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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, 1998 Commission file number 000-19495
Embrex, Inc.
(Exact name of registrant as specified in its charter)
North Carolina 56-1469825
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
1035 Swabia Court, Durham, North Carolina 27703
(Address of principal executive offices) (Zip Code)
(919) 941-5185
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.01 Par Value Per Share (and Rights Attached Thereto)
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes_ X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of February 26, 1999, the aggregate market value of the voting stock held by
non-affiliates was $37.3 million, based on a price per common share of $4.625 at
the close of business on that date.
As of February 26, 1999, there were 8,302,372 shares of the registrant's common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Document Where Incorporated
- -------- ------------------
Proxy Statement with respect to the Annual Part III
Meeting of Shareholders to be held on May 20,
1999, to be filed with the Securities
and Exchange Commission
INDEX
PAGE
----
PART I
ITEM 1. BUSINESS ................................................... 1
ITEM 2. PROPERTIES ................................................. 8
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 ........................................ 11
ITEM 6. SELECTED FINANCIAL DATA .................................... 12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ........................ 12
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK . 16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ................ 17
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE ........................ 31
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ......... 32
ITEM 11. EXECUTIVE COMPENSATION ..................................... 32
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT ................................................. 32
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ............. 32
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K ................................................ 33
SIGNATURES ................................................................ 40
PART I
ITEM 1. BUSINESS
GENERAL
Embrex, Inc. ("Embrex" or the "Company") develops and markets biological
delivery technology and biological products to increase the productivity and
profitability of the global poultry industry. The Company was incorporated in
1985 in North Carolina.
Embrex has developed and commercialized the INOVOJECT(R) system, a proprietary,
automated in-the-egg injection system which can inoculate 20,000 to 50,000 eggs
per hour and eliminates the need for manual, post-hatch injection of certain
vaccines. The INOVOJECT(R) system is designed to inject vaccines and other
compounds in precisely calibrated volumes into targeted compartments within the
egg. Embrex markets the INOVOJECT(R) system to commercial poultry producers,
charging a fee for each egg injected.
In addition to the INOVOJECT(R) system, Embrex has developed and is marketing
its Viral Neutralizing Factor ("VNF(R)") antibody, useful in the development of
certain avian vaccines. The Company also has developed and is marketing
Bursaplex(R), a VNF(R)-based vaccine for protection against avian Infectious
Bursal Disease ("IBD"). Embrex also is developing various other proprietary
pharmaceutical and biological products to improve bird health, reduce bird
production costs and provide other economic benefits to the poultry industry.
These products are in various stages of development, and some are being
developed in collaboration with major drug companies, the United States
Department of Agriculture (the "USDA"), and several leading universities in the
field of avian science. These products are being designed to be delivered
through the INOVOJECT(R) system, and some may also be administered via injection
after hatching.
EXISTING PRODUCTS
INOVOJECT(R) Patented Egg Injection System
Embrex has developed and commercialized a proprietary, automated in-the-egg
injection system which can inoculate 20,000 to 50,000 eggs per hour and
eliminates the need for manual, post-hatch injection of certain vaccines. This
proprietary system, called INOVOJECT(R), is designed to inject vaccines and
other compounds in precisely calibrated volumes into targeted compartments
within the egg. Embrex markets the INOVOJECT(R) system to commercial poultry
producers, charging a fee for each egg injected.
In 1998, the Company converted a number of hatcheries to the INOVOJECT(R) system
and continued operations of INOVOJECT(R) systems in hatcheries converted prior
to 1998. The Company estimates that its INOVOJECT(R) system inoculates in excess
of 80% of all eggs produced for the North America broiler poultry market and,
therefore, expects diminished growth in the number of system installations and
only modest INOVOJECT(R) system revenue growth in this market. Therefore, the
Company must expand its INOVOJECT(R) system installations and product sales in
markets outside North America in order to realize significant overall revenue
growth. The Company estimates that approximately 69% of the world broiler
production occurs outside the U.S. and Canada. Accordingly, the Company is
implementing a strategy to market its INOVOJECT(R) system outside North America.
