBD has been treated post-hatch via
manually delivered vaccines or in drinking water. Existing vaccines are
associated with certain limitations, and some vaccines cannot be used safely or
effectively in ovo. The Company estimates the worldwide market for IBD vaccines
is approximately $60 million annually.
In August 1995, the Company entered into an agreement with Cyanamid Websters
("Websters"), a unit of Fort Dodge Animal Health ("Ft. Dodge"), a division of
American Home Products Corp., for the joint development of another IBD vaccine
containing VNF(R), which is being marketed by Ft. Dodge in certain European
countries and, upon receipt of appropriate regulatory approvals, will be
marketed by Ft. Dodge throughout the rest of Europe, the Middle East, and
Africa, under Ft. Dodge's trade name "Bursamune(R)". To date, Bursamune(R) has
received regulatory approval in South Africa and Spain and, in October 1999, has
received temporary authorization from French regulatory authorities for the
utilization of Bursamune(R) for in ovo administration.
In June 1997, Ft. Dodge indicated that its U.K. application for in ovo
regulatory approval of Bursamune(R)had been provisionally refused. Ft. Dodge
also indicated that the U.K. regulatory authority requested that further data be
supplied. The Company has worked with Ft. Dodge, which is responsible for
obtaining the necessary approvals for Bursamune(R)in both the U.K. and other
European Community markets, to respond to the U.K. regulatory authority requests
for data with respect to Bursamune(R). The Company anticipates that the
regulatory review process will be completed during the first half of 2000.
Embrex currently is seeking regulatory approval in selected Latin American and
Asian markets for in ovo and post-hatch use of Bursaplex(R). Although Embrex has
received regulatory approval in some of these markets, there is no assurance
that the remaining approvals will be obtained. The placement of Inovoject(R)
systems outside the United
2
States and Canada depends, in part, on market acceptance of various in ovo
vaccines as well as regulatory approval. To date, regulatory approval for
Bursaplex(R) has been received in nine countries besides the United States, and
regulatory approval is temporary or pending in thirteen countries.
PRODUCTS UNDER DEVELOPMENT
Embrex is developing individually and in collaboration with others additional
products which address poultry health and performance needs when administered in
ovo and, in some cases, after hatching. These additional products are in various
stages of development. There can be no assurance that Embrex will successfully
develop or market any of these products. Marketing products developed jointly
with others may require royalty or other payments by Embrex to its
co-developers. Embrex has not initiated the regulatory approval process for any
of these potential products, and there is no assurance regulatory approval will
be obtained.
In Ovo Products For Control Of Coccidiosis
In 1995, the Company began an initiative aimed at developing a novel in ovo
biological control method for coccidiosis. Coccidiosis is caused by a protozoan
parasite which attacks the gut of the chicken, causing significant problems with
the intake and digestion of feed and, therefore, the physical and economic
performance of the bird. Currently, virtually all broiler chickens, and most
poultry in general, receive anti-coccidiosis compounds called coccidiostats
incorporated into poultry feed. Over the years, coccidia have developed levels
of resistance to these coccidiostats and thus effectiveness has been somewhat
reduced. A limited number of live vaccines have also been developed and are
administered orally soon after hatch. However, due to difficulties in providing
a precise oral dose to each bird, growth depression can occur in broiler flocks.
Therefore, such live vaccines are used primarily in parent stock. Using its
Inovoject(R) system technology and its knowledge of avian embryology, the
Company has begun this initiative to develop a novel, efficacious and
cost-effective means of preventing coccidiosis in broiler chickens. This program
is aimed at overcoming many of the problems associated with current practices.
In 1997, the Company established the feasibility of an in ovo biological control
method for coccidiosis. During 1998, this project met the required internal
milestones regarding results and timeliness. In 1999, Embrex entered into a
collaborative research and development agreement with Pfizer Inc. to research
and develop a live coccidiosis vaccine for in ovo delivery to poultry. Further
development of this project will involve extensive clinical and field trials.
There can be no assurances that any of these development efforts will be
successful. Embrex has not initiated the regulatory approval process with
respect to these development efforts, and does not expect any coccidiosis
product developed by the Company to reach the market in the near future.
OTHER PRODUCTS UNDER DEVELOPMENT
During 1999, Embrex continued to evaluate technologies which, when coupled with
Embrex's proprietary in ovo enabling delivery know-how, might have the potential
to yield improvements in the areas of feed conversion, muscle mass and leanness
within broiler chickens. These technologies typically need to be applied in the
first several days of embryonic development in order to have the desired effect.
While the Company plans to continue its research efforts in these areas in 2000,
there is no assurance that these efforts will yield product opportunities.
Embrex is also evaluating technologies and developing capabilities for
characterizing and sorting eggs before or after injection by the Inovoject(R)
system. One of these evaluation programs has resulted in the development and
introduction of the Vaccine Saver(TM) option for the Inovoject(R) system. The
Vaccine Saver(TM) option was introduced in Europe in the fourth quarter of 1999.
The capabilities being developed by Embrex include automated gender sorting.
Early gender sorting improves processing plant efficiencies by enabling
gender-specific feed rations, therefore improving feed conversion. In 1999,
Embrex received a small business research grant to support the development of an
automated device to sort poultry eggs by gender. There is no assurance, however,
that such research will result in product opportunities.
The Company has also researched the feasibility of developing a treatment for
avian leukosis disease, a viral infection that can result in production losses
for poultry producers. Based upon its findings, the Company does not intend to
continue research on this program for the foreseeable future.
Embrex routinely enters into collaborative agreements with various animal health
companies, pharmaceutical companies and research and academic institutions to
evaluate the utility of certain of their compounds or devices
3
when delivered or applied in ovo. Depending upon the outcome of these
evaluations, Embrex may or may not proceed with these collaborations for further
development. There is no assurance that these efforts will yield products or
further collaborations.
In March 1998, Embrex entered into a marketing agreement with UniSoma, Inc., the
U.S. subsidiary of UniSoma Matematica para Productividade, S.A. ("UniSoma"). The
marketing agreement granted Embrex the exclusive North American marketing rights
for 5 years for the poultry management decision support system developed by
UniSoma. This decision support system is designed to assist producers in
optimizing decisions in production, scheduling, processing and marketing to
maximize profitability. In 1999, the Company determined that there was
insufficient demand for this system and terminated the marketing agreement with
Unisoma, Inc.
PATENTS AND PROPRIETARY RIGHTS
Embrex controls (either through direct ownership or exclusive license) 23 issued
U.S. patents, 13 pending U.S. patent applications, and more than 60 issued
foreign patents and more than 50 pending foreign patent applications. In
addition, Embrex has executed confidentiality agreements with its collaborators,
subcontractors, employees and directors.
The Inovoject(R) system utilizes a process of injecting viral, bacterial or
fungal vaccines into avian eggs that was patented in the United States by the
USDA in 1984. Embrex holds the exclusive license to this patent through its
expiration in 2002. Embrex has supplemented the USDA patent with seven
additional issued U.S. patents (and multiple foreign patents and patent
applications) covering specific design features of the Inovoject(R) system. See
Item 3, "Legal Proceedings", below.
Embrex also owns or licenses method-of-use patents for the in ovo administration
of VNF(R) vaccines and other compounds to elicit various beneficial responses in
poultry. Two U.S. patents for methods of treating IBD virus infections using
VNF(R) vaccines, including in ovo administration, were issued to Embrex in March
1995. A U.S. patent claiming the use of VNF(R) viral vaccines in all non-primate
animals was allowed in 1997 and issued in February 1999. These patents and
additional patent applications encompass the use of VNF(R) vaccine compounds
regardless of the source of the VNF(R). These VNF(R) patents additionally
include composition-of-matter claims to VNF(R) vaccines against IBD virus
disease and composition-of-matter claims to VNF(R) vaccines for combating viral
diseases in non-primate animals. These patent claims cover the vaccine
preparation, regardless of the manner in which the preparation is used. The
Company filed three new U.S. patent applications in 1998 and 10 new U.S. patent
applications in 1999. During 1999, Embrex filed 42 new patent applications in
the United States and other countries. Each application covered various aspects
of in ovo technology. Also, in April 1999, a U.S. patent was issued covering the
methods and apparatus for "candling" poultry eggs, or examining the viability of
eggs by holding the egg between the eye and light to determine suitability for
injection.
Embrex continues its efforts to patent methods of delivering compounds in ovo,
including early intervention methods and devices. In 1998, five U.S. patents
with claims to methods of, or devices for, delivering compounds to avian embryos
in ovo were allowed or issued. In 1999, one U.S. patent was allowed covering a
pump used for the precise metering of small quantities of fluid used in in ovo
administration and another U.S. patent was allowed for selectively injecting
poultry eggs.
Additionally, Embrex has federally registered the trademarks Embrex(R),
Inovoject(R), VNF(R), and Bursaplex(R) in the United States, and has applied for
federal registration of Vaccine Saver(TM) and other various trademarks.
COMPETITION
The primary competition for the Inovoject(R) system is the manual, post-hatch
administration of biological products. Since most of Embrex's products and
potential products are being designed to be administered through the
Inovoject(R) system, the Inovoject(R) system must continue to be accepted within
the poultry industry and operated as intended under long-term commercial
conditions for these potential products to be marketed successfully.
The Company holds the exclusive license to the U.S. patent for injecting
vaccines into an avian embryo. Embrex has supplemented this patent with seven
additional U.S. patents covering specific design features of the Inovoject(R)
4
system. In addition, Embrex relies on numerous foreign patents to protect its
intellectual properties and to afford a competitive advantage. See "Patents and
Proprietary Rights," above. There can be no assurance, however, that a
competitive delivery method, either within or outside the United States, will
not be developed and gain commercial acceptance. Embrex continues to monitor for
the presence of any competitive in ovo administration systems worldwide. See
Item 3, "Legal Proceedings," below.
Competitive success for Embrex will be based primarily on commercial acceptance
of its in ovo products, achieving and retaining scientific expertise and
technological superiority, identifying and pursuing scientifically feasible and
commercially viable opportunities, obtaining proprietary protection for its
research achievements, obtaining adequate funding and timely regulatory
approvals, and attracting corporate sponsors or partners in developing, testing,
producing, and marketing products, none of which can be assured. In addition, a
primary competitive factor affecting Embrex is its ability to conduct research
and development. Embrex's ability to successfully compete also is dependent on
its ability to attract and retain key personnel. Maintaining financial and human
resources, therefore, are important factors for success.
PRODUCTION, MARKETING AND DISTRIBUTION
Production
Embrex currently subcontracts the production of substantially all of its
mechanical and biological products and expects to continue to do so for the
foreseeable future. The Company believes that alternative sources of manufacture
and supply generally exist.
Inovoject(R) System
Embrex's in-house engineering staff designs the Inovoject(R) system, which
incorporates proprietary mechanical, pneumatic and electronic sub-systems and
concepts. The Company uses one contract manufacturer to fabricate its
Inovoject(R) systems. While other machine fabricators exist and have constructed
limited numbers of Inovoject(R) systems, a change in fabricators could cause a
delay in manufacturing and a possible delay in the timing of future Inovoject(R)
system installations and revenues from those installations.
VNF(R) (Viral Neutralizing Factor)
In 1993, Embrex signed multi-year agreements with SPAFAS, Inc. ("SPAFAS"), a
subsidiary of Charles River Laboratories, Inc., under which SPAFAS will supply
the active ingredient in VNF(R). In connection with this agreement, Embrex
maintains appropriate inventory levels and places orders with SPAFAS to allow
Embrex to satisfy anticipated customer demand for VNF(R). The regulatory
approval granted by the USDA for Bursaplex(R) in January 1997 specifically
covers the vaccine produced with SPAFAS-manufactured VNF(R).
