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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, 1996 Commission file number 000-19495
................................................................................
EMBREX, INC.
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-1469825
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)
1035 SWABIA COURT, DURHAM, NORTH CAROLINA 27703
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (919) 941-5185
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. [ X ]
As of March 21, 1997 (the most recent practicable date), the aggregate
market value of the voting stock held by non-affiliates was $53.6 million.
As of March 21, 1997 (the most recent practicable date), there were
8,095,590 shares of the registrant's common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT WHERE INCORPORATED
Proxy Statement with respect to the Part III
Annual Meeting of Shareholders to be
held on May 15, 1997, to be filed with
the Securities and Exchange Commission
INDEX
PAGE
PART I
ITEM 1. BUSINESS 3
ITEM 2. PROPERTIES 9
ITEM 3. LEGAL PROCEEDINGS 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 10
ITEM 6. SELECTED FINANCIAL DATA 11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION 11
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 14
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 34
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 35
ITEM 11. EXECUTIVE COMPENSATION 35
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT 35
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 35
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K 35
SIGNATURES 44
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PART I
ITEM 1. BUSINESS
GENERAL
Embrex, Inc. ("Embrex" or the "Company") is a North Carolina
corporation that develops and markets bioscience and bioengineering-based
products to increase the productivity and profitability of the global poultry
industry. The Company was incorporated in 1985.
Embrex has developed and commercialized a proprietary automated egg
injection and transfer system which can inoculate 20,000 to 50,000 eggs per hour
and eliminate the need for manual post-hatch injection, the current procedure in
virtually all hatcheries in the U.S. that have not converted to the use of
Embrex's system. This proprietary system, called the 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 addition to the INOVOJECT(R) system, Embrex has developed and is
marketing a Viral Neutralizing Factor antibody useful in the development of
certain avian vaccines. Embrex also is developing various other proprietary
pharmaceutical and biological products to improve bird health, reduce bird
production costs and provide other economical benefits to the poultry industry.
These compounds include vaccines, immune enhancers, performance modifiers,
antimicrobials and genetic materials designed to increase poultry productivity
and health while reducing costs. These products are in various stages of
development, and some are being developed in collaboration with major drug
companies, the USDA, and several leading universities in the field of avian
science. These compounds can be delivered through the INOVOJECT(R) system and,
alternatively, some can be administered via post-hatch injection.
EXISTING PRODUCTS
Patented Egg Injection System (INOVOJECT(R))
Embrex has developed and commercialized a proprietary automated egg
injection and transfer system which can inoculate 20,000 to 50,000 eggs per hour
and eliminate the need for manual post-hatch injection, the current procedure in
virtually all hatcheries in the U.S. that have not converted to the use of
Embrex's system. 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 1996, the Company converted a number of hatcheries to the
INOVOJECT(R) egg injection system and continued operations of INOVOJECT(R)
systems in hatcheries converted prior to 1996. As a result, at December 31,
1996, Embrex had over 250 INOVOJECT(R) systems installed in the United States
("U.S.") and Canada, as compared with 235 at year end 1995.
During 1996, the Company also placed a number of INOVOJECT(R) systems
for trial and on contract at locations outside the U.S. and Canada. The
Company's expansion outside the U.S. and Canada has been focused initially on
Europe. At year end, the Company had INOVOJECT(R) systems either installed or on
trial in England, Ireland, France, Spain, the Netherlands, Belgium, Italy,
Israel, Egypt, South Africa, Turkey and Australia. Overall, the placement
of INOVOJECT(R) systems outside the U.S. and Canada is dependent on market
acceptance of various in ovo 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
is used in the U.S., is not as widespread in Europe as in North America.
Similarly, Gumboro disease (also known as infections bursal disease) is
prevalent both in the United States and in
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Northern Europe and Asia. The Company expects that primary usage of its
INOVOJECT(R) systems will vary by geographic region according to the prevailing
diseases.
Viral Neutralizing Factor ("VNF")
Embrex has developed and commercialized a Viral Neutralizing Factor
("VNF") technology which permits single dose immunization of the avian embryo
effective for the life of the bird. By combining VNF, an antibody, with a
vaccine virus, immunization is provided in a single step, reducing or
eliminating many of the multiple vaccinations carried out in the industry. VNF
can neutralize a virulent vaccine virus without impairing the virus' ability to
stimulate an immune response. By using VNF in this manner, the virulent vaccine
virus can be made into a safe and effective vaccine which can be used at or
before hatching.
The VNF 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 sells VNF and sublicenses the VNF technology to infectious bursal disease
("IBD") vaccine manufacturers for the production of improved IBD vaccines for
both in ovo ("in the egg") and post-hatch use. Embrex also is researching
application of VNF for other avian disease vaccines, including for Newcastle's
disease, although there is no assurance such research will result in product
opportunities.
To date, the Company's research efforts with its VNF compound have been
focused on avian uses. Based on initial experimental data, the Company now
believes that the potential exists for VNF to be used in several non-avian
species. The Company is in the early stages of exploring collaborative
relationships with other companies for the development and licensing of VNF for
non-avian uses. Embrex has not initiated any regulatory approval processes with
respect to non-avian uses of VNF, nor is there any assurance that its efforts in
this area will result in products or collaborative agreements.
Infectious Bursal Disease ("IBD") Vaccines
VNF 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 widespread in the U.S., Northern Europe and Asia. VNF renders a virulent IBD
vaccine both safe and effective, thus allowing its use at or before hatch.
In January 1995, Sanofi Animal Health, Inc. ("Sanofi") received
approval from the United States Department of Agriculture (the "USDA") for an
IBD vaccine containing Embrex's VNF for post-hatch use. Under the terms of a
1991 agreement, Embrex was to sell VNF to Sanofi, which was to manufacture and
market the vaccine. In 1995, Sanofi was acquired by Rhone Merieux SA. In January
1996, Embrex entered into an agreement with Select Laboratories, Inc.
("Select"), a wholly-owned subsidiary of Rhone Merieux SA, under which Embrex
took over the ownership and marketing from Select of the IBD vaccine containing
Embrex's VNF, known as "BURSAPLEX(TM)" (previously known as "BDA-Blen"), and
Select agreed to manufacture BURSAPLEX(TM) for Embrex on a contract basis for at
least two years. Under the agreement, Embrex will market BURSAPLEX(TM) in North
America, South America and Asia, upon receipt of appropriate regulatory
approvals. Additionally, Embrex has agreed to purchase all existing inventories
of raw material, BURSAPLEX(TM), and related materials within thirty months
following the receipt of in ovo approval of the product by the USDA, which
occurred on January 20, 1997. The Company contemplates that all of these
materials will be purchased in the form of finished goods. This purchase
commitment totals approximately $1.6 million, of which $400,000 was paid upon
execution of the agreement and $125,000 was paid following in ovo approval on
January 20, 1997.
In August 1995, the Company entered into an agreement with Cyanamid
Websters ("Webster"), a subsidiary of American Home Products, Inc., for the
joint development of another IBD vaccine containing VNF, which will be marketed
by Webster in Europe, the Middle East, and Africa under the trade name
"Bursamune(TM)."
On January 20, 1997, the Company received U.S. Department of
Agriculture approval for in ovo use of the Company's VNF based vaccine for IBD
in broiler chickens. The approval is specifically for in ovo (as opposed to
post-
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hatch) administration of the vaccine complex via Embrex's patented INOVOJECT(R)
egg injection systems. To date, IBD has been treated post-hatch via manually
delivered vaccines or in drinking water. The Company estimates the worldwide
market for IBD vaccines to be $40 million. Existing vaccines are associated,
however, with certain limitations, and some cannot be used safely or effectively
in ovo.
Embrex intends to seek regulatory approval in selected Latin American
and Asian markets for in ovo use of BURSAPLEX(TM). Embrex is beginning to
initiate this process, but there is no assurance that any such regulatory
approvals will be obtained. Moreover, the placement of INOVOJECT(R) systems
outside the U.S. and Canada is dependent on market acceptance of various in ovo
vaccines.
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. 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 development of 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) 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, aimed at overcoming many of the
problems associated with current practices.
Embrex's initial experiments with in ovo delivery of certain early
stage coccidiosis antigens have shown that broilers immunized in ovo with
coccidiosis antigens are better protected against coccidiosis as compared to
broilers immunized post-hatch with the same coccidiosis antigens. 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 for any coccidiosis product developed
by the Company to reach the market in the near future.
In Ovo Products for Control of Salmonella
Salmonella bacteria are widespread in nature and difficult to control.
With the 1996 adoption of the USDA's Hazard Analysis Critical Control Points
(HACCP) regulations, poultry producers are obliged to implement systems to
minimize contamination of meat by specific salmonella which reside in the
intestinal tract of chickens and are harmless to the bird, but which are capable
of inducing an illness (typically gastrointestinal) in humans. Newly hatched
chicks can be first exposed to salmonella very early in the hatchery
environment. Consequently, the Company believes that the earliest delivery of a
variety of agents, such as competitive exclusive agents or various vaccines,
would be best administered in ovo. Embrex continues to explore, through
collaborative relationships with the USDA and others, various products to reduce
salmonella contamination. There can be no assurance that development of such
products will be successful or that regulatory approval will be available.
Embrex has not initiated the regulatory approval process with respect to such
products.
5
Other Products Under Development
In February 1996, the Company signed an agreement with Solvay S.A.
("Solvay") of Belgium to collaborate on the use of vaccines manufactured by
Solvay together with Embrex's proprietary in ovo delivery technology. The
territories specified include Europe, the Middle East, and Africa. Under the
agreement, Embrex and Solvay will work together to introduce and establish the
use of appropriate in ovo vaccines currently being adapted or developed by
Solvay for sale to poultry producers, via Embrex's INOVOJECT(R) system, and to
extend the use of the Embrex equipment throughout the territories concerned.