During 1998, the Company placed a number of INOVOJECT(R) systems for trial and
on contract at locations outside the U.S. and Canada, including Argentina,
China, South Korea, Malaysia, Taiwan, Vietnam, Germany, Portugal, Hungary and
Poland. The Company's expansion outside the U.S. and Canada was focused
initially on Europe, the Middle East, and Africa. In the second half of 1997,
the Company began expansion efforts in Asia and, in 1998, in Latin America. At
year end 1998, the Company had INOVOJECT(R) systems either installed or on trial
in 27 countries, including the United Kingdom, Ireland, France, Spain, the
Netherlands, Belgium, Italy, the Czech Republic, Israel, Egypt, South Africa,
Turkey, Australia, Argentina, South Korea, Thailand, Germany, Portugal, Hungary,
Poland, China, Malaysia, Vietnam and Taiwan. Overall, the placement of
INOVOJECT(R) systems outside the U.S. and Canada is dependent on market
acceptance of various in ovo ("in the egg") vaccines and obtaining regulatory
approval of these vaccines in numerous countries.
Certain poultry diseases are more prevalent in some geographic regions than in
others. For example, Marek's disease, for which the INOVOJECT(R) system is used
in the U.S., is not as widespread in Europe as in North America. IBD (also known
as Gumboro disease) is prevalent both in Northern Europe and Asia and, to a
lesser extent, in the United States. The Company expects that the primary usage
of its INOVOJECT(R) systems will vary by geographic region according to the
prevailing diseases as well as regulatory approval and market acceptance of
vaccines for in ovo delivery.
VNF(R) (Viral Neutralizing Factor)
Embrex has developed, patented and commercialized a Viral Neutralizing Factor
technology which permits single-dose immunization of the avian embryo effective
for the life of the bird. By using the VNF(R) technology to form an
antibody-vaccine virus complex, immunization is provided in a single step,
reducing or eliminating many of the multiple vaccinations carried out in the
industry. VNF(R) can temporarily neutralize a virulent vaccine virus without
impairing the virus' ability to stimulate an immune response. By using VNF(R) in
this manner, the virulent vaccine virus can be made into a safe and effective
vaccine which can be used in ovo or after hatching.
The VNF(R) technology is the subject of two issued U.S. patents, a pending U.S.
patent application, and several foreign patents and foreign patent applications.
The U.S. patents are owned by the University of Arkansas and exclusively
licensed to Embrex on a royalty basis for the life of the patents. Embrex also
is researching application of VNF(R) for other avian disease vaccines, including
Newcastle's disease and infectious bronchitis, although there is no assurance
such research will result in product opportunities.
To date, the Company's research efforts with its VNF(R) compound have been
focused primarily on avian uses. Based on initial experimental data, the Company
now believes that the potential exists for VNF(R) to be used in several
non-primate species. A U.S. patent claiming the use of VNF(R) viral vaccines in
all non-primate animals was allowed in 1997 and issued in February 1999. The
Company is in the early stages of exploring collaborative relationships with
other companies for the development and licensing of VNF(R) for non-primate
uses. Embrex has not initiated any regulatory approval processes with respect to
non-primate uses of VNF(R), nor is there any assurance that its efforts in this
area will result in products or collaborative agreements.
Infectious Bursal Disease (IBD) Vaccines
VNF(R) is especially useful in vaccines against avian IBD, which weakens a
bird's immune system. Birds infected by IBD typically exhibit poor growth or can
succumb to other diseases because of a compromised immune system. This disease
is currently widespread in Northern Europe, Asia and, to a lesser extent, in the
U.S. To date, IBD has been treated post-hatch via manually delivered vaccines or
in drinking water. Existing vaccines are associated, however, with certain
limitations, and some vaccines cannot be used safely or effectively in ovo. The
Company estimates the worldwide market for IBD vaccines is approximately $60
million annually.
In January 1995, USDA approval was obtained for post-hatch administration of
Bursaplex(R), the Company's VNF(R)-based vaccine for IBD in broiler chickens.
USDA approval was obtained in January 1997 for in ovo use of Bursaplex(R),
specifically for administration via Embrex's INOVOJECT(R) egg injection systems.
During 1997, the Company conducted clinical trials of Bursaplex(R) involving
more than 43.6 million birds, which Embrex believes demonstrated clear economic
benefits of this IBD vaccine.