The Company has granted Merial Select, Inc. ("Select") (a Merck Rhone-Poulenc
company) exclusive rights to manufacture IBD vaccines containing Embrex's VNF(R)
product, known as Bursaplex(R), for Embrex to market in North America, Latin
America and Asia. Embrex has also granted Ft. Dodge (a unit of American Home
Products Corp.) rights to manufacture IBD vaccines containing the Company's
VNF(R) product, known as Bursamune(R), to be marketed in Europe, the Middle East
and Africa. Abic Ltd. has been granted similar rights to manufacture and market
an IBD vaccine, known as GuMBryo(TM), in Israel. The manufacture of the IBD
vaccines being produced by Select and Ft. Dodge, and the Company's VNF(R)
product, generally must be performed in licensed facilities or under approved
regulatory methods. Although there are other manufacturers who are capable of
manufacturing IBD products and producing products such as VNF(R), a change of
supplier for the Company could adversely affect Embrex's future operating
results due to the time it would take a new supplier to obtain regulatory
approval of its production process or manufacturing facilities.
MARKETING AND DISTRIBUTION
Because of the geographical and industrial concentration of the poultry industry
in the United States, Embrex markets its products and provides ongoing service
directly to the industry. Embrex's marketing is focused principally on the
broiler chicken segment of the poultry industry, but the Company also has
adapted its products for use by,
5
and initiated trials and entered into commercial contracts with broiler breeder
companies, a layer company and a limited number of turkey producers.
In order to encourage proper use of the Inovoject(R) system technology within an
appropriate production environment, Embrex leases and licenses Inovoject(R)
systems to hatcheries. The agreements cover the use of the mechanical equipment
and ongoing field service, maintenance and technical support provided by Embrex.
The agreements also include a license with royalty fees for use of Embrex's
proprietary injection process. Products which are delivered in ovo are sold
separately and generate some royalty revenue for the Company.
The Company also is initiating arrangements for international distribution of
Bursaplex(R), subject in each case to the availability of required regulatory
approvals. The Company has agreements with other parties to distribute
Bursaplex(R) in Chile, Ecuador, Peru and Pakistan. Of these countries,
regulatory approval has been granted in Ecuador, Peru and Pakistan. An agreement
for Israel also entitles a distributor, Abic Ltd., to manufacture a VNF(R)-based
IBD vaccine mentioned above. Subject to these agreements, the Company also will
conduct international marketing directly.
Other significant poultry markets exist in Asia and Latin America. Embrex has
held a number of discussions regarding marketing and distribution in each of
these markets. In 1997 and 1998, the Company entered into agreements with other
parties to distribute Bursaplex(R) in Venezuela, Colombia, South Korea,
Malaysia, Taiwan, Japan and Vietnam, subject to regulatory approvals. To date,
regulatory approval for Bursaplex(R) has been granted in nine countries besides
the United States, and regulatory approval is temporary or pending in thirteen
countries. Embrex also hired management for selected Asian and Latin American
markets and installed Inovoject(R) systems on a commercial or trial basis in
certain Asian markets. In 1998, Embrex established Embrex BioTech Trade
(Shanghai) Co., Ltd. in China, which will focus on marketing and distribution of
Embrex products in China. Also in 1998, Embrex established Embrex Inc. Sucursal
Argentina, a branch office in Argentina, responsible for commercial development
and customer service and support. Initially, this office will serve only
Argentina, but may extend to other regional markets such as Chile, Paraguay or
Uruguay. In 1999, Embrex established a subsidiary in Brazil, Inovoject(R) do
Brasil Ltda. Also, in April 1999, Bangkok Livestock Processing Company, Ltd.
began administering Bursaplex(R) using Embrex's Inovoject(R) system in Thailand.
Embrex has initiated activities necessary for the commercialization of its
technology in Japan. In 1992, Embrex entered into a distribution agreement with
Ishii Company, Ltd. ("Ishii"), a leading chick producer and the dominant
supplier of hatchery equipment in Japan. Veterinary medical device regulatory
approval was granted by the Japanese Ministry of Agriculture, Fisheries and
Forestry in 1999. Ishii intends to distribute the Inovoject(R) egg injection
system to poultry producers throughout Japan.
The Company's revenues attributable to international operations in 1999, 1998
and 1997 were 23%, 20% and 15% of the Company's consolidated revenues,
respectively. The Company's identifiable assets attributable to international
operations in 1999, 1998 and 1997 were 16%, 26% and 24% of the Company's
consolidated assets, respectively. The Company's gross profit attributable to
international operations in 1999, 1998 and 1997 were 19%, 14% and 7% of the
Company's consolidated gross margin, respectively. See "Notes to Consolidated
Financial Statements."
RESEARCH AND DEVELOPMENT
In 1998, Embrex opened a 12,800 square-foot research facility near the Company's
headquarters. This new facility has increased the Company's clinical trial
capabilities. Research and development expense was $4.2 million in 1997, $5.0
million in 1998 and $5.9 million in 1999. The increase in research and
development expense from 1997 to 1999 largely reflects increases in outside
contract research, supplies consumption, operating activities at the new
research facility, and Inovoject(R) design and development and global technical
support activity. Research and development is principally Company sponsored and
funded primarily from internal sources.
GOVERNMENTAL REGULATION
Regulation by governmental authorities in the United States and other countries
is a significant factor in the production and marketing of Embrex's products and
in its on-going research and development activities. Although the use of the
Inovoject(R) system is not subject to regulatory approval in the United States,
animal health products
6
being developed by Embrex and other companies must receive approval for
marketing from either the USDA or the Food and Drug Administration (the "FDA")
and from similar agencies in foreign countries where the Company has begun or
contemplates doing business. These countries may also require approval of the
Inovoject(R) system. Regulatory agencies require that products be tested and
demonstrate appropriate levels of safety and efficacy. Generally, with respect
to animal health products, the USDA has regulatory authority over products which
are biological in origin or which stimulate or affect an animal's immune system,
and the FDA has authority over all other products. The time and cost of USDA
approvals are generally less than those for FDA approvals. FDA approval
generally requires more extensive animal and toxicology testing than USDA
approvals and may take five or more years to obtain, whereas USDA approvals
generally take one to three years to obtain. The Company's products also are
subject to regulatory approval in other countries.
Management believes that compliance with environmental regulations currently has
no material adverse effect on the Company's capital expenditures, earnings or
competitive position.
EMPLOYEES
At December 31, 1999, Embrex employed 171 persons, 169 of whom were full-time
employees, an increase of 44 persons from the 125 full-time employees at
December 31, 1998.
SIGNIFICANT CUSTOMERS
Tyson Foods, Inc.("Tyson") accounted for approximately 24% of Embrex's
consolidated 1999 revenues. Based on millions of pounds of ready-to-cook poultry
meat produced in 1999, Tyson accounted for approximately 24% of the broilers
grown in the United States. During 1997, Tyson extended its contract with Embrex
through 2004. There are no customers besides Tyson that represent 10% or greater
of total revenues. However, Embrex's three largest customers, including Tyson,
accounted for approximately 38% of consolidated 1999 revenues, down from 42% in
1998. The decrease in 1999 is partly the result of the expansion of the
Company's customer base.
See "Risk Factors" filed as Exhibit 99 to this report.
ITEM 2. PROPERTIES
Embrex leases its corporate headquarters and research and development
facilities, which occupy approximately 23,000 square feet and are located
adjacent to Research Triangle Park, North Carolina. Two-thirds of the space is
devoted to research and development. The lease is a fifteen-year term expiring
March 31, 2002. Embrex paid an annual rent of approximately $208,000 during
1999. Annual rent increases thereafter amount to approximately 3%. In addition
to research and development activities conducted at its corporate headquarters,
Embrex opened a new 12,800 square-foot research facility near its headquarters
in 1998. The lease is a ten-year term expiring November 14, 2007, with a
five-year renewal option. The annual rent paid in 1999 was approximately
$139,000, with annual increases of approximately 3% through the first ten years
and approximately 4% during the five-year renewal term. During the fourth
quarter 1999, Embrex entered into a six-year lease for a larger corporate
headquarters and research and development facility near its present facilities.
This building has been leased in two phases. The first phase encompasses
approximately 20,000 square feet. The second phase encompasses another 24,000
square feet. The annual rent is approximately $400,000, with annual increases of
approximately 3% through the initial six-year term and approximately 4% during
an additional six-year renewal term. The Company intends to vacate its present
corporate headquarters once the second phase is ready for occupancy during the
second quarter of 2001.
Embrex leases approximately 3,000 square feet of warehouse space in Springdale,
Arkansas, on a year-to-year basis, which is used to support the Embrex customer
service function in the region. The Company also leases offices of 1,250 square
feet and warehouse space of 2,500 square feet in Great Dunmow, Essex, England.
Embrex also has access to facilities at certain universities. The use of these
facilities is important to Embrex's ongoing research and development efforts.
Embrex also has access to facilities used for incubating eggs and growing live
birds and for research and testing purposes at North Carolina State University.
ITEM 3. LEGAL PROCEEDINGS
In September 1996, Embrex filed a patent infringement suit in the U.S. District
Court for the Eastern District of North
7
Carolina against Service Engineering Corporation, a Maryland corporation, and
Edward G. Bounds, Jr., a Maryland resident and officer of Service Engineering
Corporation. The suit alleged that each of the defendants' development of an in
ovo injection device, designed to compete with Embrex's patented Inovoject(R)
injection method, infringes at least one claim of U.S. Patent No. 4,458,630
exclusively licensed to Embrex for the in ovo injection of vaccines into an
avian embryo (the "Sharma Patent"). Further, Embrex claimed that the defendants
had violated the terms of a Consent Judgment and Settlement Agreement entered
into with Embrex 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. Embrex 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 Embrex's patent infringement suit by asserting various affirmative
defenses and denying the substantive allegations in Embrex's complaint. This
suit concluded on July 30, 1998 with a jury verdict in favor of Embrex. The
verdict fully upheld the validity of all claims of the Sharma Patent, finding
that the defendants had willingly infringed all asserted claims of the patent.
The jury also found that Service Engineering Corporation and Edward G. Bounds,
Jr., had breached the 1995 Consent Judgment and Settlement Agreement and that
such breach was not in good faith. The jury awarded Embrex damages of $500,000
plus litigation expenses and court costs. The U.S. District Court for the
Eastern District of North Carolina entered a Judgment in favor of Embrex on
September 28, 1998, which included a monetary award of $2,612,885 and an
injunction prohibiting Service Engineering Corporation and Edward G. Bounds,
Jr., 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. The Company has opposed the
appeal.
In November 1996, Embrex filed a patent infringement suit in the U.S. District
Court for the Eastern District of North Carolina against IGI, Inc., a Delaware
corporation. The suit alleged that IGI, Inc., through its activities with
Service Engineering Corporation and Edward G. Bounds, Jr. was engaging in
activities that constituted infringement of the Sharma Patent. Embrex sought
injunctive relief to prevent infringement of the Sharma Patent as well as
monetary damages. In January 1997, IGI, Inc. responded to Embrex's patent
infringement suit by asserting various affirmative defenses and denying the
substantive allegations in Embrex's complaint. This suit was concluded by
agreement between Embrex and IGI, Inc. in January 1998, pursuant to which Embrex
and IGI have agreed to dismiss all pending claims against each other, and IGI
has agreed to abide by the terms of a royalty-bearing sublicense to the Sharma
Patent for avian vaccination.