During 1996, Embrex continued the evaluation process for several
compounds which the Company believes may have the potential to yield
improvements in the areas of feed conversion, muscle mass and leanness within
broiler chickens. These compounds need to be administered in the first several
days of embryonic development in order to have the desired effect. The Company
plans to continue its research efforts in this area in 1997. The effectiveness
of these compounds has not been confirmed, and there is no assurance that these
efforts will yield product opportunities.
Embrex also is researching technology alternatives to enhance or
automate sexing and gender sorting practices for poultry. Early gender
sorting improves processing plant efficiencies by enabling gender-specific
feed rations and improved feed conversion. There is no assurance such research
will result in product opportunities.
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
when delivered or applied in ovo. Depending upon the outcome of these tests,
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.
PATENTS AND PROPRIETARY RIGHTS
Embrex controls (either through direct ownership or exclusive license)
18 issued U.S. patents, 15 pending U.S. patent applications and over 34 issued
foreign patents and 60 pending foreign patent applications. In addition, Embrex
has executed confidentiality agreements with its employees, consultants,
collaborators, subcontractors and directors.
The process utilized by the INOVOJECT(R) system of injecting viral,
bacterial, or fungal vaccines into an avian embryo was patented in the U.S. by
the USDA in 1984. Embrex holds an exclusive license to this patent through its
expiration in June 2002. Embrex has supplemented the USDA patent with five
separately issued U.S. patents (and multiple foreign patents and patent
applications) covering certain design features of the INOVOJECT(R) system.
Embrex owns or licenses method-of-use patents which have been filed for the in
ovo administration of VNF and numerous other molecules. Two U.S. patents for
methods of treating IBD virus infections using VNF, including in ovo use, were
issued in March 1995. These patents and patent applications cover the use of
these compounds to elicit various beneficial responses in poultry and are
independent of the source of the compounds. Through licenses, Embrex has
complemented the method-of-use patents and applications with issued
composition-of-matter patents for VNF-vaccine compositions. These patents cover
the composition of matter used to elicit a beneficial effect, regardless of the
manner in which they are used.
In 1996, six additional U.S. patent applications were made covering
various aspects of in ovo biotechnology.
Embrex has begun a continuing effort to patent delivery methods
focusing on applications of in ovo technology relying upon early intervention
methods and devices. In August 1995, a second patent on early delivery was
issued in the U.S., complementing an earlier patent obtained in August 1994.
In addition, Embrex owns the federally registered trademarks EMBREX(R),
INOVOJECT(R), and OVOVAC(R), and has applied for federal registration of the VNF
logo, BURSAPLEX(TM) and FORTIMUNE(TM) trademarks.
FINANCING
During 1996, Embrex utilized a total of $2.1 million in existing lease
and other collateralized equipment financing, which the Company accounts for as
capital leases, to support the purchase of the Company's INOVOJECT(R) egg
injection systems. The Company, in turn, leases the INOVOJECT(R) systems to its
customers under multi-year contracts.
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At December 31, 1996, an aggregate of $2.0 million remained available for
utilization by Embrex under this financing arrangement.
In September 1996, the Company obtained a $2.0 million secured line of
credit from a bank in the United Kingdom, which will 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 in 1996, with the balance
of $1.6 million available at year end.
COMPETITION
Embrex continues to monitor the presence of any competitive in ovo
administration system. See Item 3, "Legal Proceedings," below. The primary
competition for the INOVOJECT(R) system is the conventional, manual, post-hatch
administration of biological products. As most of Embrex's potential products
are being designed to be administered through the INOVOJECT(R) system, the
INOVOJECT(R) system must continue to develop market acceptance within the
poultry industry and operate as intended under long-term commercial conditions
in order for these potential products to be marketed successfully.
Competitive success for Embrex will be based primarily on commercial
acceptance of its 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. Maintaining financial and human resources, therefore, are
important factors for success. Embrex's ability to compete also is dependent on
its ability to attract and retain key personnel.
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. Embrex subcontracts with equipment manufacturers to build the
INOVOJECT(R) systems. The Company uses a single 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) installations and revenues from those
installations.
VNF (Viral Neutralizing Factor)
In 1993, Embrex signed multi-year agreements with SPAFAS, Inc., a
subsidiary of Charles River Laboratories, Inc., and Hy-Vac Laboratory Eggs
Company, a division of the German-based Lohmann Group, under which the two
companies will supply the active ingredient in VNF. In connection with these
agreements, Embrex maintains appropriate inventory levels and places orders with
these companies to allow Embrex to satisfy anticipated customer demand for VNF.
The regulatory approval granted by the USDA for BURSAPLEX(TM) in January 1997
specifically covers the vaccine produced with SPAFAS-manufactured VNF. The
Company does not intend to use its remaining inventories of Hy-Vac produced VNF
domestically and, accordingly, wrote off $160,000 as the value of this inventory
in December 1996.
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Marketing and Distribution
Because of the geographical and industrial concentration of the poultry
industry in the U.S., 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 and initiated trials and entered into commercial
contracts with 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) units to hatcheries. The agreements cover the use of the mechanical
equipment and ongoing field service, maintenance and technical support. 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.
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. Upon veterinary medical device
regulatory approval by the Japanese Ministry of Agriculture, Fisheries and
Forestry, Ishii intends to distribute the INOVOJECT(R) egg injection system to
poultry producers throughout Japan.
The Company also is initiating arrangements for international
distribution of IBD vaccines, subject in each case to the availability of
required regulatory approvals. In August 1995, the Company entered into an
agreement with Cyanamid Websters, a subsidiary of American Home Products, Inc.,
providing Cyanamid Websters the right to develop, manufacture and market an in
ovo IBD vaccine containing VNF in Europe, the Middle East and Africa. In 1996,
the Company entered into agreements with other parties to distribute
BURSAPLEX(TM) in Israel, Chile, Peru and Pakistan. The agreement for Israel also
entitles the distributor to manufacture a VNF-based IBD vaccine. 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.
The Company's revenues attributable to international operations in
1996, 1995 and 1994 were 10%, 6% and 2% of the Company's consolidated revenues,
respectively. The company's identifiable assets attributable to international
operations in 1996, 1995 and 1994 were 13%, 5% and 4% of the Company's
consolidated assets, respectively.
RESEARCH AND DEVELOPMENT
Research and development expense was $4.3 million in 1994, $3.4 million
in 1995 and $3.7 million in 1996. The decrease in research and development
expense from 1994 to 1995 and the increase from 1995 to 1996 largely reflect
variances in outside contract research, supplies consumption, and INOVOJECT(R)
design and development activity. Research and development is principally Company
sponsored and funded primarily from internal sources.
GOVERNMENTAL REGULATION
Regulation by governmental authorities in the U.S. 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 U.S., animal
health products being developed by Embrex 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 it has begun or contemplates doing
business. These countries may also require approval of the INOVOJECT(R) system.
Regulatory agencies require that products be tested in animals 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
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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 require one to three years to obtain.
Embrex's VNF technology received USDA approval in January 1995 for IBD
applications post hatch and for in ovo use in January 1997. Of Embrex's products
currently under development, only the growth enhancing compounds and certain
gene therapy products (depending on the nature of the genetic material and the
response induced) are known to require FDA approval. Embrex believes all of its
other products under development will be subject only to USDA approval. Embrex's
existing products have received all necessary governmental approvals in the U.S.
Embrex'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, 1996, Embrex employed 106 persons, 101 of whom were
full-time employees, an increase of 5 percent or 5 persons from the number of
employees at December 31, 1995.
SIGNIFICANT CUSTOMERS
Tyson Foods, Inc. ("Tyson") and Perdue Farms, Inc. ("Perdue") accounted
for 33 and 11 percent of Embrex's consolidated 1996 revenues, respectively.
Based on the number of birds produced in 1996, Tyson and Perdue accounted for
approximately 22 and 8 percent of the broilers grown in the U.S., respectively.
In 1996, Tyson and Perdue were the only customers which represented greater than
10 percent of total revenues.
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 for a 10-year term expiring
March 31, 1997, with a 5 year renewal option at prevailing rates. Embrex pays an
annual rent of approximately $266,000. In December 1996, the Company exercised
its 5 year renewal option and renegotiated the annual rent. As a result, the
Company's annual rent, commencing April 1, 1997, decreases to $196,580, with
annual increases of approximately 3% thereafter. The lease will expire on March
31, 2002. Embrex paid rent totaling approximately $240,000 for its use of the
facility during 1996. Embrex is in the process of developing plans for a
new 12,000 square foot testing facility near Embrex's Research
Triangle Park headquarters. Embrex anticipates completing construction
in 1997. Embrex has extended for twelve months, until
May 10, 1998, its one-year lease agreement for
approximately 3,000 square feet of warehouse space in Springdale, Arkansas,
which is used to support the Embrex customer service function in the region. The
Company also leases offices of 650 square feet and warehouse space of 1,060
square feet in Great Dunmow, Essex, England and a 2,000 square foot office in
Dallas, Georgia to support field operations. 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 has agreements with
North Carolina State University providing access to facilities used for
incubating eggs and growing live birds and for research and testing purposes.
Embrex believes that suitable alternative facilities exist if the above
agreements are not renewed.