In August 1995, the Company entered into an agreement with Cyanamid Websters
("Websters"), a unit of Fort Dodge Animal Health ("Ft. Dodge"), a division of
American Home Products Corp., for the joint development of another IBD vaccine
containing VNF(R), which will be marketed by Ft. Dodge in Europe, the Middle
East, and Africa under Ft. Dodge's trade name "Bursamune(TM)" upon receipt of
regulatory approvals. In June 1997, Ft. Dodge indicated that its U.K.
application for in ovo regulatory approval of Bursamune(TM) had been
provisionally refused. Ft. Dodge also indicated that the U.K. regulatory
authority requested that further data be supplied. The Company has worked with
Ft. Dodge, which is responsible for obtaining the necessary approvals for
Bursamune(TM) in both the U.K. and other European Community markets, to respond
to the U.K. regulatory authority requests for data with respect to
Bursamune(TM). The Company anticipates that the regulatory review
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process will be completed during the first half of 1999. To date, Bursamune(TM)
has received regulatory approval in South Africa.
Embrex currently is seeking regulatory approval in selected Latin American and
Asian markets for in ovo and post-hatch use of Bursaplex(R). Although Embrex has
received regulatory approval in some of these markets, there is no assurance
that the remaining approvals will be obtained. The placement of INOVOJECT(R)
systems outside the U.S. and Canada depends, in part, on market acceptance of
various in ovo vaccines as well as regulatory approval. To date, regulatory
approval for Bursaplex(R) has been received in Peru, Ecuador, Pakistan, South
Korea, Thailand and Vietnam, and regulatory approval is pending in Canada,
Philippines, People's Republic of China, Indonesia, Venezuela, Argentina, Chile,
Colombia, Malaysia and Taiwan.
PRODUCTS UNDER DEVELOPMENT
Embrex is developing individually and in collaboration with others additional
products which address poultry health and performance needs when administered in
ovo and, in some cases, after hatching. These additional products are in various
stages of development. There can be no assurance that Embrex will successfully
develop or market any of these products. Marketing products developed jointly
with others may require royalty or other payments by Embrex to its
co-developers. Embrex has not initiated the regulatory approval process for any
of these potential products, and there is no assurance regulatory approval will
be obtained.
In Ovo Products for Control of Coccidiosis
In 1995, the Company began an initiative aimed at 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. This program is aimed at
overcoming many of the problems associated with current practices. In 1997, the
Company established the feasibility of an in ovo biological control method for
coccidiosis. During 1998, this project met the required internal milestones
regarding results and timeliness. Further development of this project will
involve extensive clinical trials. Embrex intends to pursue this research with
collaborative partners. There can be no assurances that any of these development
efforts will be successful. Embrex has not initiated the regulatory approval
process with respect to these development efforts, and does not expect any
coccidiosis product developed by the Company to reach the market in the near
future.
Other Products Under Development
During 1998, Embrex continued to evaluate technologies which, when coupled with
Embrex's proprietary in ovo enabling delivery know-how, might have the potential
to yield improvements in the areas of feed conversion,
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muscle mass and leanness within broiler chickens. These technologies typically
need to be applied in the first several days of embryonic development in order
to have the desired effect. While the Company plans to continue its research
efforts in these areas in 1999, there is no assurance that these efforts will
yield product opportunities.
Embrex is also evaluating technologies and developing capabilities for
characterizing and sorting eggs before injection by the INOVOJECT(R) system.
These capabilities include automatic sexing and gender sorting. Early gender
sorting improves processing plant efficiencies by enabling gender-specific feed
rations and improved feed conversion. There is no assurance, however, that such
research will result in product opportunities.
The Company is also researching the feasibility of developing a treatment for
avian leukosis disease, a viral infection that can result in production losses
for poultry producers. There is no assurance, however, that this effort 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 evaluations, Embrex may or
may not proceed with these collaborations for further development. There is no
assurance that these efforts will yield products or further collaborations.
In March 1998, Embrex entered into a marketing agreement with UniSoma, Inc., the
U.S. subsidiary of UniSoma Matematica para Productividade, S.A. ("UniSoma"). The
marketing agreement grants Embrex the exclusive North American marketing rights
for 5 years for the poultry management decision support system developed by
UniSoma. This decision support system is designed to assist producers in
optimizing decisions in production, scheduling, processing and marketing to
maximize profitability. The system is being developed for the North American
market. Embrex has not, to date, sold this system to a poultry producer, and
there is no assurance that the system will attain commercial acceptance in North
America.