In March 1997, Service Engineering Corporation and Edward G. Bounds, Jr. filed
suit against the U.S. Department of Agriculture in the U.S. District Court for
the District of Maryland with respect to its grant to Embrex of an exclusive
license for the Sharma Patent. The complaint alleged that the USDA did not
adequately comply with statutory and regulatory requirements in making the grant
to Embrex of an exclusive license to the Sharma Patent, the revision of the
exclusive license in 1991 and the revision of the exclusive license in 1994,
which extended the period of exclusivity, originally set to terminate on
December 31, 1996, through the patent expiration date. Plaintiffs alleged that
in December 1996 (after Embrex had instituted the above referenced action for
patent infringement and breach of contract), the Plaintiffs requested the USDA
to grant them a license of the Sharma Patent. The Plaintiffs alleged 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. Plaintiffs also alleged that
the USDA wrongfully consented to Embrex's bringing suit against the Plaintiffs.
Plaintiffs sought to have the court set aside the extension of the exclusive
license, the USDA's grant of permission for Embrex to sue Service Engineering
Corporation, Edwards 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. In addition, Plaintiffs sought to have the court 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. Plaintiffs also
sought attorneys' fees and costs from the USDA. The USDA filed a motion for
summary judgment. In March 1999, the U.S. District Court for the District of
Maryland granted the USDA's motion for summary judgment, agreeing that "the
plaintiff lacked standing to challenge the USDA's actions in this matter and
that the [USDA's] motion for summary judgment will be granted."
On April 15, 1999, Machining Technologies, Inc. of Hebron, Maryland served on
Embrex a Complaint for Declaratory Judgment against Embrex in the U.S. District
Court for the District of Maryland. Machining
8
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. Embrex believed the action was without legal basis and, on June 4,
1999, filed a motion to dismiss the action. On March 7, 2000, the U.S. District
Court for the District of Maryland granted Embrex's motion to dismiss this
action and ordered this case closed.
See "Risk Factors" filed as Exhibit 99 to this report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock trades on the Nasdaq National Market System under the
symbol EMBX. The quarterly trading ranges of the Company's Common Stock for the
last two fiscal years were as shown in the table below:
Common Stock
Price Per Share
---------------
Quarter Ended High Low
------------- ---- ---
1998
----
March 31, 1998 6 3/8 5
June 30, 1998 6 7/8 5 3/8
September 30, 1998 6 3/16 4 5/16
December 31, 1998 6 3 5/8
1999
----
March 31, 1999 5 1/2 4 1/8
June 30, 1999 8 1/2 4 3/16
September 30, 1999 10 7 15/16
December 31, 1999 12 5/8 7
At February 25, 2000 (the most recent practicable date), there were 427 holders
of record of the Common Stock. The Company has paid no dividends on any stock
since inception and has no plans to pay dividends on its Common Stock in the
foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
SUMMARY OF OPERATIONS BY QUARTERS (UNAUDITED)
(Dollars In Thousands, Except Per
Share Amounts)
1999 1998
---- ----
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
------- ------- ------- ------- ------- ------- ------- -------
Revenues $8,016 $8,411 $8,249 $9,074 $6,857 $6,961 $7,404 $7,393
Operating Expenses 3,314 3,551 3,250 3,923 2,857 2,618 3,179 3,178
Net income 1,137 1,330 1,552 1,725 527 605 753 976
9
1999 1998
---- ----
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
------- ------- ------- ------- ------- ------- ------- -------
Net income (per share of Common Stock)
Basic $0.14 $0.16 $0.19 $0.22 $0.06 $0.07 $0.09 $0.12
Diluted $0.14 $0.16 $0.18 $0.20 $0.06 $0.07 $0.09 $0.12
Number of Shares Used in Per Share
Calculation (thousands)
Basic 8,293 8,250 8,135 7,927 8,243 8,249 8,262 8,264
Diluted 8,368 8,456 8,683 8,443 8,334 8,340 8,339 8,341
5-YEAR SUMMARY OF SELECTED FINANCIAL DATA
(Dollars In Thousands, Except Per 1999 1998 1997 1996 1995
Share Amounts) ---- ---- ---- ---- ----
(Restated)
STATEMENTS OF OPERATIONS DATA
Revenues ............................ $ 33,750 $ 28,615 $ 24,789 $ 20,632 $ 13,719
Research and development expenses ... 5,857 4,995 4,188 4,036 3,416
Other operating expenses ............ 8,181 6,837 5,607 3,775 3,836
Net income (loss) ................... 5,744 2,861 1,760 341 (4,512)
Net income (loss) per share of Common
Stock
Basic ........................ $ 0.70 $ 0.35 $ 0.21 $ 0.05 ($ 0.73)
Diluted ...................... $ 0.68 $ 0.34 $ 0.21 $ 0.06 ($ 0.73)
Number of Shares Used in Per Share
Calculation (thousands)
Basic ......................... 8,151 8,255 8,184 7,218 6,187
Diluted ....................... 8,488 8,339 8,339 7,520 6,187
BALANCE SHEET DATA
Working capital ..................... $ 7,858 $ 8,299 $ 7,585 $ 7,552 $ 5,934
Total assets ........................ 26,233 24,990 25,161 25,554 21,789
Long-term liabilities ............... 20 644 3,278 5,814 10,966
Accumulated deficit ................. (30,328) (36,072) (38,933) (40,693) (41,034)
Shareholders' equity ................ 21,035 18,805 15,741 13,309 5,909
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Company's financial statements and related notes appearing elsewhere in this
report.
Consolidated net income for 1999 was $5.7 million compared to $2.9 million in
1998 and $1.8 million in 1997. Diluted earnings per share increased from $0.21
in 1997 and $0.34 in 1998 to $0.68 in 1999. For the year ended 1999, shares
outstanding on a diluted basis were 8.5 million, up from 8.3 million for the
years ended 1998 and 1997. The change in diluted average shares outstanding from
1998 to 1999 is attributable to the increase in the number of in-the-money stock
options included in the diluted average shares outstanding calculation following
an appreciation in the price of the Company's Common Stock during the second
half of 1999 as well as Common Stock repurchases.
REVENUES
Consolidated revenues in 1999 totaled $33.8 million, representing an increase of
18% over 1998 revenues of $28.6 million, which were 15% over 1997 revenues of
$24.8 million. Inovoject(R) revenues totaled $32.3 million in 1999 compared to
$27.4 million in 1998 and $23.6 million in 1997, representing increases of 18%
from 1998 to 1999, and 16% from 1997 to 1998, with the 1999 increase coming
principally from increased placement and throughput of Inovoject(R) systems in
North America and Europe.
The 1999 revenues include Inovoject(R) lease fees derived from multi-year
contracts and paid trials in the United States and foreign countries, and the
sale of Inovoject(R) systems to distributors. Embrex estimates that as of
December 31, 1999, it was vaccinating in excess of 80% of the estimated 8.0
billion broiler birds grown in the
10
United States in 1999, 1998 and 1997. Given its market penetration, the Company
expects only moderate Inovoject(R) systems revenue growth in this market.
Management anticipates moderate revenue and earnings growth in 2000 from
existing Inovoject(R) operations in the United States and Canada, new
Inovoject(R) system leases in other countries, and sales of Bursaplex(R) product
to poultry producers worldwide. However, the rate at which the marketplace will
accept the Inovoject(R) technology outside the United States and Canada, the
timing of regulatory approvals of third-party vaccines for in ovo use outside
the United States and Canada, start-up costs in new markets, possible
variability in United States hatchery bird production as a result of grain price
fluctuations, and variability in the demand for, and pricing of, U.S. poultry
and poultry products outside the United States, will impact the pace of revenue
growth, if any, and the sustaining of profitability from the installation and
operational throughputs of Inovoject(R) systems.
Sales of Bursaplex(R), the Company's proprietary vaccine for the treatment of
avian infectious bursal disease, was the principal source of $1.3 million of
product revenues in 1999 and $931,000 of product revenues in 1998. The Company's
ability to generate revenue from product sales has been constrained by the
previously announced delay associated with Ft. Dodge's obtaining British
regulatory approval for the sale of Bursamune(R) in the United Kingdom, lower
levels of breeder and broiler flock vaccination rates, and fewer reported
incidences of bursal disease in the United States. Product sales increased 34%
during 1999 from the $931,000 recorded for the same period in 1998. Sales of
VNF(R) for inclusion in IBD vaccines were the principal source of previous
years' product revenues, which generated $1.1 million and $1.2 million in 1997
and 1996, respectively.
COST OF PRODUCT SALES AND INOVOJECT(R) REVENUES
Cost of revenues as a percentage of revenues decreased from 47% and 49% of total
revenues in 1998 and 1997, respectively, to 39% of total revenues in 1999. The
improvement in 1999 is primarily attributable to Inovoject(R) system-related
cost reductions and some price increases in selected markets.
OPERATING EXPENSES
Operating expenses totaled $14.0 million in 1999 compared to $11.8 million in
1998, and $9.8 million in 1997.
General and administrative ("G&A") expenses were $7.4 million in 1999, up 19%
from $6.2 million in 1998, and up 48% from $5.0 million in 1997. The 1999 and
1998 G&A increases over 1997 were primarily attributable to development costs in
Asia and Latin America as well as legal expenses incurred in connection with
various patent infringement lawsuits filed by the Company.
Sales and marketing expenses totaled $795,000 in 1999 compared to $633,000 in
1998 and $587,000 in 1997. Fluctuations during these periods resulted from
various levels of activity in the Company's sales and customer service functions
to support market expansion and field support of Inovoject(R) systems, as well
as stepped-up international activity, principally in Europe.
Certain 1997 operating expenses were reclassified to cost of revenues to conform
to the 1998 presentation. These reclassifications had no effect on previously
reported net income or shareholders' equity.
Research and development ("R&D") expenses were $5.9 million in 1999 compared to
$5.0 million in 1998 and $4.2 million in 1997. The increase in R&D expense from
1997 to 1999 largely reflects an increase in outside contract research, supplies
consumption, operating expenses for the new research facility and Inovoject(R)
design and development and global technical support activity. The Company
continues to manage its research and development effort to leverage its
know-how, patent position, market presence and expenditures.
OTHER INCOME AND EXPENSE
Interest income totaled $315,000, $402,000 and $488,000 in years 1999, 1998 and
1997, respectively. The 1999 decrease relative to 1998 resulted principally from
lower cash balances and the 1998 decrease relative to 1997 resulted principally
from lower cash balances and lower interest rates.
Interest expense totaled $311,000 in 1999 compared to $645,000 in 1998 and $1.1
million in 1997. In 1999, the
11
decrease in interest expense reflected the repayment of approximately $2.7
million of external financing, primarily in the form of equipment leases. In
1998, the decrease in interest expense reflected the repayment of approximately
$2.8 million of external financing, primarily in the form of equipment leases.
In 1997, the amount of interest expense was principally attributable to the
Company's funding of its growing installed base of Inovoject(R) systems with the
use of capital lease financing. Management expects to continue to rely on the
use of internally generated funds to finance the cost of additional Inovoject(R)
systems in 2000, as was the case in 1999.
EFFECT OF INFLATION
Management expects cost of product sales and Inovoject(R) systems revenues,
operating expenses and capital equipment costs to change in line with periodic
inflationary changes in price levels. While management generally believes that
the Company will be able to offset the effect of price level changes by
adjusting selling/lease prices and effecting operating efficiencies, any
material unfavorable changes in price levels could have a material adverse
affect on its results of operations.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, the Company's cash and short-term investment balances
totaled $4.8 million compared to $7.2 million and $8.6 million at December 31,
1998 and 1997, respectively. The decrease reflected the ability of the Company
to fund capital expenditures with internal cash instead of equipment lease
financing. Working capital decreased to $7.9 million in 1999 from $8.3 million
in 1998, as a decrease in cash was offset by a reduction in the short-term
portions of capital lease obligations.