ITEM 3. LEGAL PROCEEDINGS
In September 1996, Embrex filed a patent infringement suit in the
United States District Court for the Eastern District of North 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 the 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 claims that the defendants
have 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 and Bounds 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
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November 1996, Service Engineering Corporation and Edward G. Bounds responded to
Embrex's patent infringement suit by asserting various affirmative defenses and
denying the substantive allegations in Embrex's complaint.
In November 1996, Embrex filed a patent infringement suit in the United
States District Court for the Eastern District of North Carolina against IGI,
Inc., a Delaware corporation. The suited alleged that IGI, through its
activities with Service Engineering Corporation and Edward G. Bounds, Jr., an
officer of Service Engineering Corporation, is engaging in activities that
constitute 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.
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, 1996.
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
------------------------------------- --------------------------- ---------------------------
March 31, 1995 7 4 3/4
June 30, 1995 7 1/2 4 5/8
September 30, 1995 7 5 5/8
December 31, 1995 6 7/8 5 5/8
March 31, 1996 8 1/4 5 1/2
June 30, 1996 7 7/8 6
September 30, 1996 7 3/8 6
December 31, 1996 7 3/4 6
------------------------------------- --------------------------- ---------------------------
At March 21, 1997 (the most recent practicable date), there were 476
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.
10
ITEM 6. SELECTED FINANCIAL DATA
SUMMARY OF OPERATIONS BY QUARTERS (UNAUDITED)
- -------------------------------- ------------------------------------------ ----------------------------------------------
1996 1995
--------- ----------- --------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS) 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr 1st Qtr 2nd Qtr(1) 3rd Qtr 4th Qtr
- -------------------------------- --------- ----------- --------- ---------- ---------- ---------- ---------- ----------
(Restated)
Revenues $4,595 $5,068 $5,641 $5,328 $2,967 $3,156 $3,537 $4,059
Operating Expenses 1,720 1,876 2,277 2,412 1,729 1,763 1,506 2,447
Net income (loss) 58 193 203 (113) (998) (2,119) (799) (596)
Net income (loss) per share
of Common Stock $ .01 $ .03 $ .03 $ (.01) $ (.17) $ (.34) $ (.12) $ (.09)
Weighted average shares
of Common Stock
outstanding (thousands) 7,038 7,317 7,442 7,405 6,017 6,177 6,518 6,632
- -------------------------------- --------- ----------- --------- ---------- -- ---------- ---------- ---------- ----------
(1) See Note 11 to the Company's financial statements appearing elsewhere in
this report.
5-YEAR SUMMARY OF SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- ------------------------------------------------------- ------------ -------------- -------------- ----------- -----------
1996 1995 1994 1993 1992
- ------------------------------------------------------- ------------ -------------- -------------- ----------- -----------
STATEMENTS OF OPERATIONS DATA
Revenues $20,632 $13,719 $ 6,897 $ 2,159 $ 699
Research and development expenses 3,673 3,416 4,271 3,763 3,028
Other operating expenses 4,612 4,029 3,561 4,248 3,207
Net income (loss) 341 (4,512) (6,710) (7,307) (5,480)
Net income (loss) per share of Common Stock $ .05 $ (.71) $ (1.12) $ (1.48) $ (1.33)
Weighted average shares of
Common Stock outstanding (thousands) 7,405 6,336 6,005 4,937 4,120
BALANCE SHEET DATA
Working capital $ 7,552 $ 5,934 $ 1,608 $ 9,370 $ 8,529
Total assets 25,554 21,789 13,379 14,997 10,507
Long-term liabilities 5,814 10,966 3,093 1,377 1,281
Accumulated deficit (40,693) (41,034) (36,522) (29,812) (22,505)
Shareholders' equity $13,309 $ 5,909 $ 5,323 $11,996 $ 8,479
- ------------------------------------------------------- ------------ -------------- -------------- ----------- -----------
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 1996 was $341,000 compared to net losses of
$4.5 million in 1995, on a restated basis, and $6.7 million in 1994. The Company
marked its first profitable year in 1996, which is attributable primarily to
continued growth in INOVOJECT(R) revenues. Earnings per share increased from net
losses of $1.12 in 1994 and $.71 in 1995, on a restated basis, to net income of
$.05 in 1996. For the year ended 1996, weighted average shares outstanding were
7.4 million, up from 6.3 and 6.0 million at year-end 1995 and 1994,
respectively. See "Liquidity and Capital Resources."
11
Revenues
Consolidated revenues in 1996 totaled $20.6 million, representing an
increase of 50% over 1995 revenues ($13.7 million) which was 199% over
1994 revenues ($6.9 million). INOVOJECT(R) revenues totaled $19.3 million
in 1996 compared to $12.8 million in 1995 and $5.9 million in 1994,
representing increases of 50% from 1995 to 1996, and 116% from 1994 to 1995.
The 1996 revenues include INOVOJECT(R) lease fees derived from
multi-year contracts and paid trials in the U.S. and foreign countries, the sale
of INOVOJECT(R) systems to distributors, and the sale of one INOVOJECT(R) system
to a pharmaceutical company for use in the production of human influenza
vaccine. Embrex does not expect sales of INOVOJECT(R) systems for use in the
production of vaccines, if any, to be a significant source of future revenue. At
December 31, 1996, Embrex had over 250 INOVOJECT(R) systems installed and
operating under lease agreements worldwide, up from 235 systems at December 31,
1995, and 117 at December 31, 1994. Additionally, Embrex estimates that as of
December 31, 1996, it was vaccinating approximately 80% of the 7.7 billion
broiler birds grown in the U.S. in 1996, up from 66% in 1995, and 37% in 1994.
Management anticipates further revenue growth in 1997 from existing
INOVOJECT(R) operations in the United States and Canada, new INOVOJECT(R) system
leases in other countries, and sales of BURSAPLEX(TM) product to poultry
producers. However, the rate at which the marketplace will accept the
INOVOJECT(R) technology outside the United States and Canada, the timing of
approvals of third-party vaccines for in ovo use outside the United States and
Canada, possible variability in U.S. hatchery bird production as a result of
recent high grain prices, and possible variability in the demand for U.S.
poultry and poultry products outside the U.S., 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 the Company's proprietary Viral Neutralizing Factor product
(VNF) for inclusion in Gumboro disease vaccines were the principal source of
product revenues, which generated $1.2 million, $817,000, and $952,000 in 1996,
1995, and 1994, respectively.
Cost of Product Sales and INOVOJECT(R) REVENUES
Cost of revenues as a percentage of revenues decreased from 62% and
80% of total revenues in 1995 and 1994, respectively, to 51% of total revenues
in 1996. The improvement in 1996 is primarily attributable to the fact that
revenues increased at a rate substantially in excess of the rate of change in
the cost of products.
Operating Expenses
Operating expenses totaled $8.3 million in 1996 compared to $7.4
million in 1995, and $7.8 million in 1994.
General and administrative ("G&A") expenses were $3.7 million in 1996,
up 11% from $3.3 million in 1995, and 6% from $3.1 million in 1994. The 1996
increase was largely due to increased legal expenses associated with the
implementation of a shareholder rights plan in March 1996 and amendments to
the Company's Articles of Incorporation approved at the annual meeting of
shareholders in May 1996. The 1995 increase over 1994 was attributable to
legal expenses incurred in connection with various patent infringement
lawsuits filed, and subsequently settled, by the Company during 1995.
See "Legal Proceedings."
Sales and marketing expenses totaled $929,000 in 1996 compared to
$718,000 and $427,000 in 1995 and 1994, respectively. The increases in 1996 and
1995 resulted from stepped-up international activity, principally in Europe, as
well as general increases in the Company's sales and customer service functions
to support market expansion and field support of INOVOJECT(R) systems.
12
Research and development ("R&D") expenses were $3.7 million in 1996
compared to $3.4 million in 1995 and $4.3 million in 1994. The increase in R&D
expense from 1995 to 1996 largely reflects an increase in outside contract
research, supplies consumption, and INOVOJECT(R) design and development
activity. The decrease in expense from 1994 to 1995 is principally attributable
to reductions in contract research, lower use of consumable supplies, and a
reduction in INOVOJECT(R) design and development 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 $355,000, $389,000, and $297,000 in years 1996,
1995, and 1994, respectively. The 1996 decrease relative to 1995 resulted
principally from lower interest rates, while the increase in 1995 relative to
1994 was a function of higher cash balances.
Interest expense totaled $1.6 million in 1996 compared to $2.7 million,
on a restated basis in 1995, and $579,000 in 1994. In all years, the amount of
expense is principally attributable to the Company's funding of its growing
installed base of INOVOJECT(R) systems with the use of capital lease financing
and in 1995 the issuance of convertible debentures. Additionally, interest
expense for 1995 has been restated to reflect a one-time charge associated with
recognizing $1,019,000 of interest expense attributable to the difference
between the market price of the Company's Common Stock and the conversion price
of the debentures issued in 1995. See "Liquidity and Capital Resources" and Note
11 to the Company's financial statements. Management expects to place a greater
emphasis and reliance on the use of internally generated funds to finance the
cost of additional INOVOJECT(R) systems in 1997.
Effect of Inflation
Management expects cost of product sales and INOVOJECT(R) revenues,
operating expenses and capital equipment costs to change in line with periodic
inflationary changes in price levels. Management also believes that the Company
will be able to offset the effect of price level changes by adjusting
selling/lease prices and effecting operating efficiencies. Consequently,
management does not expect changes in price levels to have any material adverse
affect on its results of operations.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company's cash and short-term investment
balances totaled $9.9 million compared to $7.3 million and $4.6 million at
December 31, 1995 and 1994, respectively. Working capital increased from $5.9
million in 1995 to $7.6 million in 1996 primarily due to the exercise of
warrants as described below.