PATENTS AND PROPRIETARY RIGHTS
Embrex controls (either through direct ownership or exclusive license) 23 issued
U.S. patents, 13 pending U.S. patent applications, and over 60 issued foreign
patents and over 50 pending foreign patent applications. In addition, Embrex has
executed confidentiality agreements with its collaborators, subcontractors,
employees and directors.
The INOVOJECT(R) system utilizes a process of injecting viral, bacterial or
fungal vaccines into avian eggs that was patented in the U.S. by the USDA in
1984. Embrex holds the exclusive license to this patent through its expiration
in 2002. Embrex has supplemented the USDA patent with five additional issued
U.S. patents (and multiple foreign patents and patent applications) covering
specific design features of the INOVOJECT(R) system. See Item 3, "Legal
Proceedings", below.
Embrex also owns or licenses method-of-use patents for the in ovo administration
of VNF(R) vaccines and other compounds to elicit various beneficial responses in
poultry. Two U.S. patents for methods of treating IBD virus infections using
VNF(R) vaccines, including in ovo administration, were issued to Embrex in March
1995. A U.S. patent claiming the use of VNF(R) viral vaccines in all non-primate
animals was allowed in 1997 and issued in February 1999. These patents and
additional patent applications encompass the use of VNF(R) vaccine compoundS
regardless of the source of the VNF(R). These VNF(R) patents additionally
include composition-of-matter claims to VNF(R) vaccines against IBD virus
disease and composition-of-matter claims to VNF(R) vaccines for combating viral
diseases in non-primate animals. These patent claims cover the vaccine
preparation, regardless of the manner in which the preparation is used.
In 1998, three new U.S. patent applications were filed covering various aspects
of in ovo technology.
Embrex continues its efforts to patent methods of delivering compounds in ovo,
including early intervention methods and devices. In 1998, five U.S. patents
with claims to methods of, or devices for, delivering compounds to avian embryos
in ovo were allowed or issued.
Additionally, Embrex has federally registered the trademarks EMBREX(R),
INOVOJECT(R), VNF(R), and BURSAPLEX(R) in the U.S., and has applied for federal
registration of various trademarks.
COMPETITION
The primary competition for the INOVOJECT(R) system is the manual, post-hatch
administration of biological products. Since most of Embrex's products and
potential products are being designed to be administered
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through the INOVOJECT(R) system, the INOVOJECT(R) system must continue to be
accepted within the poultry industry and operated as intended under long-term
commercial conditions for these potential products to be marketed successfully.
The Company holds the exclusive license to the U.S. patent for injecting
vaccines into an avian embryo. Embrex has supplemented this patent with five
additional U.S. patents covering specific design features of the INOVOJECT(R)
system. In addition, Embrex relies on numerous foreign patents to protect its
intellectual properties and to afford a competitive advantage. See "Patents and
Proprietary Rights," above. There can be no assurance, however, that a
competitive delivery method, either within or outside the United States, will
not be developed and gain commercial acceptance. Embrex continues to monitor for
the presence of any competitive in ovo administration systems worldwide. See
Item 3, "Legal Proceedings," below.
Competitive success for Embrex will be based primarily on commercial acceptance
of its in ovo products, achieving and retaining scientific expertise and
technological superiority, identifying and pursuing scientifically feasible and
commercially viable opportunities, obtaining proprietary protection for its
research achievements, obtaining adequate funding and timely regulatory
approvals, and attracting corporate sponsors or partners in developing, testing,
producing, and marketing products, none of which can be assured. In addition, a
primary competitive factor affecting Embrex is its ability to conduct research
and development. Embrex's ability to compete also is dependent on its ability to
attract and retain key personnel. Maintaining financial and human resources,
therefore, are important factors for success.
PRODUCTION, MARKETING AND DISTRIBUTION
Production
Embrex currently subcontracts the production of substantially all of its
mechanical and biological products and expects to continue to do so for the
foreseeable future. The Company believes that alternative sources of manufacture
and supply generally exist.