During 1999, operating activities generated $9.6 million in cash, primarily due
to non-cash depreciation and net income. Within investing activities,
Inovoject(R) systems, the Company's new research facility, and equipment
purchases required $5.9 million. Financing activities used $5.8 million, of
which $2.7 million was used to repay long-term debt and capital lease
obligations and $3.8 million was used to repurchase the Company's Common Stock
(see below).
In October 1998, the Company announced that the Board of Directors authorized a
share repurchase program to purchase up to 10% of outstanding shares of Common
Stock, or up to approximately 830,000 shares over 18 months, in open market or
privately negotiated transactions. As of December 31, 1999, the Company had
purchased 499,600 shares for $4.0 million at an average price of $7.9844. See
"Notes to Consolidated Financial Statements."
As of December 31, 1999, the Company had outstanding purchase commitments of
approximately $3.4 million related to the production of the Company's
Bursaplex(R) product, VNF(R) for the manufacture of Bursaplex(R) and
Bursamune(R), and materials and supplies for construction and maintenance of
Inovoject(R) egg injection systems.
The Company maintained during 1998 a $2.0 million secured line of credit with a
bank in the United Kingdom, which could be used to finance the construction of
additional Inovoject(R) systems for Europe, the Middle East and Africa. The
Company utilized $0.4 million of this line during 1998. This line of credit was
repaid and terminated by year-end 1998.
In April 1999, the Company obtained a $6.0 million secured revolving line of
credit from its bank, Branch Banking and Trust Company. This line of credit may
be used for working capital purposes and has a term of 18 months.
Based on its current operations, management believes that the Company's
available cash and short-term investments, together with cash flow from
operations, will be sufficient to meet its foreseeable cash requirements.
YEAR 2000 ISSUE
The Company established a team to address the Year 2000 issue in June 1998. The
team conducted an inventory and assessment of the Company's computer hardware
and software systems, as well as embedded systems in its Inovoject(R) systems,
manufacturing and laboratory equipment and office facilities. The team developed
remediation, testing, and implementation plans for imbedded systems, including
the Inovoject(R) system, which remediation, testing, and implementation was
completed in October 1999. The Company also engaged an outside
12
consulting firm to conduct an independent verification and validation of the
controls and software that operate the Inovoject(R) system, which determined
that the Inovoject(R) system was not affected by Year 2000 considerations.
The Company incurred approximately $200,000 in 1999 addressing Year 2000 issues.
To date, the Company is not aware of any immediate, adverse impact resulting
from Year 2000 issues, either on the Company's ability to operate and manage the
Inovoject(R) system at its customers' hatcheries or its ability to manage its
business and to communicate with its customers and suppliers. However, the
Company cannot provide any assurance that its systems and business relationships
have not been impacted in a manner that is not yet apparent. The Company will
continue to monitor its systems in order to promptly remediate any adversely
impacted systems.
FORWARD-LOOKING STATEMENTS
Information set forth in this Annual Report on Form 10-K contains various
"forward looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which
statements represent the Company's judgment concerning the future and are
subject to risks and uncertainties that could cause the Company's actual
operating results and financial position to differ materially. Such forward
looking statements can be identified by the use of forward looking terminology
such as "may," "will," "expect," "anticipate," "estimate," "believe," or
"continue," or the negative thereof or other variations thereof or comparable
terminology.
The Company cautions that any such forward looking statements include statements
with respect to future products, services, markets and financial results. These
statements involve risks and uncertainties that could cause actual results to
differ materially, including without limitation the ability of the Company to
penetrate new markets, place Inovoject(R) systems worldwide, establish a degree
of market acceptance for new products such as but not limited to Bursaplex(R)
and Bursamune(R), prevail in the outcome of its patent litigation appeal, the
number of eggs set by poultry producers, complete commercial development of
potential future products or obtain regulatory approval of its products, which
approval is dependent upon a number of factors, such as results of trials, the
discretion of regulatory officials, and potential changes in regulations, and
the Company's dependence on certain customers. These statements are also
contingent upon continued growth and production levels of the global poultry
industry and the economic viability of certain markets. Additional information
on these risks and other factors which could affect the Company's financial
results are included in the Risk Factors described in Exhibit 99 to this report
and in the Company's other filings with the SEC, including the Company's Forms
10-Q, 10-K and 8-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A portion of the Company's operations are in jurisdictions outside North
America. The Company leases Inovoject(R) systems and sells products in Europe,
Asia, and Latin America. As a result, the Company's financial results could be
affected by factors such as changes in foreign currency exchange rates or weak
economic conditions in the foreign markets in which the Company distributes its
products. At December 31, 1999, the Company's operations outside North America
were not material to the Company's consolidated results as a whole, and a
significant change in currency exchange rates or economic conditions in the
jurisdictions outside North America in which the Company operates would not have
a material effect on the Company's consolidated financial results.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Embrex Inc.
We have audited the accompanying consolidated balance sheets of Embrex, Inc. and
subsidiaries as of December 31, 1999 and 1998, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1999. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
13
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Embrex, Inc. and
subsidiaries at December 31, 1999 and 1998, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule when considered in relation to the basic financial statements
taken as a whole, presents fairly in all material respects the information set
forth therein.
/s/ Ernst & Young LLP
Raleigh, North Carolina
February 15, 2000
14
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31,
------------
ASSETS 1999 1998
---- ----
Current Assets
Cash and cash equivalents................................. $4,799 $7,167
Restricted cash (Note 2).................................. 275 275
Inventories:
Materials and supplies............................. 1,562 925
Product............................................ 827 1,281
Accounts receivable - trade............................... 4,751 3,454
Other current assets............................................ 822 738
-------- --------
Total Current Assets...................... 13,036 13,840
Inovoject(R)Systems under construction.......................... 978 568
Inovoject(R)Systems............................................. 27,386 24,161
Less accumulated depreciation............................. (19,804) (16,297)
-------- --------
7,582 7,864
Equipment, furniture and fixtures............................... 7,195 5,060
Less accumulated depreciation............................. (2,906) (2,468)
-------- --------
4,289 2,592
OTHER ASSETS:
Patents and exclusive licenses of patentable
technology (net of accumulated amortization of $108
in 1999 and $196 in 1998). 348 126
TOTAL ASSETS.................................................... $26,233 $24,990
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable.......................................... $538 $393
Accrued expenses.......................................... 2,738 2,033
Deferred revenue.......................................... 584 175
Product warranty accrual.................................. 394 322
Current portion of capital lease obligations.............. 568 2,618
Line of credit (Note 4)................................... 356 -0-
-------- --------
Total Current Liabilities ............... 5,178 5,541
Capital lease obligations, less current portion (Note 3)....... 20 634
Long-term debt, less current portion (Note 4)................... 0 10
15
Shareholders' Equity (Notes 5, 6, 7 and 8) Common Stock, $.01 par value per
share
Authorized - 30,000,000 shares
Issued and outstanding - 7,922,627
net of 499,600 treasury shares and 8,264,490 net of 40,800 treasury
shares at December 31, 1999 and 1998, respectively 84 83
Additional paid-in capital................................ 55,231 54,894
Accumulated other comprehensive income.................... 37 113
Accumulated deficit....................................... (30,328) (36,072)
Treasury stock............................................ (3,989) (213)
-------- --------
Total Shareholders' Equity................ 21,035 18,805
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY...................... 26,233 $24,990
======== ========
See accompanying notes.
16
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts) Year ended December 31,
-----------------------
1999 1998 1997
-------- -------- --------
REVENUES
Inovoject(R)revenue ............................... $ 32,314 $ 27,426 $ 23,614
Product revenue ................................... 1,252 931 1,062
Other revenue ..................................... 184 258 113
-------- -------- --------
Total Revenues .............................. 33,750 28,615 24,789
Cost of Product Sales and Inovoject(R)Revenues ......... 13,119 13,341 12,244
-------- -------- --------
20,631 15,274 12,545
OPERATING EXPENSES
General and administrative ........................ 7,386 6,204 5,020
Sales and marketing ............................... 795 633 587
Research and development .......................... 5,857 4,995 4,188
-------- -------- --------
Total Operating Expenses .................... 14,038 11,832 9,795
-------- -------- --------
Operating Income ....................................... 6,593 3,442 2,750
Other Income (Expense)
Interest income ................................... 315 402 488
Interest expense .................................. (311) (645) (1,070)
Other ............................................. (12) 38 14
-------- -------- --------
Total Other Expense ........................ (8) (205) (568)
-------- -------- --------
Income Before Taxes ........................ 6,585 3,237 2,182
Income Taxes (Note 9) .................................. 841 376 422
-------- -------- --------
Net Income ............................................. $ 5,744 $ 2,861 $ 1,760
======== ======== ========
Net Income per share of Common Stock (Note 11)
Basic ............................................. $ 0.70 $ 0.35 $ 0.21
Diluted ........................................... $ 0.68 $ 0.34 $ 0.21
Number of Shares Used in Per Share Calculation (Note 11)
Basic ............................................. 8,151 8,255 8,184
Diluted ........................................... 8,488 8,339 8,339
See accompanying notes.
17
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands) Year ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
Operating Activities
Net income................................................... $5,744 $2,861 $1,760
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization.......................... 4,096 4,884 4,043
Changes in operating assets and liabilities:
Accounts receivable, inventories and other
current assets................................. (1,564) (1,526) (797)
Accounts payable, accrued expenses and
other current liabilities.................. 1,331 (537) 1,083
------- ------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 9,607 5,682 6,089
Investing Activities
Sales of short-term investments -0- -0- 876
Collateralization of Lease (Note 2) -0- -0- (275)
Purchases of Inovoject(R)systems, equipment, furniture
and fixtures (5,903) (4,850) (3,962)
(Additions)/reductions to patents and other noncurrent assets (240) 248 280
------- ------- -------
NET CASH USED IN INVESTING ACTIVITIES (6,143) (4,602) (3,081)
Financing Activities
Issuance of Common Stock 338 107 257
Net proceeds from line of credit 356 -0- -0-
Repayment of long-term debt (10) (286) (119)
Proceeds from capital lease obligations -0- 101 102
Payments on capital lease obligations (2,664) (2,511) (3,328)
Repurchase of Common Stock (3,776) (213) -0-
------- ------- -------
NET CASH USED IN FINANCING ACTIVITIES (5,756) (2,802) (3,088)
------- ------- -------
DECREASE IN CASH AND CASH EQUIVALENTS (2,292) (1,722) (80)
CURRENCY TRANSLATION ADJUSTMENTS (76) 309 (376)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 7,167 8,580 9,036
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $4,799 $7,167 $8,580
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Total interest paid was $311,000, $645,000 and $1,070,000 for the years ended
December 31, 1999, 1998 and 1997 respectively.
Total income taxes paid were $618,000, $277,000 and $70,000 for the years ended
December 31, 1999, 1998 and 1997, respectively.
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITY:
During 1997, $425,000 of outstanding debentures along with $139,000 of accrued
interest were converted into 98,267 shares of Common Stock net of unamortized
debt issuance costs totaling $1,000. In addition, 419 shares of Embrex Common
Stock were issued pursuant to the non-cash exercise of warrants related to the
initial sale of the debentures in May 1995. As of December 1, 1997, all
debentures had been converted into Common Stock.
On May 27, 1997, 34,320 shares of Common Stock were issued in exchange for
substantially all of the assets of Agrimatic Corporation.
See accompanying notes.