During 1996, operating activities generated $4.1 million in cash,
including $626,000 million attributable to a net increase in working capital.
Within investing activities, INOVOJECT(R) and equipment purchases required $4.9
million, while the sale of short-term investments, provided an
offsetting $1.1 million. In addition, financing activities during 1996 generated
a net $3.3 million in cash reflecting $3.9 million from the issuance of equity
and debt securities offset by approximately $700,000 in net payments on
capital lease obligations.
To diversify its sources of external financing, in September 1996 the
Company obtained a $2.0 million line of credit from a bank in the United
Kingdom, which will be used to finance the construction of additional
INOVOJECT(R) systems for Europe, the Middle East and Africa. The line is secured
by compensating cash balances on deposit with the bank in an amount equal to the
funds loaned. The Company will receive interest on the deposited funds, and will
pay interest on the loaned funds at a rate of 1% in excess of the interest it
earns. The terms call for minimum drawdowns of $250,000, with repayment of each
drawdown over four years. The Company utilized $400,000 of this line in 1996.
In November 1996, the holders of warrants to purchase Common Stock,
originally issued to the managing underwriter of the Company's initial public
offering, exercised such warrants for 638,805 shares at an aggregate exercise
13
price of $3,085,447. Also in November, warrants to purchase approximately 3.5
million shares of Common Stock at exercise prices ranging from $9.02 to $15.52
per share expired. After giving effect to these events, warrants to purchase a
total of 360,775 shares of Common Stock at prices ranging from $6.00 to $9.50,
subject to adjustment, remain outstanding. These outstanding warrants have
expiration dates ranging from July 29, 1998 through June 9, 2001.
The Company had outstanding purchase commitments of approximately $3.5
million as of December 31, 1996 which were principally related to construction
of additional INOVOJECT(R) systems scheduled for delivery at various times
during 1997 as well as the production of BURSAPLEX(TM). See "Subsequent Events."
Based on its current operations, management believes that its available
cash and short-term investments, together with cash flow from operations and
existing equipment financing lines, will be sufficient to meet its foreseeable
cash requirements.
SUBSEQUENT EVENTS
On January 20, 1997, the Company received U.S. Department of
Agriculture (USDA) approval for in ovo use of the Company's viral neutralizing
factor-based vaccine for IBD in broiler chickens. The approval is specifically
for in ovo (as opposed to post-hatch) administration of the vaccine complex via
Embrex's INOVOJECT(R) systems.
Trade-named BURSAPLEX(TM), this new vaccine (previously called
BDA-Blen) is a unique combination of an existing strain of IBD vaccine and
Embrex's patented Viral Neutralizing Factor (VNF) licensed from the University
of Arkansas. VNF has been shown to render a virulent infectious bursal disease
vaccine both safe and effective in broiler chickens, thus allowing its use at or
before hatch. Some of the health benefits of this new VNF/vaccine complex
include single-dose efficacy and effective early vaccination in broilers.
Infectious bursal disease weakens a chicken's immune system, resulting in poor
growth and the potential for contracting other diseases. The disease is
widespread in the United States, Northern Europe and Asia.
FORWARD-LOOKING STATEMENTS
Information set forth in this Annual Report on Form 10-K contains various
"forward looking statements" within the meeting 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 are further
qualified by important factors that could cause the Company's actual operating
results to differ materially from those in the forward looking statements,
including without limitation the Company's dependence on certain customers; the
ability of the Company, its manufacturing and marketing partners and others to
obtain regulatory approval for products to be delivered in ovo, which are
dependent on a number of factors, including the results of trials, the
discretion of regulatory officials, and any potential changes in regulations;
the Company's ability to generate future cash flow from operations; continued
demand for the INOVOJECT (R) system; the Risk Factors described in Exhibit 99 to
this report; and other risks detailed from time to time in the Company's
Securities and Exchange Commission filings, including the Company's Forms 10-Q,
10-K, and 8-K.
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, 1996 and 1995, and
the related consolidated statements of operations, shareholders' equity
and cash flows for each of the three years in the period ended December
31, 1996. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion
on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. These 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 consolidated financial
position of Embrex, Inc. and subsidiaries at December 31, 1996 and 1995,
the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
(signature of Ernst & Young LLP)
Raleigh, North Carolina
March 19, 1997
14
Consolidated Balance Sheets
(Dollars in thousands)
December 31 December 31
1996 1995
-------------- ----------
(Restated)
ASSETS
CURRENT ASSETS
Cash and cash equivalents ................................................. $ 9,036 $ 5,354
Short-term investments (Note 2) ........................................... 876 1,972
Inventories:
Materials and supplies ................................................ 1,061 1,027
Product ............................................................... 573 600
Accounts receivable - trade ............................................... 2,313 1,787
Other current assets ...................................................... 124 108
-------- --------
TOTAL CURRENT ASSETS .................................................. 13,983 10,848
INOVOJECT(R)SYSTEMS UNDER CONSTRUCTION ........................................ 530 801
INOVOJECT(R)SYSTEMS ........................................................... 18,193 13,846
Less accumulated depreciation ............................................. (8,499) (5,271)
-------- --------
9,694 8,575
EQUIPMENT, FURNITURE AND FIXTURES ............................................. 2,607 2,274
Less accumulated depreciation ............................................. (1,695) (1,441)
-------- --------
912 833
OTHER ASSETS:
Patents and exclusive licenses of patentable technology
(net of accumulaated amortization of $58 in 1996 and $48 in 1995) ....... 125
131
Debt issuance costs (net of accumulated amortization of $209 in 1996
and $125 in 1995) ....................................................... 7 201
Other noncurrent assets ................................................... 303 400
-------- --------
TOTAL ASSETS .................................................................. $ 25,554 $ 21,789
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable .......................................................... $ 1,355 $ 1,623
Accrued expenses .......................................................... 1,087 958
Current portion of capital lease obligations .............................. 3,080 2,333
Current portion of long-term debt (Note 4) ................................ 909 0
-------- --------
TOTAL CURRENT LIABILITIES ......................................... 6,431 4,914
CAPITAL LEASE OBLIGATIONS, less current portion (Note 3) ...................... 5,806 7,172
LONG-TERM DEBT, less current portion (Note 4) ................................. 8 3,794
SHAREHOLDERS' EQUITY (Notes 5, 6 and 7)
Common Stock, $.01 par value 1996 and no stated par 1995 Authorized -
30,000,000 shares in 1996 and 15,000,000 in 1995 Issued and outstanding
- 8,043,490 and 6,714,724 shares at
December 31, 1996 and 1995, respectively .......................... 80 46,122
Additional paid-in capital ................................................ 53,742 821
Currency translation adjustments .......................................... 180 0
Accumulated deficit ....................................................... (40,693) (41,034)
-------- --------
TOTAL SHAREHOLDERS' EQUITY ............................................ 13,309 5,909
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .................................... $ 25,554 $ 21,789
======== ========
15
Consolidated Statements of Operations
- -------------------------------------------------------------------------------------------------------------------------
Year ended December 31,
- -------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts) 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
(Restated)
REVENUES
INOVOJECT(R)revenue $19,263 $12,806 $ 5,940
Product revenues 1,217 817 952
Other revenue 152 96 5
---------- --------- --------
TOTAL REVENUES 20,632 13,719 6,897
COST OF PRODUCT SALES AND INOVOJECT(R)REVENUES 10,558 8,521 5,493
---------- --------- --------
10,074 5,198 1,404
OPERATING EXPENSES
General and administrative 3,683 3,311 3,134
Sales and marketing 929 718 427
Research and development 3,673 3,416 4,271
-------- ------ -----
TOTAL OPERATING EXPENSES 8,285 7,445 7,832
-------- ------- -----
OPERATING INCOME (LOSS) 1,789 (2,247) (6,428)
OTHER INCOME (EXPENSE)
Interest income 355 389 297
Interest expense (1,608) (2,654) (579)
------- ------- -----
TOTAL OTHER EXPENSE (1,253) (2,265) (282)
------- ------- -----
INCOME (LOSS) BEFORE TAXES $ 536 $(4,512) $(6,710)
INCOME TAXES (Note 9) 195 0 0
---------------------------------------------------
NET INCOME (LOSS) $ 341 $(4,512) $(6,710)
====================================================
Net Income (loss) per share of Common Stock $0.05 $ (.71) $(1.12)
======== ========= =========
WEIGHTED AVERAGE SHARES OF
COMMON STOCK OUTSTANDING (in thousands) 7,405 6,336 6,005
======== ========= =========
See accompanying notes.
16
Consolidated Statements of Cash Flows
- -------------------------------------------------------------------------------------------------------------------
Year ended December 31,
- -------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
(Restated)
Operating Activities
Net income (loss) $ 341 $(4,512) $(6,710)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 4,433 3,443 2,018
Changes in operating assets and liabilities:
Accounts receivable, inventories and other current assets (747) (1,610) (738)
Accounts payable and accrued expenses 119 (64) 1,172
------- ------ ------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 4,146 (2,743) (4,258)
Investing Activities
Purchases of short-term investments 0 (147) (1,825)
Sales of short-term investments 1,096 0 0
Purchases of INOVOJECT(R) systems, equipment,
furniture and fixtures (4,888) (7,330) (4,434)
Additions to patents and other noncurrent assets 93 111 (354)
------- ------ ------
NET CASH USED IN INVESTING ACTIVITIES (3,699) (7,366) (6,613)
Financing Activities
Issuance of Common Stock 3,438 927 37
Issuance of long-term debt 476 6,403 0
Proceeds from capital lease obligations 2,139 7,101 4,720
Payments on capital lease obligations (2,818) (1,771) (838)
------- ------ ------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,235 12,660 3,919
------- ------ ------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,682 2,551 (6,952)
Cash and cash equivalents at beginning of period 5,354 2,803 9,755
CASH AND CASH EQUIVALENTS AT END OF PERIOD $9,036 $ 5,354 $ 2,803
======= ======= =======
Supplemental Disclosure of Cash Flow Information
Total interest paid was $1,593,000, $1,635,000 and $579,000 for the years ended
December 31, 1996, 1995, and 1994, respectively.