INOVOJECT(R) System
Embrex's in-house engineering staff designs the INOVOJECT(R) system, which
incorporates proprietary mechanical, pneumatic and electronic sub-systems and
concepts. The Company uses 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)
system installations and revenues from those installations.
VNF(R) (Viral Neutralizing Factor)
In 1993, Embrex signed multi-year agreements with SPAFAS, Inc. ("SPAFAS"), a
subsidiary of Charles River Laboratories, Inc., under which SPAFAS will supply
the active ingredient in VNF(R). In connection with this agreement, Embrex
maintains appropriate inventory levels and places orders with SPAFAS to allow
Embrex to satisfy anticipated customer demand for VNF(R). The regulatory
approval granted by the USDA for Bursaplex(R) in January 1997 specifically
covers the vaccine produced with SPAFAS-manufactured VNF(R).
The Company has granted Merial Select, Inc. ("Select") (a Merck Rhone-Poulenc
company) exclusive rights to manufacture Infectious Bursal Disease vaccines
containing Embrex's VNF(R) product, known as Bursaplex(R), for Embrex to market
in North America, Latin America and Asia. Embrex has also granted Ft. Dodge (a
unit of American Home Products Corp.) rights to manufacture IBD vaccines
containing the Company's VNF(R) product, known as Bursamune(TM), to be marketed
in Europe, the Middle East and Africa. Abic Ltd. has been granted similar rights
to manufacture and market an IBD vaccine, known as GuMBryo(TM), in Israel. The
manufacture of the IBD vaccines being produced by Select and Ft. Dodge, and the
Company's VNF(R) product, generally must be performed in licensed facilities or
under approved regulatory methods. Although there are other manufacturers who
are capable of manufacturing IBD products and producing products such as VNF(R),
a
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change of supplier for the Company could adversely affect Embrex's future
operating results due to the time it would take a new supplier to obtain
regulatory approval of its production process or manufacturing facilities.
MARKETING AND DISTRIBUTION
Because of the geographical and industrial concentration of the poultry industry
in the 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)
systems 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.
The Company also is initiating arrangements for international distribution of
Bursaplex(R), subject in each case to the availability of required regulatory
approvals. In 1996, the Company entered into agreements with other parties to
distribute Bursaplex(R) in Chile, Ecuador, Peru and Pakistan. To date,
regulatory approval has been granted in Ecuador, Peru, and Pakistan. An
agreement for Israel also entitles a distributor, Abic Ltd., to manufacture a
VNF(R)-based IBD vaccine mentioned above. Subject to these agreements, the
Company also will conduct international marketing directly.
Other significant poultry markets exist in Asia and Latin America. Embrex has
held a number of discussions regarding marketing and distribution in each of
these markets. In 1997 and 1998, the Company entered into agreements with other
parties to distribute Bursaplex(R) in Venezuela, Colombia, South Korea,
Malaysia, Taiwan, Japan and Vietnam, subject to regulatory approvals. To date,
regulatory approval has been granted in South Korea, Thailand and Vietnam, as
well as the other countries indicated above, and regulatory approval is pending
in Canada, Philippines, People's Republic of China, Indonesia, Venezuela,
Argentina, Chile, Colombia, Malaysia and Taiwan. Embrex also hired management
for selected Asian and Latin American markets and installed INOVOJECT(R) systems
on a commercial or trial basis in certain Asian markets. In 1998, Embrex
installed its INOVOJECT(R) system in a hatchery in China and established Embrex
BioTech Trade (Shanghai) Co., Ltd. in China, which will focus on marketing and
distribution of Embrex products in China. Also in 1998, Embrex established
Embrex Inc. Sucursal Argentina, a branch office in Argentina, responsible for
commercial development and customer service and support. Initially, this office
will serve only Argentina, but may extend to other regional markets such as
Chile, Paraguay or Uruguay. Embrex has installed INOVOJECT(R) systems at three
of Argentina's top broiler producers and one breeder operation.
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. In 1997, the Company sold two INOVOJECT(R)
systems to Ishii.
The Company's revenues attributable to international operations in 1998, 1997
and 1996 were 20%, 15% and 14% of the Company's consolidated revenues,
respectively. The Company's identifiable assets attributable to international
operations in 1998, 1997 and 1996 were 26%, 24% and 18% of the Company's
consolidated assets, respectively. See "Notes to Consolidated Financial
Statements."