18
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands)
Accumulated
Additional Other
Common Paid-in Comprehensive Accumulated Treasury
Stock Capital Income Deficit Stock Total
----- ------- ------ ------- ----- -----
BALANCE AT DECEMBER 31, 1996 ................ $ 80 $ 53,742 $ 180 $(40,693) $ 0 $ 13,309
Stock issued:
Upon exercise of options ............ 1 201 202
Under employee stock purchase plan .. 55 55
Upon conversion of long-term debt
(net of issuance cost of $111) .. 1 563 564
Upon issuance of shares for
Agrimatic acquisition ............ 227 227
Other Comprehensive Income, Net of Tax
(Note 1)
Currency translation adjustments . (376) (376)
Net income ....................... 1,760 1,760
----- ------- ------ ------- ----- -----
Comprehensive income ............. 1,384
--------
BALANCE AT DECEMBER 31, 1997 ................ 82 54,788 (196) (38,933) 0 15,741
Stock Repurchased ....................... (213) (213)
Stock issued:
Upon exercise of options ............ 1 1
Under employee stock purchase plan .. 1 105 106
Other Comprehensive Income, Net of Tax
(Note 1)
Currency translation adjustments . 309 309
Net income ....................... 2,861 2,861
----- ------- ------ ------- ----- -----
Comprehensive income ............. 3,170
-----
BALANCE AT DECEMBER 31, 1998 ................ 83 54,894 113 (36,072) (213) 18,805
Stock Repurchased ....................... (3,776) (3,776)
Stock issued:
Upon exercise of options and issuance
of bonus stock ...................... 1 401 402
Under employee stock purchase plan .. 87 87
Upon exercise of warrants ........... (151) (151)
Other Comprehensive Income, Net of Tax
(Note 1)
Currency translation adjustments . (76) (76)
Net income ....................... 5,744 5,744
----- ------- ------ ------- ----- -----
Comprehensive income ............. 5,668
-----
BALANCE AT DECEMBER 31, 1999 ................ $ 84 $ 55,231 $ 37 $(30,328) $ (3,989) $ 21,035
======== ======== ======== ======== ======== ========
See accompanying notes.
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Embrex, Inc. has developed and commercialized the Inovoject(R) system, a
proprietary, automated, in-the-egg injection system which eliminates the need
for manual, post-hatch injection of certain vaccines for newly hatched broiler
chicks. Embrex also develops and markets proprietary pharmaceutical and
biological products to improve bird health, reduce bird production costs and
provide other economic benefits to the poultry industry.
ACQUISITION
On May 27, 1997, the Company issued 34,320 shares of Common Stock in exchange
for substantially all of the assets of Agrimatic Corporation. In 1998, the book
value of the assets acquired in this acquisition was written off. This
transaction and subsequent write-off had an immaterial effect on the operations
of Embrex.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Embrex, Inc. and
its wholly owned subsidiaries, Embrex Europe Limited and Embrex Sales, Inc. (the
"Company"). All significant intercompany transactions and accounts have been
eliminated. Currently, non-U.S. operations account for approximately 23% of the
Company's revenues.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
INVENTORIES
Items recorded as inventory are generally purchased from others and recorded at
the lower of cost or market using the average cost method. Materials and
supplies inventories include spare parts for the Inovoject(R) systems as well as
laboratory and general supplies. Product inventories are comprised of biological
compounds, principally the Company's Viral Neutralizing Factor product (VNF(R)).
INOVOJECT(R) SYSTEMS
Inovoject(R) systems are comprised of egg injection and related equipment
available for lease to customers. The equipment is recorded at the lower of cost
or estimated net realizable value. Depreciation is computed principally by using
accelerated and straight-line methods over the estimated useful life of the
equipment and commences after construction is complete and the equipment is
placed in service.
EQUIPMENT, FURNITURE AND FIXTURES
Equipment, furniture and fixtures are recorded at cost. Depreciation is computed
principally by using accelerated and straight-line methods over the estimated
three-to-five years useful lives of the assets placed in service.
PATENTS AND EXCLUSIVE LICENSES OF PATENTABLE TECHNOLOGY
Costs incurred to acquire exclusive licenses of U.S. patentable technology and
to apply for and obtain U.S. patents on internally developed technology are
capitalized and amortized using the straight-line method. Exclusive license
agreements are amortized over the period of the license. Patents are amortized
over the shorter of the useful or legal life of the patent.
20
FOREIGN CURRENCY TRANSLATION
All assets and liabilities in the balance sheets of the Company's foreign
subsidiary, Embrex Europe Limited, and its Asian operations, are translated at
year-end exchange rates except shareholders' equity which is translated at
historical rates. Revenues, costs and expenses are recorded at average rates of
exchange during the year. Translation gains and losses are accumulated as a
component of shareholders' equity. Foreign currency transaction gains and losses
are included in determining net income.
REVENUE RECOGNITION
Inovoject(R) system fees are recognized based on eggs processed during the
period. Product sales are recognized when the products are shipped. Contract
research revenue is recognized as services are performed over the term of the
contract. Revenue received, but not yet earned, is classified as deferred
revenue.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs, including costs incurred to complete contract
research, are charged to operations when incurred and are included in operating
expenses.
INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). SFAS 109 requires recognition of deferred tax assets and liabilities for
the expected future tax consequences of temporary basis differences that have
arisen between financial statement and income tax reporting.
NET INCOME PER SHARE
Basic net income per share was determined by dividing net income available for
common shareholders by the weighted average number of common shares outstanding
during each year. Diluted net income per share reflects the potential dilution
that could occur assuming conversion or exercise of all convertible securities
and issued and unexercised stock options. A reconciliation of the net income
available for common shareholders and number of shares used in computing basic
and diluted net income per share is in Note 11.
USE OF ESTIMATES
The presentation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from these estimates.
PRINCIPAL CUSTOMERS
Tyson Foods, Inc. ("Tyson") accounted for approximately 24%, 27% and 28% of
consolidated 1999, 1998 and 1997 revenues, respectively. Based on the millions
of pounds of ready-to-eat poultry meat produced in 1999, Tyson accounted for
approximately 24% of the broilers grown in the United States. In 1999, Tyson was
the only customer that represented greater than 10% of total revenues.
CONCENTRATION OF CREDIT RISK
The Company's principal financial instrument, subject to potential concentration
of credit risk, is accounts receivable which are unsecured. As of December 31,
1999, Tyson Foods, Inc. accounted for approximately 13% of consolidated accounts
receivable, and substantially all of the Company's accounts receivable are due
from companies in the poultry industry.
SOURCES OF SUPPLY
The Company has developed a strategic relationship with one contract
manufacturer to fabricate its Inovoject(R)
21
systems. While other machine fabricators exist and have constructed limited
numbers of Inovoject(R) systems, a change in fabricators could cause a delay in
manufacturing and a possible delay in the timing of future Inovoject(R)
installations and revenues from those installations.
The Company has granted Merial Select, Inc. ("Select") (a Merck Rhone-Poulenc
company) exclusive rights to manufacture IBD vaccines containing Embrex's
proprietary VNF(R) product for Embrex to market in North America, Latin America
and Asia under the trade name Bursaplex(R). In 1995, Embrex granted Cyanamid
Websters ("Websters"), a unit of Ft. Dodge Animal Health, which is a division of
American Home Products Corp. ("Ft. Dodge"), rights to manufacture and market
bursal disease vaccines containing the Company's VNF(R) product to be marketed
in Europe, the Middle East and Africa under the trade name Bursamune(R).
Additionally, the Company has one contract supplier of its VNF(R) product. The
manufacture of the bursal disease vaccines being produced by Select and Ft.
Dodge and the Company's VNF(R) product generally must be performed in licensed
facilities and/or under methods approved by regulatory agencies. Although there
are other manufacturers who are capable of manufacturing bursal disease products
and producing products such as VNF(R), a change of suppliers could adversely
effect the Company's future operating results due to the time it would take a
new supplier to obtain regulatory approval of its production process and/or
manufacturing facilities. The Company seeks to minimize this exposure through
multi-year supply agreements and the maintenance of adequate inventories.
COMPREHENSIVE INCOME
In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive Income
(SFAS 130). This Statement establishes standards for reporting and display of
comprehensive income and its components in the financial statements. In
accordance with SFAS 130, the Company has determined total comprehensive income,
net of tax, to be $5.7 million, $3.2 million and $1.4 million for the years
ended December 31, 1999, 1998 and 1997, respectively. Embrex's total
comprehensive income represents net income plus the after-tax effect of foreign
currency translation adjustments for the years presented.
SEGMENTS
Effective January 1, 1998, the Company adopted SFAS 131, "Disclosures about
Segments of an Enterprise and Related Information". This pronouncement
superseded SFAS 14, "Financial Reporting for Segments of a Business Enterprise".
SFAS 131 establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports. SFAS 131 also establishes standards for
related disclosures about products and services, geographic areas and major
customers. The adoption of SFAS 131 did not affect results of operations or
financial position. The Company is considered to have only one operating segment
based on SFAS 131.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments
and for Hedging Activities". This pronouncement was originally effective for
annual periods beginning after June 15, 1999. The FASB amended SFAS 133 to defer
the effective date of adoption until all fiscal quarters of all fiscal years
beginning after June 15, 2000. SFAS 137, "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133", was issued in June 1999. SFAS 133 requires all derivatives to be recorded
on the balance sheet and establishes accounting rules for hedging activities.
The effect of the hedge accounting rules is to offset changes in value or cash
flows of both the hedge and hedged item in earnings in the same period. Changes
in the fair value of derivatives that do not qualify for hedge accounting are
reported in earnings in the period of the change. Based on the fact that the
Company does not currently use derivatives, adoption of this pronouncement is
not expected to have a material impact on the Company's financial position or
results of operations.
During 1998, the Company adopted SOP 98-1, "Accounting for the Costs of Computer
Software Developed or
22
Obtained for Internal Use", which requires capitalization of certain costs
incurred in connection with developing or obtaining internal use software. The
impact of adoption was not material.
2. RESTRICTED CASH
On October 13, 1997, the Company executed a ten-year collateralized lease
relative to the facilities housing the Company's new research facility. Such
collateral exists in the form of a certificate of deposit, which is required to
be maintained at least through the end of the seventh year of the lease.
3. LEASES
At December 31, 1999 and 1998, the Company had assets totaling $944,000 and $3.3
million, respectively, financed by capital lease agreements which expire through
December 2001. Accumulated depreciation and amortization includes $784,000 and
$2.3 million of amortization related to these assets at December 31, 1999 and
1998, respectively. Amortization of assets financed by capital leases is
included with depreciation expense.
The Company leases its facilities under a number of operating leases extending
through November 2007. The Company has the option to cancel one of its operating
lease agreements with the payment of a $180,000 penalty. Total rent expense was
$483,000, $456,000 and $312,000 for the years ended December 31, 1999, 1998 and
1997, respectively.
At December 31, 1999, the Company's minimum future commitments under capital and
operating leases were as follows:
Operating Capital
Leases Leases
------ ------
2000................................... $765,000 $616,000
2001................................... 834,000 11,000
2002................................... 682,000 11,000
2003................................... 628,000 0
2004................................... 648,000 0
Beyond................................. 896,000 0
------- -
Total.................................. $4,453,000 $638,000
========== ========
Less amounts representing interest..... (50,000)
--------
Present value of future minimum lease payments $588,000
========
4. DEBT
During 1997, $425,000 of outstanding debentures along with $66,000 of accrued
interest were converted into 98,267 shares of Common Stock net of unamortized
debt issuance costs totaling $1,000. In addition, 419 shares of Embrex Common
Stock were issued pursuant to the non-cash exercise of warrants related to the
initial sale of such debentures.
In April 1999, the Company obtained a $6.0 million secured revolving line of
credit facility from its bank, Branch Banking and Trust Company. This facility
may be used for working capital purposes, has a term of 18 months and matures on
October 2, 2000. The entire unpaid balance of the line of credit
then-outstanding plus accrued interest is due in full at maturity. Borrowings
drawn down under this facility bear interest at a rate over LIBOR and are
collateralized by a security interest in the Company's inventory and accounts
receivable. At December 31, 1999, the unused amount of this line of credit
facility amounted to $5.6 million.