Total income taxes paid was $170,000, $0 and $0 for the years ended
December 31, 1996, 1995 and 1994, respectively.
Supplemental Schedule of Noncash Financing Activity:
In May 1995, American Cyanamid Company, a subsidiary of American Home Products
Corporation, converted the promissory note issued by Embrex, Inc. to American
Cyanamid in 1991. The $1.2 million note, which would have been due on May 27,
1995, was converted into 320,000 shares of Common Stock.
Also, during the 1995 period, $3.0 million of the debentures issued in May 1995,
along with $34,000 of accrued interest, were converted into 507,678 shares of
Common Stock net of unamortized debt issuance costs totaling $211,000.
During 1996, an additional $3.3 million of the debentures, along with $258,000
of accrued interest, were converted into 612,061 shares of Common Stock net of
unamortized debt issuance costs totaling $111,000.
17
Consolidated Statements of Shareholders' Equity
Additional Currency
Paid-in Translation Accumulated
(Dollars in thousands) Common Capital Adjustments Deficit Total
Stock
---------------- --------------- --------------- ---------------- -----------------
Balance at December 31, 1993 $41,587 $221 $ 0 $(29,812) $11,996
Stock issued:
Upon exercise of options 1 1
Under employee stock purchase plan 36 36
Net loss (6,710) (6,710)
------- ----- ----- -------- -------
Balance at December 31, 1994 41,624 221 0 (36,522) 5,323
Stock issued:
Upon exercise of options 134 134
Under employee stock purchase plan 80 80
Upon conversion of long-term debt
(net of issuance costs of $232) 3,554 450 4,004
Upon exercise of warrants 730 730
Warrants issued on May 1, 1995 150 150
Net loss (4,512) (4,512)
------- ------ ------ ------- -------
Balance at December 31, 1995 (as restated) 46,122 821 0 (41,034) 5,909
Stock issued:
Upon exercise of options 286 286
Under employee stock purchase plan 68 68
Upon conversion of long-term debt
(net of issuance costs of $111) 2,947 494 3,441
Upon exercise of warrants 3,084 3,084
Establishment of $.01 par value (Note 5) (52,427) 52,427
Currency translation adjustments 180 180
Net income 341 341
------- ------ ------ ------- -------
Balance at December 31, 1996 $ 80 $ 53,742 $ 180 $(40,693) $13,309
======== ======= ======= ======= =======
18
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 vaccination of newly hatched broiler chicks. Embrex also develops and
markets patented pharmaceutical and biological products to improve bird health,
reduce bird production costs and provide economic value to the global poultry
industry.
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, foreign operations account
for less than 10% 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).
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 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 methods over the estimated useful lives of the
assets placed in service.
19
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 over the period of the exclusive license agreements or
patents using the straight-line method.
Foreign Currency Translation
All assets and liabilities in the balance sheets of the Company's foreign
subsidiary, Embrex Europe Limited, 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 on a straight-line basis 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
Income tax expense includes U.S. and international income taxes. Certain items
of income and expense are not reported in tax returns and financial statements
in the same year. The tax effects of these differences are reported as deferred
income taxes. Tax credits are accounted for as a reduction of tax expense in the
year in which the credits reduce taxes payable.
Net Income (Loss) Per Share
Net income (loss) per share is computed using the weighted average number of
shares of Common Stock outstanding. Common equivalent shares from stock options
and warrants are excluded from the computation during periods of net loss
because their effect is antidilutive. For all periods presented, the difference
between primary and fully diluted net income per share is not significant.
Use of Estimates
20
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") and Perdue Farms Inc. ("Perdue") accounted for 33
percent and 11 percent of consolidated 1996 revenues, respectively. Based on the
number of birds produced in 1996, Tyson and Perdue accounted for approximately
22 and 8 percent of the broilers grown in the U.S., respectively. In 1995, Tyson
and Perdue Farms, Inc. individually accounted for greater than 10 percent of
total revenues.
Sources of Supply
The Company has developed a strategic relationship with a single 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) installations and revenues from those
installations.
The Company has granted Select Laboratories, Inc. ("Select"), a division of
Rhone Merieux, exclusive rights to manufacture bursal disease vaccines
containing Embrex's proprietary VNF product for Embrex to market in the North
American, South American and Asian regions. Embrex has also granted Arthur
Webster Pty. Ltd. ("Webster") exclusive rights to manufacture bursal disease
vaccines containing the Company's VNF product to be marketed in Europe,
the Middle East and Africa. Additionally, the Company has two contract
suppliers of its VNF product. The manufacture of the bursal disease vaccines
being produced by Select and Webster and the Company's VNF product generally
must be performed in licensed facilities and/or under regulatory approved
methods. Although there are other manufacturers who are capable of
manufacturing bursal disease products and producing products such as VNF, 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.
Long-Lived Assets
The Company adopted Financial Accounting Standards Board ("FASB") Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" ("FASB 121") in the first quarter of 1996. The
adoption for FASB 121 had no material effect on the financial statements in
1996.
21
Reclassification
Certain 1995 and 1994 amounts in the accompanying financial statements have been
reclassified to conform to the 1996 presentation. These reclassifications had no
effect on previously reported net loss or shareholders' equity.
2. Short-Term Investments
Management determines the appropriate classification of its investments in debt
securities at the time of purchase and reevaluates such determination at each
balance sheet date. Debt securities for which the Company has both the intent
and ability to hold to maturity are classified as held to maturity. These
securities are carried at amortized cost. At December 31, 1996, the Company had
no investments that qualified as trading or available for sale.
At December 31, 1996, the Company's investments in debt securities were
classified as cash and cash equivalents and short-term investments. The Company
maintains cash and cash equivalents and short-term investments principally of
United States treasury securities and commercial paper with a maturity date less
than twelve months with various financial institutions. The Company performs
periodic evaluations of the relative credit standing of those financial
institutions that are considered in the Company's investment strategy which is
designed to limit exposure to any one institution.
The following is a summary of short-term investments by balance sheet
classification at December 31:
1996 1995
======= ============
Short-term Investments:
Commercial Paper $ 251,000 $ 749,000
Repurchase Agreements 625,000 0
U.S. Treasury Obligations 0 1,223,000
--------- ------------
$ 876,000 $1,972,000
========= ============
The Company's short-term investment balances are maintained in accounts at
various financial institutions. In connection with the secured line of
credit, the Company has deposited $417,000 as a compensating cash balance
with the lender.
22
3. Leases
At December 31, 1996 and 1995, the Company had assets totaling $13.9 million and
$13.1 million, respectively, financed by capital lease agreements which expire
through October 2000. Accumulated depreciation and amortization includes $8.2
million and $5.1 million of amortization related to these assets at December 31,
1996 and 1995, respectively. Amortization of assets financed by capital leases
is included with depreciation expense. As of December 31, 1996, the Company has
used $9.2 million ($2.1 million in 1996 and $7.1 million in 1995) of the $11.2
million capital lease financing closed in 1995 to fund construction of
INOVOJECT(R) systems principally under contract with North American customers in
the United States. At December 31, 1996, the Company had available $2.0 million
of aggregate unutilized capital financing capacity for use in the construction
of INOVOJECT(R) systems.
The Company leases its principal facilities under an operating lease extending
through March 2002. The company has the option to cancel the operating lease
agreement with the payment of a $180,000 penalty. Total rent expense was
$334,000, $426,000, and $307,000 for the years ended December 31, 1996, 1995,
and 1994, respectively.
At December 31, 1996, the Company's minimum future commitments under capital and
operating leases were as follows:
Operating Capital
Leases Leases
1997 $359,000 $4,083,000
1998 279,793 3,234,000
1999 226,807 2,947,000
2000 213,342 615,000
2001 219,618 -0-
Beyond 55,296 -0-
----------- -----------
Total $ 1,353,856 $10,879,000
===========
Less amounts representing interest (1,993,000)
-----------
Present value of future minimum
lease payments $8,886,000
==========
23
4. Long-Term Debt
On May 1, 1995, the Company closed on a private placement offering of
convertible debentures ("the debentures") resulting in net proceeds to the
Company of $5.4 million (as adjusted for the August 1995 rescission of the
issuance of $225,000 of the debentures). The debentures are payable on May 1,
1997. Through June 13, 1995, the holders of the debentures were entitled to
convert the debentures into Common Stock of the Company at a conversion price
equal to the average market price at the time of issuance. Commencing on June
14, 1995, the holders of the debentures are entitled to convert the debentures
into Common Stock of the Company at a conversion price of the lesser of the
market price at the time of issuance ($5.00 per share) or 85 percent of the
average closing bid price of the Company's Common Stock for the five trading
days ending on the conversion date. The debentures accrue interest, payable at
maturity, at a rate of 8 percent per annum. The accrued interest is convertible
into Common Stock of the Company at the same conversion price as the debenture
principal. The Company has the right to demand conversion of the debentures and
any accrued interest after April 30, 1996. Additionally, at any time, the
Company has the right to redeem the debentures for cash equal to the closing bid
of the Company's Common Stock at the date of redemption multiplied by the
underlying shares into which the debentures would have been convertible. In
conjunction with this offering, the Company incurred issuance costs totaling
$540,000 and recorded $1.0 million of interest expense related to the 15%
discount from market upon conversion (See Note 11). The issuance costs are being
amortized as a component of interest expense over the term of the debentures.