RESEARCH AND DEVELOPMENT
In 1998, Embrex opened a 12,800 square-foot research facility near the Company's
headquarters. This new facility is expected to increase the Company's clinical
trial capabilities. Research and development expense was $4.0 million in 1996,
$4.2 million in 1997 and $5.0 million in 1998. The increase in research and
development expense from 1996 to 1998 largely reflects increases in outside
contract research, supplies
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consumption, operating activities at the new research facility, and INOVOJECT(R)
design and development and global technical support activity. Research and
development is principally Company sponsored and funded primarily from internal
sources.
GOVERNMENTAL REGULATION
Regulation by governmental authorities in the 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 and other companies must receive
approval for marketing from either the USDA or the Food and Drug Administration
(the "FDA") and from similar agencies in foreign countries where the Company has
begun or contemplates doing business. These countries may also require approval
of the INOVOJECT(R) system. Regulatory agencies require that products be tested
and demonstrate appropriate levels of safety and efficacy. Generally, with
respect to animal health products, the USDA has regulatory authority over
products which are biological in origin or which stimulate or affect an animal's
immune system, and the FDA has authority over all other products. The time and
cost of USDA approvals are generally less than those for FDA approvals. FDA
approval generally requires more extensive animal and toxicology testing than
USDA approvals and may take five or more years to obtain, whereas USDA approvals
generally require one to three years to obtain. Embrex's VNF(R) technology
received USDA approval in January 1995 for IBD applications post-hatch, and for
in ovo use in January 1997. Embrex believes all of its other biological products
under development will be subject only to USDA approval. Embrex's existing
products have received all necessary governmental approvals in the U.S. The
Company's products also are subject to regulatory approval in other countries.
Management believes that compliance with environmental regulations currently has
no material adverse effect on the Company's capital expenditures, earnings or
competitive position.
EMPLOYEES
At December 31, 1998, Embrex employed 132 persons, 125 of whom were full-time
employees, an increase of 17 persons from the 115 full-time employees at
December 31, 1997.
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SIGNIFICANT CUSTOMERS
Tyson Foods, Inc.("Tyson") accounted for approximately 27% of Embrex's
consolidated 1998 revenues. Based on millions of pounds of ready-to-cook poultry
meat produced in 1998, Tyson accounted for approximately 24% of the broilers
grown in the U.S. During 1997, Tyson extended its contract with Embrex through
2004. There are no customers besides Tyson that represent 10 percent or greater
of total revenues. However, Embrex's three largest customers, including Tyson,
accounted for approximately 42% of consolidated 1998 revenues.
See "Risk Factors" filed as Exhibit 99 to this report.
ITEM 2. PROPERTIES
Embrex leases its corporate headquarters and research and development
facilities, which occupy approximately 23,000 square feet and are located
adjacent to Research Triangle Park, North Carolina. Two-thirds of the space is
devoted to research and development. The lease is for a 15-year term expiring
March 31, 2002. Embrex paid an annual rent of approximately $218,000 during
1998. Annual rent increases thereafter amount to approximately 3%. In addition
to research and development activities conducted at its corporate headquarters,
Embrex opened a new 12,800 square-foot research facility near its headquarters
in 1998. The lease is for a 10-year term expiring November 14, 2007, with a
5-year renewal option. The annual rent is approximately $136,000, with annual
increases of approximately 3% through the first 10 years and approximately 4%
during the 5-year renewal term.
Embrex leases approximately 3,000 square feet of warehouse space in Springdale,
Arkansas, on a year-to-year basis, which is used to support the Embrex customer
service function in the region. The Company also leases offices of 1,250 square
feet and warehouse space of 2,500 square feet in Great Dunmow, Essex, England.
Embrex also has access to facilities at certain universities. The use of these
facilities is important to Embrex's ongoing research and development efforts.
Embrex has had agreements with North Carolina State University ("NCSU")
providing access to facilities used for incubating eggs and growing live birds
and for research and testing purposes. Reliance on the NCSU facilities is
expected to decline as a result of Embrex's new research facility. Embrex
believes that suitable alternative facilities exist if the above agreements are
not renewed.