A $10,000 note from the State of North Carolina with an interest rate of 8.75%
was repaid along with accrued interest in 1999.
23
5. SHAREHOLDERS' EQUITY
On May 16, 1996, the Company's shareholders approved an increase in the number
of authorized shares of Common Stock from 15,000,000 to 30,000,000 shares and an
increase in the amount of authorized Preferred Stock from 20,000 to 15,000,000
shares. In addition, the Company changed the par value of the Common Stock and
Series A Participating Preferred Stock from no par value to par value stock,
with a par value of $.01 per share.
At December 31, 1999, the Company had reserved a total of 2,048,114 shares of
its Common Stock for future issuance as follows:
For exercise of warrants to purchase Common Stock................... 122,000
For exercise of Common Stock options and Bonus Stock................ 1,914,475
For possible future issuance to employees and others
under employee stock purchase plans................................. 11,639
---------
Total reserved...................................................... 2,048,114
=========
At December 31, 1999, the Company had issued and outstanding warrants to
purchase Common Stock as follows:
Date through Which
Exercise Price Shares Reserved for Warrants are
Per Share Exercise of Warrants Exercisable
--------- -------------------- -----------
$9.50................................................. 30,000 12/31/00
$9.50................................................. 15,000 6/9/01
$6.00................................................. 47,000 4/30/00
$7.28................................................. 30,000 10/30/01
------
122,000
=======
In October 1998, the Company announced that the Board of Directors authorized a
share repurchase program to purchase up to 10% of outstanding shares of Common
Stock, or up to approximately 830,000 shares over 18 months, in open market or
privately negotiated transactions. As of December 31, 1999, the Company had
purchased 499,600 shares for $4.0 million at an average price of $7.9844.
6. STOCK OPTION PLANS
The Company has elected to follow Accounting Principles Board Option No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation," requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
The Company's stock option plans provide for option grants designated as either
non-qualified or incentive stock options. The options generally vest over a
four-year period and expire ten years from the date of grant. In general, the
exercise price of stock options is the closing price of the Company's Common
Stock on the date of grant.
Most U.S. employees and certain employees outside the United States are eligible
to receive a grant of stock options periodically with the number of shares
generally determined by the employee's salary grade and performance level. In
addition, certain management and professional level employees may receive a
stock option grant upon hire. Non-employee directors of the Company receive
annual grants of stock options in amounts specified in the applicable plan.
24
Stock option information with respect to all of the Company's stock option plans
follows:
Number Option Price Expiration
of Shares Range per Share Date
--------- --------------- ----
Balance at December 31, 1996, outstanding
options................................................... 866,414 $2.00 to $8.375 1998-2006
Granted............................................. 279,525 $6.063 to $7.125 2007
Exercised........................................... (53,773) $2.00 to $7.00
Canceled............................................ (53,468) $6.125 to $7.00
--------
Balance at December 31, 1997, outstanding
options................................................... 1,038,698 $2.00 to $8.75 1998-2007
Granted............................................. 307,495 $5.00 to $6.375
Exercised........................................... (3,900) $2.00
Canceled............................................ (47,754) $5.375 to $7.00
--------
Balance at December 31, 1998, outstanding
options................................................... 1,294,539 $2.00 to $8.75 1999-2008
Granted............................................. 340,416 $4.625 to $6.125
Exercised........................................... (159,513) $2.00 to $7.00
Canceled............................................ (75,412) $5.125 to $7.125
Balance at December 31, 1999, outstanding
options................................................... 1,400,030 $2.00 to $8.75 1998-2008
The Company's 1998 Amendment to its 1993 Incentive Stock Option Plan increased
the authorized grant of options to company personnel from 1.2 million shares of
common stock up to 1.9 million shares. All options granted have ten year terms
and a four-year vesting schedule.
Pro forma information regarding net income and income per share is required by
SFAS 123, and has been determined as if the Company accounted for its employee
stock options granted subsequent to December 31, 1994 under the fair value
method of SFAS 123. The fair value for these options was estimated at the date
of grant using a Black-Scholes option pricing model with the following weighted
average assumptions:
1999 1998 1997
---- ---- ----
Risk free interest rate......... 4.76% 4.92% 6.13%
Dividends....................... -- -- --
Volatility factor............... 0.500 0.305 0.358
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
changes in the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:
For the year ended December 31
1999 1998 1997
---- ---- ----
Pro forma net income (in thousands).......... $5,017 $2,212 $1,272
Pro forma basic income per share............. $0.62 $0.27 $0.16
At December 31, 1999, 1998 and 1997, exercisable options for 857,962, 791,468
and 612,628 shares, respectively were outstanding.
25
The weighted average remaining contractual life of those options is 6.65 years.
The weighted average exercisable price of outstanding options at December 31,
1999 is $5.89.
7. EMPLOYEE STOCK PURCHASE PLAN
The Company has an Employee Stock Purchase Plan (the "Purchase Plan") to provide
its employees with an additional opportunity to share in the ownership of the
Company. Under terms of the Purchase Plan, all regular full-time employees of
the Company may make voluntary payroll contributions thereby enabling them to
purchase Common Stock. Contributions are limited to 20% of an employee's
compensation. Up to 100,000 shares of Common Stock may be issued under the
Purchase Plan. The purchase price of the stock is the lesser of 85% of the Fair
Market Value on the first business day of the Purchase Period or 85% of the Fair
Market Value on the date of exercise which can be at any time during the Plan
year.
Under the Purchase Plan, during 1999, 1998 and 1997, 21,074, 20,594 and 9,764
shares of Common Stock, respectively, were purchased. To date, 88,361 shares of
Common Stock have been purchased.
8. 401(K) RETIREMENT SAVINGS PLAN
The Company has a 401(k) plan which is available to all employees upon
employment who are at least 18 years of age. Employer contributions are
voluntary at the discretion of the Company.
Company contributions amounted to $74,542, $62,988 and $44,080 for the years
ended December 31, 1999, 1998 and 1997, respectively.
9. INCOME TAXES
The components of income tax expense for the year ended December 31 are as
follows:
1999 1998 1997
---- ---- ----
Current:
Federal.......................... $348,000 $197,000 $ 59,000
State............................ 169,000 34,000 84,000
Foreign.......................... 324,000 145,000 279,000
------- ------- -------
$841,000 $376,000 $422,000
======== ======== ========
The Company's consolidated effective tax rate differed from the statutory rate
as set forth below for the year ended December 31:
1999 1998 1997
---- ---- ----
Federal taxes at statutory rate ............ $ 2,178,000 $ 1,101,000 $ 742,000
State and local income taxes, net of Federal
benefit .................................. 321,000 162,000 84,000
Non-deductible expenses .................... 488,000 75,000 24,000
Foreign losses for which no benefit has been
recognized ............................... (67,000) 230,000 346,000
Change in valuation allowance .............. (2,403,000) (1,337,000) (1,112,000)
Alternative minimum and foreign withholding
taxes .................................... 324,000 145,000 338,000
----------- ----------- -----------
$ 841,000 $ 376,000 $ 422,000
=========== =========== ===========
26
Deferred income taxes reflect the net effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. The Company has no deferred tax
liabilities. Significant components of the Company's deferred tax assets are as
follows:
At December 31,
---------------
1999 1998
---- ----
Deferred tax assets:
Book over tax depreciation and amortization ...... $ 88,000 $ 278,000
Net operating loss carryforwards ................. 7,450,000 9,710,000
Research and experimental tax credit carryforwards 2,487,000 2,228,000
Charitable contributions carryforward ............ 27,000 22,000
Accrued liabilities and reserves ................. 245,000 457,000
Alternative Minimum Tax credit carryforward ...... 200,000 205,000
------------ ------------
Total deferred tax assets .................. $ 10,497,000 $ 12,900,000
Valuation allowance for deferred tax assets ............ ($10,497,000) ($12,900,000)
------------ ------------
Net deferred tax assets ....................... $ 0 $ 0
============ ============
During 1999 and 1998, the valuation allowance decreased by ($2,403,000) and
($1,337,000), respectively.
At December 31, 1999, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $19.6 million which are available
to offset future taxable income. These net operating loss carryforwards expire
during the years 2000 through 2006. Any loss carryforward amounts exceeding the
limitation can be carried forward to future years within the carryforward
period.
In addition, the Company has Research and Experimental Tax Credit carryforwards
totaling approximately $2.5 million which are available to offset future federal
income taxes. These credits expire during the years 2000 through 2014.
10. COMMITMENTS AND CONTINGENCIES
As of December 31, 1999, the Company had outstanding purchase commitments of
approximately $3.4 million related to the production of the Company's
Bursaplex(R) product, VNF(R) for the manufacture of Bursaplex(R) and
Bursamune(R), and materials and supplies for the construction and maintenance of
Inovoject(R) egg injection systems.
The Company is engaged in certain legal and administrative proceedings
incidental to its normal business activities. While it is not possible to
determine the ultimate outcome of those actions, in the opinion of management
after discussion with legal counsel, it is unlikely that the outcome of such
litigation and other proceedings will have a material adverse effect on the
results of the Company's operations or its financial position.
11. NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net income
per share (in thousands, except per share amounts):
1999 1998 1997
------ ------ ------
Numerator:
Net Income Available To Common Stockholders ................ $5,744 $2,861 $1,760
Effect of dilutive securities:
Regulation S Debentures .......................... 0 0 9
------ ------ ------
Numerator for diluted earnings per share-income
available to common stockholders after assumed
27
conversions ................................... $5,744 $2,861 $1,769
====== ====== ======
Denominator:
Denominator for basic net income per share--weighted-average
shares ..................................................... 8,151 8,255 8,184
Effect of Dilutive Securities:
Employee Stock Options ........................... 336 84 143
Warrants ......................................... 1 0 8
Convertible Debentures ........................... 0 0 4
Dilutive Potential Shares ..................... 337 84 155
Denominator for diluted net income per
share--adjusted weighted-average shares and
assumed conversions ........................... 8,488 8,339 8,339
====== ====== ======
Basic net income per share ................................. $ 0.70 $ 0.35 $0.21
====== ====== ======
Diluted net income per share ............................... $ 0.68 $ 0.34 $0.21
====== ====== ======
28
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information on the executive officers and directors is incorporated by reference
from the Company's Proxy Statement (under the headings "Management" and
"Proposal 1: Election of Directors," respectively), with respect to the Annual
Meeting of Shareholders to be held on May 18, 2000, to be filed with the
Securities and Exchange Commission.
ITEM 11. EXECUTIVE COMPENSATION
This information is incorporated by reference from the Company's Proxy Statement
(under the heading "Executive Compensation"), with respect to the Annual Meeting
of Shareholders to be held on May 18, 2000, to be filed with the Securities and
Exchange Commission.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information is incorporated by reference from the Company's Proxy Statement
(under the heading "Share Ownership of Management and Certain Beneficial
Owners"), with respect to the Annual Meeting of Shareholders to be held on May
18, 2000, to be filed with the Securities and Exchange Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
29
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1). The financial statements listed below are included in Item 8 of this
report.
Report of Independent Auditors
Financial Statements
Consolidated Balance Sheets at December 31, 1999 and 1998
Consolidated Statements of Operations for each of the three years ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for each of the three years ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Shareholders' Equity for each of the three
years ended December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
The financial statements of the Company's Employee Stock Purchase Plan
listed below are filed herewith, pursuant to Form 10-K, General Instruction F.