In 1995, $3.0 million of the debentures' principal and related discount was
converted into 517,910 shares of Common Stock, net of unamortized debt issuance
costs totaling $215,000. During 1996, an additional $3.3 million debentures and
related discount, along with $258,000 of accrued interest were converted into
612,061 shares of Common Stock, net of unamortized debt issuance costs totaling
$111,000.
As part of its compensation for the sale of the convertible debentures, the
Company's placement agent received a 6.5 percent commission, which is included
in the $540,000 total issuance costs, and warrants to purchase 96,000 shares of
Common Stock at a price of $6.00 per share. The estimated value of these
warrants, $150,600, has been recorded as additional paid-in capital, while their
cost has been included within the $540,000 total issuance costs discussed above.
On May 29, 1991, the Company issued a four-year convertible term note (the
"note") to American Cyanamid Company, now a subsidiary of American Home Products
Corporation, in exchange for $1.2 million. During May 1995, at the election of
American Cyanamid, the
24
note was converted into 320,000 shares of Common Stock of the Company.
Contemporaneous with the conversion, the Company paid to American Cyanamid
$160,000 of accrued interest due on the note.
25
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, 1996, the Company had reserved a total of 2,006,970 shares of
its Common Stock for future issuance as follows:
For conversion of debentures 96,492
For exercise of warrants to purchase Common Stock 390,775
For exercise of Common Stock options 1,456,373
For possible future issuance to employees and others
under stock option and employee stock purchase plans 63,330
---------
Total reserved 2,006,970
=========
At December 31, 1996, the Company had issued and outstanding warrants to
purchase Common Stock as follows:
Date through
Exercise Price Shares Reserved for Which Warrants
Per Share Exercise of Warrants are Exercisable
$ 8.07 188,197 7/28/98
$ 9.02 31,578 1/28/99
$ 9.50 30,000 12/31/00
$ 9.50 15,000 6/9/01
$ 6.00 96,000 4/30/00
$ 7.28 30,000 10/30/01
-------
390,775
=======
26
6. Stock Option Plans
The Company's stock option plans provide for option grants designated as either
nonqualified 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 U.S. 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.
Stock option information with respect to all of the Company's stock option plans
follows:
Number Option Price Range Expiration
of Shares per Share Date
Balance at December 31, 1993, outstanding options 528,588 $ 2.00 to $ 8.75 1998-2003
Granted 194,910 $ 6.125 to $ 7.00 2004
Exercised (431) $ 2.00
Canceled (9,665) $ 2.00 to $ 6.75
---------
Balance at December 31, 1994, outstanding options 713,402 $ 2.00 to $ 8.75 1998-2004
Granted 314,370 $5.875 to $ 6.50 2005
Exercised (59,444) $ 2.00 to $7.875
Canceled (59,207) $ 2.00 to $ 8.75
---------
Balance at December 31, 1995, outstanding options 909,121 $ 2.00 to $8.375 1998-2005
Granted 111,980 $6.125 to $7.625 2006
Exercised (66,873) $2.00 to $7.00
Canceled (87,814) $6.125 to $7.875
---------
Balance at December 31, 1996, outstanding options 866,414 $2.00 to $8.375 1998-2006
=========
At December 31, 1996, options to purchase 534,188 shares of Common Stock were
exercisable at prices ranging from $2.00 to $8.375 per share.
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.
27
The Company's 1996 Amendment to its 1993 Incentive Stock Option Plan increases
the authorized grant of options to company personnel from 500,000 shares of
common stock up to 1.2 million shares. All options granted have 10 year
terms and vest and become fully exercisable at the end of 4 years of
continued employment.
Proforma information regarding net loss and loss 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 for 1996 and 1995:
1996 1995
Risk free interest rate 6.42 6.67
Dividends -- --
Volatility factor .421 .421
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 proforma disclosures, the estimated fair value of the options is
amortized to expense over the options' vesting period. The Company's pro forma
information follows:
December 31
1996 1995
Pro forma net income (loss) $51,513 $(4,574,000)
Pro forma income (loss) per share $ .007 $ (.72)
Because SFAS 123 is applicable only to options granted subsequent to December
31, 1994, its proforma effect will not be fully reflected until 1997.
Exercise prices for options outstanding as of December 31, 1996
ranged from $5.875 to $8.75.
28
The weighted average remaining contractual life of those options is 8.21
years. The weighted average exercisable price of outstanding options at December
31, 1996 is $6.30.
29
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 at a price to be determined by the Compensation Committee
of the Board, but not less than 85 percent of the lower of the fair market value
as of the beginning or end of the twelve-month offering period. Contributions
are limited to 20 percent of an employee's compensation. Up to 100,000 shares of
Common Stock may be issued under the Purchase Plan.
Under the Purchase Plan, during 1996, 1995 and 1994, 11,028, 17,041 and 7,556
shares of Common Stock, respectively, were purchased.
30
8. 401(k) Retirement Savings Plan
The Company has a 401(k) plan which covers all employees upon employment who are
at least 18 years of age. Employer contributions are voluntary at the discretion
of the Company. There were no Company contributions for the years ended December
31, 1996, 1995, and 1994.
9. Income Taxes
The components of income tax expense for the year ended December 31, 1996
are as follows:
Current:
Federal $ 45,000
State 30,000
Foreign 120,000
---------
$195,000
=========
The Company's consolidated effective tax rate differed from the statutory
rate as set forth below for the year ended December 31, 1996:
Federal taxes at statutory rate $182,000
State and local income taxes,
net of Federal benefit 30,000
Change in valuation allowance (255,000)
Non-deductible expenses 220,000
Foreign losses for which no
benefit has been recognized 114,000
Utilization of net operating
loss carryforwards (486,000)
Alternative minimum and
foreign withholding taxes 165,000
Other 225,000
--------
$ 195,000
========
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,
1996 1995
Deferred tax assets:
Book over tax depreciation $790,000 $704,000
Net operating loss carry forwards 12,800,000 13,330,000
Research and experimental
tax credit carry forwards 1,725,000 1,661,000
Charitable contributions
carryforward 16,000 11,000
Other 170,000 61,000
----------- ----------
Total deferred tax assets 15,501,000 15,767,000
Valuation allowance for
deferred tax assets (15,501,000) (15,767,000)
------------ ------------
Net deferred tax assets $ 0 $ 0
============ ============
During 1996 and 1995, the valuation allowance (decreased) increased by
($255,000) and $1,112,000, respectively.
At December 31, 1996, the Company had net operating loss carry forwards for
federal income tax purposes of approximately $34 million which are available to
offset future taxable income. These net operating loss carry forwards expire
during the years 2000 through 2010. As a result of the changes in ownership
percentages which occurred with the 1991 Initial Public Offering (IPO), the
future utilization of the net operating loss carry forwards incurred prior to
the 1991 IPO is limited to approximately $2.1 million per year. Any loss
carryforward amounts exceeding the limitation can be carried forward to future
years within the carryforward period. The net operating loss carry forwards
incurred
31
subsequent to the 1991 IPO are not subject to these change in ownership
limitations.
In addition, the Company has Research and Experimental Tax Credit Carry forwards
totaling approximately $1.6 million which are available to offset future federal
income taxes. These credits expire during the years 2000 through 2012.
32
10. Commitments
As of December 31, 1996 the Company had outstanding purchase agreements of
approximately $3.5 million for the production of BURSAPLEX(TM), $205,000
for VNF, as well as materials and supplies for the construction and maintenance
of INOVOJECT(R) systems.
33
11. Restatement
At the annual meeting of the American Institute of Certified Public Accountants
(AICPA) in January 1997 and at the March 1997 staff meeting of the Emerging
Issues Task Force of the Financial Accounting Standards Board (FASB), the
Securities and Exchange Commission staff stated that a charge to income is
appropriate in situations where a registrant has issued debt securities
convertible to Common Stock at the lower of a conversion rate fixed at issuance
or a fixed discount to the Common Stock's market price at the date of
conversion.
In accordance with the SEC's position, the Company has restated its
1995 financial statements to record additional interest expense of
$1.1 million related to the conversion feature at a 15% discount included in
the 1995 debentures (see Note 4). The restatement resulted in an increase
of $1.0 million in the previously reported 1995 net loss and an increase in
1995 net loss per share from $.55 per share to $.71 per share. In addition,
at December 31, 1995, long-term debt was increased by $569,000 and shareholders
equity was decreased by $569,000 to reflect the conversion discount related to
outstanding debentures that had not been converted.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
34
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 I: Election of Directors," respectively), with respect to the
Annual Meeting of Shareholders to be held on May 15, 1997, 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 15, 1997, 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 15, 1997, to be filed with the Securities and Exchange Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
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. All financial statement schedules normally required under
Regulation S-X are omitted as the required information is inapplicable.
Report of Independent Auditors
Financial Statements
Consolidated Balance Sheets at
December 31, 1995 and 1996
Consolidated Statements of Operations
for each of the three fiscal years ended
December 31, 1994, 1995 and 1996
Consolidated Statements of Cash Flows
for each of the three fiscal years ended
December 31, 1994, 1995 and 1996
Consolidated Statements of Shareholders'
Equity for each of the three fiscal
years ended December 31, 1994, 1995 and 1996
Notes to Consolidated Financial Statements
35
(a)(2). The financial statements of the Company's Employee Stock
Purchase Plan listed below are filed herewith.