-8-
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 claimed that the defendants had violated
the terms of a Consent Judgment and Settlement Agreement entered into with
Embrex in November 1995 in which prior litigation was concluded with Service
Engineering Corporation and Edward G. Bounds, Jr. agreeing not to engage in
future activities violating the Sharma Patent. Embrex sought injunctive relief
to prevent infringement of the Sharma Patent as well as monetary damages. In
November 1996, Service Engineering Corporation and Edward G. Bounds, Jr.
responded to Embrex's patent infringement suit by asserting various affirmative
defenses and denying the substantive allegations in Embrex's complaint. This
suit concluded on July 30, 1998 with a jury verdict in favor of Embrex. The
verdict fully upheld the validity of all claims of the Sharma Patent, finding
that the defendants had willingly infringed all asserted claims of the patent.
The jury also found that Service Engineering Corporation and Edward G. Bounds,
Jr. had breached the 1995 Consent Judgment and Settlement Agreement and that
such breach was not in good faith. The jury awarded Embrex damages of $500,000
plus litigation expenses and court costs. The United States District Court for
the Eastern District of North Carolina entered a Judgment in favor of Embrex on
September 28, 1998, which included a monetary award of $2,612,885 and an
injunction prohibiting Service Engineering Corporation and Edward G. Bounds, Jr.
from practicing methods claimed in, or otherwise infringing, the Sharma Patent.
On October 28, 1998, Service Engineering Corporation and Edward G. Bounds, Jr.
filed a notice of appeal in the United States Court of Appeals for the Federal
Circuit seeking a reversal of the Judgment. The Company plans to oppose the
appeal.
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 suit alleged that IGI, Inc., through its activities
with Service Engineering Corporation and Edward G. Bounds, Jr. was engaging in
activities that constitute infringement of the Sharma Patent. Embrex sought
injunctive relief to prevent infringement of the Sharma Patent as well as
monetary damages. In January 1997, IGI, Inc. responded to Embrex's patent
infringement suit by asserting various affirmative defenses and denying the
substantive allegations in Embrex's complaint. This suit was concluded by
agreement between Embrex and IGI, Inc. in January 1998, pursuant to which Embrex
and IGI have agreed to dismiss all pending claims against each other, and IGI
has agreed to abide by the terms of a royalty-bearing sublicense to the Sharma
Patent for avian vaccination.
In March 1997, Service Engineering Corporation and Edward G. Bounds, Jr. filed
suit against the United States Department of Agriculture in the United States
District Court for the District of Maryland with respect to its grant to Embrex
of an exclusive license for the Sharma Patent. The complaint alleges that the
USDA did not adequately comply with statutory and regulatory requirements in
making the grant to Embrex of an exclusive license to the Sharma Patent, the
revision of the exclusive license in 1991 and the revision of the exclusive
license in 1994, which extended the period of exclusivity, originally set to
terminate on December 31, 1996, through the patent expiration date. Plaintiffs
allege that in December 1996 (after Embrex had instituted the above referenced
action for patent infringement and breach of contract), the Plaintiffs requested
the USDA to grant them a license of the Sharma Patent. The Plaintiffs allege
that the USDA refused to do so because the USDA said that the license was not
available and that the Plaintiffs had no basis for relief. Plaintiffs also
allege that the USDA wrongfully consented to Embrex's bringing suit against the
Plaintiffs. Plaintiffs are seeking to have the court set aside the extension of
the exclusive license, the USDA's grant of permission for Embrex to sue Service
Engineering Corporation, Edwards G. Bounds, Jr. and IGI, Inc. for patent
infringement, the USDA's refusal to grant to Service Engineering Corporation a
non-exclusive license to the Sharma Patent and the USDA's refusal to act
favorably upon Service Engineering Corporation's appeal from the refusal to
grant it a non-exclusive license. In addition, Plaintiffs seek to have the court
issue an order requiring the USDA, prior to granting any exclusive license under
the Sharma Patent, including by extending the term of a pre-existing exclusive
license, to observe the procedures set forth under laws and regulations
governing the grant of licenses to patents owned by the USDA, and to remand the
matter to the USDA to take action in accordance with the order. Plaintiffs also
seek attorneys' fees and costs from the USDA. The USDA has filed motions to
-9-
dismiss plaintiffs' complaint, and plaintiffs have filed motions for summary
judgment. Those motions are pending before the Court.