Report of Independent Auditors
Financial Statements
Statements of Net Assets Available for Plan Benefits at December 31, 1999
and 1998
Statements of Changes in Net Assets Available for Plan Benefits for the
three years ended December 31, 1999, 1998 and 1997
Notes to Financial Statements
(a)(2) Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts
30
(a)(3). The exhibits listed below are filed as part of this report. Executive
compensation plans and arrangements are listed in Exhibits 10.15 through 10.43.
Exhibits Description
3.1(1) Restated Articles of Incorporation
3.2(2) Articles of Amendment to Restated Articles of
Incorporation, effective March 21, 1996
3.3(3) Articles of Amendment to Restated Articles of
Incorporation, effective May 28, 1996
3.4 Amended and Restated Bylaws, effective April 16, 1999
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4
4.2(4) Specimen of Common Stock Certificate
4.3(5) Warrant to Purchase Common Stock of Embrex issued to
Schwartz Investments, Inc.
4.4(6) Rights Agreement dated as of March 21, 1996 between
Embrex and Branch Banking and Trust Company, as Rights
Agent
10.1(7) Exchange Agreement dated May 28, 1991, between Embrex
and American Cyanamid Company, Advent First Limited
Partnership A, Biotechnology Venture Fund S.A.,
Biotechnology Investments Limited, Domain Partners,
L.P., Elf Technologies, Inc., Prince Venture Partners
III, L.P., 3I Securities Corporation, and Charles E.
Austin
10.2(7) License Agreement dated December 11, 1991, between
Embrex and the National Technical Information Service, a
primary operating unit of the United States Department
of Commerce
10.3(7) Collaborative Research Agreement dated January 17, 1989
between Embrex and the University of Arkansas
10.4(7) License Agreement dated October 1, 1998 between Embrex
and the National Technical Information Service, a
primary operating unit of the United States Department
of Commerce
10.5(7) Lease Agreement dated December 9, 1986 between Embrex,
as tenant, and Imperial Center Partnership and Petula
Associates, Ltd., as landlord, as amended by First
Amendment dated June 11, 1987, Second Amendment dated
December 1, 1988, and Third Amendment dated May 2, 1989
10.6(4) Fourth Amendment of Lease dated October 1, 1994 between
the Company and Glaxo Inc. (as successor in interest to
Imperial Center Partnership and Petula Associates, Ltd.)
10.7(4) Fifth Amendment of Lease dated December 13, 1996 between
the Company and Glaxo Wellcome Inc. (as successor in
interest to Glaxo Inc.)
10.8(8) Lease for Royal Center II dated October 13, 1997 between
the Company and Petula Associates, Ltd.
10.9 Sublease Agreement dated October 1, 1999, between
Embrex, as subtenant, and Wandel & Goltermann
Technologies, Inc., as sublandlord
10.10 First Amendment to Sublease Agreement dated February 29,
2000, among Wandel & Goltermann Technologies, Inc.,
Embrex and W & G Associates
10.11(7) Facility Agreement dated March 1, 1991, between Embrex
and Mississippi Agriculture and
31
Forestry Experiment Station, Mississippi State
University
10.12(7) Unrestricted Grant Agreement dated April 1, 1988,
between Embrex and North Carolina State University, as
amended by Amendment dated September 15, 1989 and
Amendment dated April 22, 1991
10.13(7) Unrestricted Grant Agreement dated November 1, 1986,
between Embrex and North Carolina State University, as
amended by Amendment dated May 3, 1989, Amendment dated
September 15, 1989, and Amendment dated April 22, 1991
10.14(7) Basic Research Agreement dated October 24, 1989, between
Embrex and University of Arkansas, as amended on October
23, 1990, February 1, 1991 and July 22, 1991
10.15(7) 1988 Incentive Stock Option Plan and form of Incentive
Stock Option Agreement
10.16(7) 1989 Nonstatutory Stock Option Plan and form of
Nonstatutory Stock Option Agreement
10.17(7) 1991 Nonstatutory Stock Option Plan and form of
Nonstatutory Stock Option Agreement
10.18(9) Incentive Stock Option and Nonstatutory Stock Option
Plan and forms of Stock Option Agreements - June 1993
10.19(3) Amendment dated May 16, 1996 to Incentive Stock Option
and Nonstatutory Stock Option Plan - June 1993
10.20(10) Amended and Restated Incentive Stock Option and
Nonstatutory Stock Option Plan - May 1998
10.21(14) Amended and Restated Incentive Stock Option and
Nonstatutory Stock Option Plan - January 1999 and form
of Stock Option Agreement
10.22(4) Amended and Restated Employee Stock Purchase Plan
10.23(7) Employment Agreement dated November 15, 1989, between
Embrex and Randall L. Marcuson
10.24(4) Amendment to Employment Agreement dated May 21, 1996
between Embrex and Randall L. Marcuson
10.25(4) Change In Control Severance Agreement dated May 21, 1996
between Embrex and Randall L. Marcuson
10.26(13) Amendment to Change in Control Severance Agreement dated
October 1, 1998 between Embrex and Randall L. Marcuson
10.27(7) Employment Agreement dated October 16, 1989, between
Embrex and Catherine A. Ricks
10.28(4) Change In Control Severance Agreement dated May 21, 1996
between Embrex and Catherine A. Ricks
10.29(13) Amendment to Change in Control Severance Agreement dated
October 1, 1998 between Embrex and Catherine A. Ricks
10.30(2) General Provisions to Employment Agreement between
Embrex and Brian V. Cosgriff dated August 18, 1995
10.31(4) Change In Control Severance Agreement dated May 21, 1996
between Embrex and Brian V. Cosgriff
32
10.32(13) Amendment to Change in Control Severance Agreement dated
October 1, 1998 between Embrex and Brian V. Cosgriff
10.33(2) Terms and Conditions of Employment between Embrex Europe
Limited and David M. Baines dated May 12, 1994
10.34(4) Change In Control Severance Agreement dated June 9, 1996
between Embrex and David M. Baines
10.35(13) Amendment to Change in Control Severance Agreement dated
October 1, 1998 between Embrex and David M. Baines
10.36(4) Letter Agreement and General Provisions to Employment
Agreement dated August 20, 1996 between Embrex and Don
T. Seaquist and Amendment to Employment Agreement dated
September 9, 1996 between Embrex and Don T. Seaquist
10.37(4) Change In Control Severance Agreement dated September 9,
1996 between Embrex and Don T. Seaquist
10.38(13) Amendment to Change in Control Severance Agreement dated
October 1, 1998 between Embrex and Don T. Seaquist
10.39(13) Letter Agreement and General Provisions to Employment
Agreement dated May 31, 1991 between Embrex and V. Hayes
Fenstermacher and Amendment to Employment Agreement
dated July 18, 1996 between Embrex and V. Hayes
Fenstermacher
10.40(13) Change In Control Severance Agreement dated October 16,
1996 between Embrex and V. Hayes Fenstermacher
10.41(13) Amendment to Change in Control Severance Agreement dated
October 1, 1998 between Embrex and V. Hayes
Fenstermacher
10.42(13) Letter Agreement and General Provisions to Employment
Agreement dated February 3, 1999 between Embrex and
Brian C. Hrudka
10.43(13) Change In Control Severance Agreement dated March 24,
1999 between Embrex and Brian C. Hrudka
10.44(7) Shareholders' Agreement dated August 14, 1991 by and
among Embrex, Advent Euroventures Limited Partnership,
and Plant Resource Venture Fund II Limited Partnership
10.45(14) Agreement among Embrex, Micro Cap Partners, L.P., Palo
Alto Investors, Inc., Walter Smiley and William L.
Edwards dated as of April 18, 1999
10.46(14) Indemnification Agreement among Embrex, Randall L.
Marcuson, Charles E. Austin, C. Daniel Blackshear,
Lester M. Crawford, Peter J. Holzer, Kenneth N. May, and
Arthur M. Pappas dated as of April 1, 1999
10.47(16) Letter Agreement among Embrex, Micro Cap Partners, L.P.,
Palo Alto Investors, Inc., and William L. Edwards dated
as of February 11, 2000
10.48(8) Inovoject(R) Egg Injection System Lease, Limited
License, Supply and Service Agreement dated September 1,
1994 between Embrex and Tyson Foods, Inc. (asterisks
located within the exhibit denote information which has
been deleted pursuant to a request for confidential
treatment filed with the Securities and Exchange
Commission)
33
10.49(8) Amendment dated March 26, 1997 to the Inovoject(R) Egg
Injection System Lease, Limited License, Supply and
Service Agreement dated September 1, 1994 between Embrex
and Tyson Foods, Inc. (asterisks located within the
exhibit denote information which has been deleted
pursuant to a request for confidential treatment filed
with the Securities and Exchange Commission)
10.50(11) Master Lease Agreement dated December 3, 1993 between
Embrex and Capital Associates International, Inc. with a
form of equipment schedule and collateral assignment of
lease attached
10.51(11) Master Lease Agreement dated January 28, 1994 between
Embrex and Aberlyn Capital Management Limited
Partnership with a form of lease schedule and collateral
assignment of lease attached
10.52(11) Agreement to Issue Warrant dated January 28, 1994
between Embrex and Aberlyn Capital Management Limited
Partnership
10.53(11) Common Stock Purchase Warrant issued to Aberlyn Capital
Management Limited Partnership
10.54(11) Agreement to Issue Warrant dated January 28, 1994
between Embrex and Aberlyn Holding Company, Inc.
10.55(11) Common Stock Purchase Warrant issued to Aberlyn Holding
Company, Inc.
10.56(12) Master Equipment Lease Agreement dated as of December 7,
1994between Financing for Science International, Inc.
and Embrex with a Consent to Assignment of Equipment
Lease Agreement, Security Agreement and Rental Schedule
attached
10.57(12) License Agreement dated as of December 7, 1994 between
Financing for Science International, Inc. and Embrex
with Sublicense Agreement attached
10.58(12) Common Stock Purchase Warrant dated January 17, 1995
issued to Financing for Science International, Inc.
10.59(12) Agreement for Sale of Equipment and Rights Under User
Agreement dated as of December 7, 1994 between Financing
for Science International, Inc. and Embrex
10.60(2) Limited License and Supply Agreement dated as of
July 20, 1995 between Embrex and Webster
10.61(4) Amendments dated August 1, 1996 and November 11, 1996 to
Limited License and Supply Agreement dated as of July
20, 1995 between Embrex and Webster
10.62(2) Agreement dated as of January 22, 1996 between Embrex
and Select
10.63(2) Letter Agreement dated as of January 22, 1996 between
Select and Embrex
10.64(2) License dated as of January 22, 1996 granted by Select
to Embrex
10.65(2) Commitment letter accepted June 14, 1995 between Embrex
and Financing for Science International, Inc. for $2.0
million capital lease financing facility
10.66(2) Stock Purchase Warrant dated June 9, 1995 issued to
Financing for Science International, Inc.
34
10.67(2) Financing Agreement (Number 10783) dated as of October
30, 1995 between Lease Management Services, Inc. and
Embrex, and Addendum thereto dated October 30, 1995
attached
10.68(2) License Agreement dated October 30, 1995 between Embrex
and Lease Management Services, Inc.
10.69(2) Sublicense Agreement dated as of October 30, 1995
between Embrex and Lease Management Services, Inc.
10.70(2) Movable Hypothec on Equipment and Contracts dated as of
October 30, 1995 between Embrex and Lease Management
Services, Inc.
10.71(2) Warrant to Purchase 30,000 Shares of Common Stock dated
October 30, 1995 issued to Lease Management Services,
Inc.