Report of Independent Auditors
Financial Statements
Statements of Net Assets Available for Plan
Benefits at December 31, 1995 and 1996
Statements of Changes in Net Assets Available
for Plan Benefits for the three years ended
December 31, 1996
36
Notes to Financial Statements
(a)(3). The exhibits listed below are filed as part of this report.
Executive compensation plans and arrangements are listed in Exhibits 10.13
through 10.31.
Exhibits Description
3.1(1) Restated Articles of Incorporation
3.2(2) Articles of Amendment to Articles of Incorporation effective March 21, 1996
3.3(3) Bylaws of the Company
4.1 Reference is made to Exhibits 3.1, 3.2 and 3.3
4.2 Specimen of Common Stock Certificate
4.3(4) Notices to holders of outstanding warrants regarding adjustments in warrant terms resulting
from Regulation S private placement
4.4(5) Form of Registration Rights Agreement
4.5(4) Form of Regulation S Securities Subscription Agreement
4.6(4) Form of Embrex 8% Convertible Debenture due May 1, 1997
4.7(4) Warrant to Purchase Common Stock of Embrex issued to Schwartz Investments, Inc.
4.8(6) Rights Agreement dated as of March 21, 1996 between Embrex and Branch Banking and Trust
Company, as Rights Agent
10.1(3) 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(3) Form of Stock Purchase Warrant exercisable for the purchase of 180,003 shares of Common Stock
10.3(3) 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
10.4(3) Collaborative Research Agreement dated January 17, 1989 between Embrex and the University of
Arkansas
10.5(3) License Agreement dated October 1, 1988, between
Embrex and the National Technical Information
Service, a primary operating unit of the United
States Department of Commerce
37
Exhibits Description
10.6(3) 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
10.7 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.)
10.8 Fifth Amendment of Lease dated December 13, 1996 between the Company and Glaxo Wellcome Inc.
(as successor in interest to Glaxo Inc.)
10.9(3) Facility Agreement dated March 1, 1991, between Embrex and Mississippi Agriculture and
Forestry Experiment Station, Mississippi State University
10.10(3) 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
10.11(3) 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
10.12(3) 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
10.13(3) 1988 Incentive Stock Option Plan and form of Incentive Stock Option Agreement
10.14(3) 1989 Nonstatutory Stock Option Plan and form of Nonstatutory Stock Option Agreement
10.15(3) 1991 Nonstatutory Stock Option Plan and form of Nonstatutory Stock Option Agreement
10.16(7) Incentive Stock Option and Nonstatutory Stock Option Plan and forms of Stock Option
Agreements - June 1993
10.17(8) Amendment dated May 16, 1996 to Incentive Stock Option and Nonstatutory Stock Option Plan -
June 1993
10.18 Amended and Restated Employee Stock Purchase Plan
10.19(3) Employment Agreement dated November 15, 1989, between Embrex and Randall L. Marcuson
10.20 Amendment to Employment Agreement dated May 21, 1996 between Embrex and Randall L. Marcuson
10.21 Change In Control Severance Agreement dated May 21, 1996 between Embrex and Randall L.
Marcuson
10.22(3) Employment Agreement dated October 16, 1989, between Embrex and Catherine A. Ricks
38
Exhibits Description
10.23 Change In Control Severance Agreement dated May 21, 1996 between Embrex and Catherine A. Ricks
10.24(2) General Provisions to Employment Agreement between Embrex and Brian V. Cosgriff dated August
18, 1995
10.25 Charge In Control Severance Agreement dated May 21, 1996 between Embrex and Brian V. Cosgriff
10.26(2) Terms and Conditions of Employment between Embrex Europe Limited and David M. Baines dated
May 12, 1994
10.27 Change In Control Severance Agreement dated June 9, 1996 between Embrex and David M. Baines
10.28 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
10.29 Change In Control Severance Agreement dated September 9, 1996 between Embrex and Don T.
Seaquist
10.30 Letter Agreement and General Provisions to Employment Agreement dated August 26, 1996 between
Embrex and Rick L. Ryan and Amendment to Employment Agreement dated August 26, 1996 between
Embrex and Rick L. Ryan
10.31 Change In Control Severance Agreement dated August 26, 1996 between Embrex and Rick L. Ryan
10.32(3) Shareholders' Agreement dated August 14, 1991 by and among Embrex, Advent Euroventures
Limited Partnership, and Plant Resource Venture Fund II Limited Partnership
10.33(9) INOVOJECT(R)Egg Injection System Lease, Limited License, Supply and Service Agreement dated
May 4, 1993 between Embrex and Tyson Foods, Inc.
10.34(10) 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
10.35(10) 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
10.36(10) Agreement to Issue Warrant dated January 28, 1994 between Embrex and Aberlyn Capital
Management Limited Partnership
10.37(10) Common Stock Purchase Warrant issued to Aberlyn Capital Management Limited Partnership
10.38(10) Agreement to Issue Warrant dated January 28, 1994 between Embrex and Aberlyn Holding Company,
Inc.
39
Exhibits Description
10.39(10) Common Stock Purchase Warrant issued to Aberlyn Holding Company, Inc.
10.40(11) Master Equipment Lease Agreement dated as of December 7, 1994 between Financing for Science
International, Inc. and Embrex with a Consent to Assignment of Equipment Lease Agreement,
Security Agreement and Rental Schedule attached
10.41(11) License Agreement dated as of December 7, 1994 between Financing for Science International,
Inc. and Embrex with Sublicense Agreement attached
10.42(11) Common Stock Purchase Warrant dated January 17, 1995 issued to Financing for Science
International, Inc.
10.43(11) Agreement for Sale of Equipment and Rights Under User Agreement dated as of December 7, 1994
between Financing for Science International, Inc. and Embrex
10.44(4) Letter of Agreement for $6.0 million Convertible Regulation S Private Placement by and
between the Company and Swartz Investments, Inc., as placement agent
10.45(2) Limited License and Supply Agreement dated as of July 20, 1995 between Embrex and Webster
10.46 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
10.47(2) Agreement dated as of January 22, 1996 between Embrex and Select
10.48(2) Letter Agreement dated as of January 22, 1996 between Select and Embrex
10.49(2) License dated as of January 22, 1996 granted by Select to Embrex
10.50(2) Commitment letter accepted June 14, 1995 between Embrex and Financing for Science
International, Inc. for $2.0 million capital lease financing facility
10.51(2) Stock Purchase Warrant dated June 9, 1995 issued to Financing for Science International, Inc.
10.52(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
10.53(2) License Agreement dated October 30, 1995 between Embrex and Lease Management Services, Inc.
10.54(2) Sublicense Agreement dated as of October 30, 1995 between Embrex and Lease Management
Services, Inc.
10.55(2) Movable Hypothec on Equipment and Contracts dated as of October 30, 1995 between Embrex and
Lease Management Services, Inc.
10.56(2) Warrant to Purchase 30,000 Shares of Common Stock dated October 30, 1995 issued to Lease
Management Services, Inc.
40
Exhibits Description
10.57(2) Intercreditor Agreement dated as of October 31, 1995 among Financing for Science
International, Inc., Lease Management Services, Inc., and Embrex.
10.58 Embrex Europe Limited Loan Agreement dated April 3, 1996
21 Subsidiaries
23 Consent of Ernst & Young LLP to the inclusion of
their report with respect to the financial statements
of the Company in this Form 10-K and the
incorporation by reference of such report into the
Registration Statement on Form S-3 (No. 333-18231),
as filed with the Securities and Exchange Commission
on December 19, 1996, and into the Registration
Statements under the Securities Act of 1933 on Form
S-8 (Registration No. 33-51582 and No. 33-63318), as
filed with the Securities and Exchange Commission
on September 1, 1992 and May 25, 1993, 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 with respect to the
financial statements of the Embrex, Inc. Employee
Stock Purchase Plan included in this Form 10-K.
24 Powers of Attorney
27 Financial Data Schedule
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 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
(4) Exhibit to the Company's Form 10-Q as filed with the
Securities and Exchange Commission for the three months ended
June 30, 1995 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 months ended
March 31, 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 Form 10-K as filed with the
Securities and Exchange Commission for the fiscal year ending
December 31, 1992 and incorporated herein by reference
(8) 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
41
(9) Exhibit to the Company's Form 10-QSB, as amended, as filed
with the Securities Exchange Commission for the three months
ended March 31, 1993 and incorporated herein by reference
(10) 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
(11) 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
(b). No reports on Form 8-K were filed during the last quarter of the fiscal
year ended December 31, 1996.
42
SIGNATURES
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.
By: /s/ Randall L. Marcuson
Date: March 27, 1997 Randall L. Marcuson
President and Chief
Executive Officer
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
President, Chief Executive Officer, March 27, 1997
/s/ Randall L. Marcuson
Randall L. Marcuson and Director
/s/ Don T. Seaquist
Don T. Seaquist Vice President, Finance March 27, 1997
and Administration (Principal
Financial and Accounting Officer)
* Director March 27, 1997
- ------------------------------------
Charles E. Austin
* Chairman of the March 27, 1997
- ------------------------------------ Board of Directors
Lester M. Crawford, D.V.M. Ph.D.
* Director March 27, 1997
- ------------------------------------
Kenneth N. May, Ph.D.
* Director March 27, 1997
- ------------------------------------
Stephen Hartogensis
* Director March 27, 1997
- ------------------------------------
Arthur M. Pappas
/s/ Randall L. Marcuson
* By: Randall L. Marcuson, as Attorney-in-Fact
43
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, 1996
and 1995, and the related statement of changes in net assets available for plan
benefits for each of the three years in the period ended December
31, 1996. 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 generally accepted auditing
standards. 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, 1996 and 1995, and the changes
in net assets available for plan benefits for each of the three years in the
period ended December 31, 1996 in conformity with generally accepted
accounting principles.
Ernst & Young LLP
(signature of Ernst & Young LLP)
Raleigh, North Carolina
March 19, 1997
44
STATEMENTS OF NET ASSETS AVAILABLE FOR PLAN BENEFITS
EMBREX, INC. EMPLOYEE STOCK PURCHASE PLAN
At December 31,
1996 1995
Receivable from Company $ 26,077 $ 37,100
-------- --------
Net assets available for Plan benefits $ 26,077 $ 37,100
======== ========
See accompanying notes.
45
STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS
EMBREX, INC. EMPLOYEE STOCK PURCHASE PLAN
Years Ended December 31,
1996 1995 1994
---------------------------------------
Employee contributions $ 79,487 $ 90,880 $ 71,350
Deductions:
Purchases of Common Stock 59,116 79,739 36,271
Withdrawals 31,394 15,862 10,904
------- ------ -------
90,510 95,601 47,175
------ ------ ------
New (decrease) increase (11,023) (4,721) 24,175
Net assets available for Plan benefits at
beginning of period 37,100 41,821 17,646
------ ------ ------
Net assets available for Plan benefits at $26,077 $37,100 $41,821
end of period ======= ====== =======
Shares of Common Stock purchased 11,028 17,041 7,556
during year ======= ====== =======
46
EMBREX, INC. EMPLOYEE STOCK PURCHASE PLAN
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
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 percent of the lower of the fair market values as of the beginning or end of
the twelve month offering period.
Contributions are limited to 20 percent 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.
Exhibits Description
3.1(1) Restated Articles of Incorporation
3.2(2) Articles of Amendment to Articles of Incorporation effective March 21, 1996
3.3(3) Bylaws of the Company
4.1 Reference is made to Exhibits 3.1, 3.2 and 3.3
4.2 Specimen of Common Stock Certificate
4.3(4) Notices to holders of outstanding warrants regarding adjustments in warrant terms resulting
from Regulation S private placement
4.4(5) Form of Registration Rights Agreement
4.5(4) Form of Regulation S Securities Subscription Agreement
4.6(4) Form of Embrex 8% Convertible Debenture due May 1, 1997
4.7(4) Warrant to Purchase Common Stock of Embrex issued to Schwartz Investments, Inc.
4.8(6) Rights Agreement dated as of March 21, 1996 between Embrex and Branch Banking and Trust
Company, as Rights Agent
10.1(3) 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(3) Form of Stock Purchase Warrant exercisable for the purchase of 180,003 shares of Common Stock
10.3(3) 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
10.4(3) Collaborative Research Agreement dated January 17, 1989 between Embrex and the University of
Arkansas
10.5(3) License Agreement dated October 1, 1988, between
Embrex and the National Technical Information
Service, a primary operating unit of the United
States Department of Commerce
47
Exhibits Description
10.6(3) 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
10.7 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.)
10.8 Fifth Amendment of Lease dated December 13, 1996 between the Company and Glaxo Wellcome Inc.
(as successor in interest to Glaxo Inc.)
10.9(3) Facility Agreement dated March 1, 1991, between Embrex and Mississippi Agriculture and
Forestry Experiment Station, Mississippi State University
10.10(3) 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
10.11(3) 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
10.12(3) 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
10.13(3) 1988 Incentive Stock Option Plan and form of Incentive Stock Option Agreement
10.14(3) 1989 Nonstatutory Stock Option Plan and form of Nonstatutory Stock Option Agreement
10.15(3) 1991 Nonstatutory Stock Option Plan and form of Nonstatutory Stock Option Agreement
10.16(7) Incentive Stock Option and Nonstatutory Stock Option Plan and forms of Stock Option
Agreements - June 1993
10.17(8) Amendment dated May 16, 1996 to Incentive Stock Option and Nonstatutory Stock Option Plan -
June 1993
10.18 Amended and Restated Employee Stock Purchase Plan
10.19(3) Employment Agreement dated November 15, 1989, between Embrex and Randall L. Marcuson
10.20 Amendment to Employment Agreement dated May 21, 1996 between Embrex and Randall L. Marcuson
10.21 Change In Control Severance Agreement dated May 21, 1996 between Embrex and Randall L.
Marcuson
10.22(3) Employment Agreement dated October 16, 1989, between Embrex and Catherine A. Ricks
48
Exhibits Description
10.23 Change In Control Severance Agreement dated May 21, 1996 between Embrex and Catherine A. Ricks
10.24(2) General Provisions to Employment Agreement between Embrex and Brian V. Cosgriff dated August
18, 1995
10.25 Charge In Control Severance Agreement dated May 21, 1996 between Embrex and Brian V. Cosgriff
10.26(2) Terms and Conditions of Employment between Embrex Europe Limited and David M. Baines dated
May 12, 1994
10.27 Change In Control Severance Agreement dated June 9, 1996 between Embrex and David M. Baines
10.28 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
10.29 Change In Control Severance Agreement dated September 9, 1996 between Embrex and Don T.
Seaquist
10.30 Letter Agreement and General Provisions to Employment Agreement dated August 26, 1996 between
Embrex and Rick L. Ryan and Amendment to Employment Agreement dated August 26, 1996 between
Embrex and Rick L. Ryan
10.31 Change In Control Severance Agreement dated August 26, 1996 between Embrex and Rick L. Ryan
10.32(3) Shareholders' Agreement dated August 14, 1991 by and among Embrex, Advent Euroventures
Limited Partnership, and Plant Resource Venture Fund II Limited Partnership
10.33(9) INOVOJECT(R)Egg Injection System Lease, Limited License, Supply and Service Agreement dated
May 4, 1993 between Embrex and Tyson Foods, Inc.
10.34(10) 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
10.35(10) 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
10.36(10) Agreement to Issue Warrant dated January 28, 1994 between Embrex and Aberlyn Capital
Management Limited Partnership
10.37(10) Common Stock Purchase Warrant issued to Aberlyn Capital Management Limited Partnership
10.38(10) Agreement to Issue Warrant dated January 28, 1994 between Embrex and Aberlyn Holding Company,
Inc.
49
Exhibits Description
10.39(10) Common Stock Purchase Warrant issued to Aberlyn Holding Company, Inc.
10.40(11) Master Equipment Lease Agreement dated as of December 7, 1994 between Financing for Science
International, Inc. and Embrex with a Consent to Assignment of Equipment Lease Agreement,
Security Agreement and Rental Schedule attached
10.41(11) License Agreement dated as of December 7, 1994 between Financing for Science International,
Inc. and Embrex with Sublicense Agreement attached
10.42(11) Common Stock Purchase Warrant dated January 17, 1995 issued to Financing for Science
International, Inc.
10.43(11) Agreement for Sale of Equipment and Rights Under User Agreement dated as of December 7, 1994
between Financing for Science International, Inc. and Embrex
10.44(4) Letter of Agreement for $6.0 million Convertible Regulation S Private Placement by and
between the Company and Swartz Investments, Inc., as placement agent
10.45(2) Limited License and Supply Agreement dated as of July 20, 1995 between Embrex and Webster
10.46 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
10.47(2) Agreement dated as of January 22, 1996 between Embrex and Select
10.48(2) Letter Agreement dated as of January 22, 1996 between Select and Embrex
10.49(2) License dated as of January 22, 1996 granted by Select to Embrex
10.50(2) Commitment letter accepted June 14, 1995 between Embrex and Financing for Science
International, Inc. for $2.0 million capital lease financing facility
10.51(2) Stock Purchase Warrant dated June 9, 1995 issued to Financing for Science International, Inc.
10.52(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
10.53(2) License Agreement dated October 30, 1995 between Embrex and Lease Management Services, Inc.
10.54(2) Sublicense Agreement dated as of October 30, 1995 between Embrex and Lease Management
Services, Inc.
10.55(2) Movable Hypothec on Equipment and Contracts dated as of October 30, 1995 between Embrex and
Lease Management Services, Inc.
10.56(2) Warrant to Purchase 30,000 Shares of Common Stock dated October 30, 1995 issued to Lease
Management Services, Inc.
50
Exhibits Description
10.57(2) Intercreditor Agreement dated as of October 31, 1995 among Financing for Science
International, Inc., Lease Management Services, Inc., and Embrex.
10.58 Embrex Europe Limited Loan Agreement dated April 3, 1996
21 Subsidiaries
23 Consent of Ernst & Young LLP to the inclusion of
their report with respect to the financial statements
of the Company in this Form 10-K and the
incorporation by reference of such report into the
Registration Statement on Form S-3 (No. 333-18231),
as filed with the Securities and Exchange Commission
on December 19, 1996, and into the Registration
Statements under the Securities Act of 1933 on Form
S-8 (Registration No. 33-51582 and No. 33-63318), as
filed with the Securities and Exchange Commission on
September 1, 1992 and May 25, 1993, 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 with respect to the financial statements
of the Embrex, Inc. Employee Stock Purchase Plan
included in this Form 10-K.
24 Powers of Attorney
27 Financial Data Schedule
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 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
(4) Exhibit to the Company's Form 10-Q as filed with the
Securities and Exchange Commission for the three months ended
June 30, 1995 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 months ended
March 31, 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 Form 10-K as filed with the
Securities and Exchange Commission for the fiscal year ending
December 31, 1992 and incorporated herein by reference
(8) 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
51
(9) Exhibit to the Company's Form 10-QSB, as amended, as filed
with the Securities Exchange Commission for the three months
ended March 31, 1993 and incorporated herein by reference
(10) 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
(11) 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
52