10.72(2) Intercreditor Agreement dated as of October 31, 1995
among Financing for Science International, Inc., Lease
Management Services, Inc., and Embrex
10.73(15) Loan Agreement between Embrex and Branch Banking and
Trust Company dated as of April 7, 1999
21 Subsidiaries
23 Consent of Ernst & Young LLP to the inclusion of their
report dated February 15, 2000 with respect to the
consolidated financial statements and schedule of the
Company in this Form 10-K and the incorporation by
reference of such report into the Registration
Statements on Form S-3 (Registration Nos. 333-18231 and
333-31811), as filed with the Securities and Exchange
Commission on December 19, 1996 and July 22, 1997,
respectively, and into the Registration Statements under
the Securities Act of 1933 on Form S-8 (Registration
Nos. 33-51582, 33-63318, 333-04109, and 333-56279), as
filed with the Securities and Exchange Commission on
September 1, 1992, May 25, 1993, May 20, 1996, and June
8, 1998, respectively, and to the incorporation by
reference in the Registration Statement on Form S-8
(Registration No. 33-63318) pertaining to the Employee
Stock Purchase Plan of their report dated March 20, 2000
with respect to the financial statements of the Embrex,
Inc. Employee Stock Purchase Plan included in this Form
10-K
24 Powers of Attorney (included in the signature page for
this report)
27 Financial Data Schedule to the Company's Form 10-K for
the year ended December 31, 1999
99 Risk Factors relating to the Company
(1) Exhibit to the Company's Form 10-K as filed with the Securities and Exchange
Commission for fiscal year ending December 31, 1991 and incorporated herein by
reference
(2) Exhibit to the Company's Form 10-K as filed with the Securities and Exchange
Commission for the fiscal year ending December 31, 1995 and incorporated herein
by reference
(3) Exhibit to the Company's Form 10-Q as filed with the Securities and Exchange
Commission for the three months ended June 30, 1996 and incorporated herein by
reference
(4) Exhibit to the Company's Form 10-K as filed with the Securities and Exchange
Commission for fiscal year ending December 31, 1996 and incorporated herein by
reference
(5) Exhibit to the Company's Form 10-Q as filed with the Securities and Exchange
Commission for the three
35
months ended June 30, 1995 and incorporated herein by reference
(6) Exhibit to the Company's Registration Statement on Form 8-A as filed with
the Securities and Exchange Commission on March 22, 1996 and incorporated herein
by reference
(7) Exhibit to the Company's Registration Statement on Form S-1 as filed with
the Securities and Exchange Commission (Registration No. 33-42482) effective
November 7, 1991 and incorporated herein by reference
(8) Exhibit to the Company's Form 10-K as filed with the Securities and Exchange
Commission for the fiscal year ending December 31, 1997 and incorporated herein
by reference.
(9) Exhibit to the Company's Form 10-K as filed with the Securities and Exchange
Commission for the fiscal year ending December 31, 1992 and incorporated herein
by reference
(10) Exhibit to the Company's Registration Statement on Form S-8 as filed with
the Securities and Exchange Commission (Registration No. 333-56279) effective
June 8, 1998 and incorporated herein by reference
(11) Exhibit to the Company's Form 10-KSB, as amended, as filed with the
Securities and Exchange Commission for the fiscal year ending December 31, 1993
and incorporated herein by reference
(12) Exhibit to the Company's Form 10-K as filed with the Securities and
Exchange Commission for the fiscal year ending December 31, 1994 and
incorporated herein by reference
(13) Exhibit to the Company's Form 10-K as filed with the Securities and
Exchange Commission for the fiscal year ending December 31, 1998 and
incorporated herein by reference
(14) Exhibit to the Company's Form 10-Q as filed with the Securities and
Exchange Commission for the three months ended March 31, 1999 and incorporated
herein by reference
(15) Exhibit to the Company's Form 10-Q as filed with the Securities and
Exchange Commission for the three months ended June 30, 1999 and incorporated
herein by reference
(16) Exhibit to the Company's Form 8-K as filed with the Securities and Exchange
Commission on February 22, 2000.
(b). No reports on Form 8-K were filed during the last quarter of the fiscal
year ended December 31, 1999. The Company filed a report of Form 8-K on February
22, 2000.
36
SIGNATURES AND POWER OF ATTORNEY
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized.
EMBREX, INC.
/s/ Randall L. Marcuson
By:________________________
Date : March 24, 2000 Randall L. Marcuson
President and Chief Executive
Officer
We, the undersigned directors and officers of Embrex, Inc. (the "Company"), do
hereby constitute and appoint Randall L. Marcuson and Don T. Seaquist or either
of them, our true and lawful attorneys-in-fact and agents, with full power of
substitution, to execute and deliver an Annual Report on Form 10-K pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the
"Act"), with respect to the year ended December 31, 1999, to be filed with the
Securities and Exchange Commission, and to do any and all acts and things and to
execute any and all instruments for us and in our names in the capacities
indicated below, which said attorneys-in-fact and agents, or either of them, may
deem necessary or advisable to enable the Company to comply with the Act and any
rules, regulations, and requirements of the Securities and Exchange Commission
in connection with such Report, including without limitation the power and
authority to execute and deliver for us or any of us in our names and in the
capacities indicated below any and all amendments to such Report; and we do
hereby ratify and confirm all that the said attorneys-in-fact and agents, or
either of them, shall do or cause to be done by virtue of this power of
attorney.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Randall L. Marcuson President, Chief Executive Officer March 24, 2000
- -------------------------------- and Director
Randall L. Marcuson
/s/ Don T. Seaquist Vice President, Finance and March 24, 2000
- --------------------- Administration (Principal Financial
Don T. Seaquist and Accounting Officer)
/s/ Charles E. Austin Director March 24, 2000
- --------------------------------
Charles E. Austin
/s/ C. Daniel Blackshear Director March 24, 2000
- --------------------------------
C. Daniel Blackshear
/s/ Lester M. Crawford Director March 24, 2000
- --------------------------------
Lester M. Crawford, D.V.M. Ph.D.
/s/ Peter J. Holzer Director March 24, 2000
- --------------------------------
Peter J. Holzer
/s/ Kenneth N. May Director March 24, 2000
- --------------------------------
Kenneth N. May, Ph.D.
/s/ Arthur M. Pappas Director March 24, 2000
- --------------------------------
Arthur M. Pappas
/s/ Walter V. Smiley Director March 24, 2000
- --------------------------------
Walter V. Smiley
37
Report of Independent Auditors
The Board of Directors
Embrex, Inc.
We have audited the accompanying statements of net assets available for plan
benefits of Embrex, Inc. Employee Stock Purchase Plan as of December 31, 1999
and 1998, and the related statements of changes in net assets available for plan
benefits for each of the three years in the period ended December 31, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the net assets available for plan benefits of Embrex,
Inc. Employee Stock Purchase Plan at December 31, 1999 and 1998, and the changes
in net assets available for plan benefits for each of the three years in the
period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States.
/s/ Ernst & Young LLP
Raleigh, North Carolina
March 20, 2000
38
STATEMENTS OF NET ASSETS AVAILABLE FOR PLAN BENEFITS
EMBREX, INC. EMPLOYEE STOCK PURCHASE PLAN
At December 31,
1999 1998
---- ----
Receivable from Company............................. $74,719 $46,243
------- -------
Net assets available for Plan benefits.............. $74,719 $46,243
======= =======
See accompanying notes.
STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS
EMBREX, INC. EMPLOYEE STOCK PURCHASE PLAN
Years Ended December 31,
1999 1998 1997
Employee contributions ...................... $136,073 $137,454 $87,189
Deductions:
Purchases of Common Stock 95,535 99,354 46,355
Withdrawals ............. 12,062 30,523 28,245
-------- -------- -------
107,597 129,877 74,600
-------- -------- -------
Net (decrease) increase ..................... 28,476 7,577 12,589
Net assets available for Plan benefits at
beginning of period ..... 46,243 38,666 26,077
-------- -------- -------
Net assets available for Plan benefits at
end of period ........... $ 74,719 $ 46,243 $ 38,666
======== ======== =======
Shares of Common Stock purchased
during year ...................... $ 21,074 20,594 8,209
======== ======== =======
39
EMBREX, INC. EMPLOYEE STOCK PURCHASE PLAN
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
NOTE 1 - BASIS OF PRESENTATION
The accompanying financial statements of the Embrex, Inc. Employee Stock
Purchase Plan ("the Plan") have been prepared on the accrual basis.
NOTE 2 - PLAN DESCRIPTION AND SUMMARY OF SIGNIFICANT PLAN PROVISIONS
The Board of Directors of Embrex, Inc. ("the Company") adopted the Plan on
January 28, 1993, and the Plan was approved by shareholders of the Company at
the Annual Meeting of Shareholders on May 20, 1993. The Plan became effective as
of June 1, 1993.
The purpose of this Plan is to provide the Company's employees with an
additional opportunity to share in the ownership of the Company. Under terms of
the Plan, all regular full-time employees of the Company may make voluntary
payroll contributions thereby enabling them to purchase Common Stock at a price
to be determined by the Compensation Committee of the Board, but not less than
85% of the lower of the fair market values as of the first business day of the
twelve-month offering period or the date of exercise which can be at any time
during the offering period.
Contributions are limited to 20% of an employee's compensation, and the
aggregate number of shares of Common Stock which may be purchased in total by
all Plan participants may not exceed 100,000 shares.
Contributions to the Plan are maintained in a non-interest bearing account until
such time as the participant exercises the option to purchase shares of Common
Stock from his or her available contributions, or withdraws from the account.
All amounts representing net Plan assets are considered general assets of the
Company and may be subject to the claims of creditors.
In addition to contributions, plan activity consists of voluntary purchases of
shares of Common Stock and withdrawals from participation in the Plan.
Participants may purchase whole shares of Common Stock during a Purchase Period
(generally a twelve-month period ending each June 30th). A participant may
withdraw from the Plan and cease making contributions at any time.
The Plan is not subject to the provisions of the Employee Retirement Income
Security Act of 1974 ("ERISA") and is not qualified under Section 401(a) of the
Internal Revenue Code of 1986, as amended which relates to qualification of
certain pension, profit-sharing and stock bonus plans.
All costs to administer the Plan are paid by the Company.
40
FINANCIAL STATEMENT SCHEDULE
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
EMBREX, INC. AND CONSOLIDATED SUBSIDIARIES
ADDITIONS
(1) (2)
CHARGED TO CHARGED TO
BALANCE AT COSTS AND OTHER BALANCE AT
BEGINNING OF EXPENSES ACCOUNTS-- DEDUCTIONS-- END OF
PERIOD -------- DESCRIBE DESCRIBE PERIOD
------ -------- -------- ------
DESCRIPTION
YEAR ENDED DECEMBER 31, 1999
Allowance for doubtful accounts $ 133,521 $ 66,231(a) $ (28,446)(a) $ 171,306
Inventory valuation allowance 585,049 110,000(a) (247,061)(a) 447,988
Amortization of intangible assets 74,364 9,543(a) 0 83,907
YEAR ENDED DECEMBER 31, 1998
Allowance for doubtful accounts $ 48,665 $ 94,227(a) $ (9,371)(a) $ 133,521
Inventory valuation allowance 333,416 313,942(a) (62,309)(a) 585,049
Amortization of intangible assets 79,952 55,143(a) (60,731)(f) 74,364
YEAR ENDED DECEMBER 31, 1997
Allowance for doubtful accounts $ 6,590 $ 42,075(a) $ 0 $ 48,665
Inventory valuation allowance 272,385 173,500(a) (112,469)(a) 333,416
Amortization of intangible assets 57,673 22,279(a) 0 79,952
(a) To adjust allowance for change in estimates.
(b) Fully-amortized intangible assets written off.
(c) Purchase accounting adjustments.
(d) Sales of assets
(e) Revaluation adjustments.
(f) Not fully amortized - intangible asset write off
41