On February 5, 1999, Embrex learned that Machining Technologies, Inc. of Hebron,
Maryland has filed a Complaint for Declaratory Judgment against Embrex in the
United States District Court for the District of Maryland. Machining
Technologies, Inc. seeks a declaration that the Sharma Patent is not infringed,
invalid and/or not enforceable. Machining Technologies, Inc. was a manufacturer
of egg injection machine parts to Edward G. Bounds, Jr. and Service Engineering
Corporation. Embrex believes the action is without legal basis and plans to file
a motion to dismiss the action if and when Machining Technologies, Inc. serves
the Complaint on the Company.
See "Risk Factors" filed as Exhibit 99 to this report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1998.
-10-
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
------------- ---- ---
1997
----
March 31, 1997 7 13/16 6 3/8
June 30, 1997 7 3/8 6 3/16
September 30, 1997 7 3/8 5 15/16
December 31, 1997 7 5
1998
----
March 31, 1998 6 3/8 5
June 30, 1998 6 7/8 5 3/8
September 30, 1998 6 3/16 4 5/16
December 31, 1998 6 3 5/8
At February 26, 1999 (the most recent practicable date), there were 479 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.
-11-
ITEM 6. SELECTED FINANCIAL DATA
SUMMARY OF OPERATIONS BY QUARTERS (UNAUDITED)
(Dollars In Thousands, Except Per
Share Amounts)
1998 1997
---- ----
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
------- ------- ------- ------- ------- ------- ------- -------
Revenues............................ $6,857 $6,961 $7,404 $7,393 $5,925 $5,922 $6,531 $6,412
Operating Expenses.................. 2,857 2,618 3,179 3,178 2,577 2,403 2,585 2,230
Net income.......................... 527 605 753 976 262 417 540 542
Net income (per share of Common Stock)
Basic....................... $0.06 $0.07 $0.09 $0.12 $0.03 $0.05 $0.06 $0.07
Diluted..................... $0.06 $0.07 $0.09 $0.12 $0.03 $0.05 $0.06 $0.07
Number of Shares Used in Per Share
Calculation (thousands)
Basic........................ 8,243 8,249 8,262 8,264 8,058 8,203 8,236 8,238
Diluted...................... 8,334 8,340 8,339 8,341 8,278 8,380 8,369 8,331
5-YEAR SUMMARY OF SELECTED FINANCIAL DATA
(Dollars In Thousands, Except Per 1998 1997 1996 1995 1994
Share Amounts) ---- ---- ---- ---- ----
(Restated)
STATEMENTS OF OPERATIONS DATA
Revenues............................ $28,615 $24,789 $20,632 $13,719 $6,897
Research and development expenses... 4,995 4,188 4,036 3,416 4,271
Other operating expenses............ 6,837 5,607 3,775 3,836 3,561
Net income (loss)................... 2,861 1,760 341 (4,512) (6,710)
Net income (loss) per share of Common
Stock
Basic......................... $0.35 $0.21 $0.05 ($0.73) ($1.19)
Diluted....................... $0.34 $0.21 $0.06 ($0.73) ($1.19)
Number of Shares Used in Per Share
Calculation (thousands)
Basic.......................... 8,255 8,184 7,218 6,187 5,645
Diluted........................ 8,339 8,339 7,520 6,187 5,645
BALANCE SHEET DATA
Working capital..................... $8,299 $7,585 $7,552 $5,934 $1,608
Total assets........................ 24,990 25,161 25,554 21,789 13,379
Long-term liabilities............... 644 3,278 5,814 10,966 3,093
Accumulated deficit................. (36,072) (38,933) (40,693) (41,034) (36,522)
Shareholders' equity................ 18,805 15,741 13,309 5,909 5,323
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 1998 was $2.9 million compared to $1.8 million in
1997 and $341,000 in 1996. Diluted earnings per share increased from $0.06 in
1996 and $0.21 in 1997, to $0.34 in 1998. For the years ended 1998 and 1997,
shares outstanding on a diluted basis were 8.3 million, up from 7.5 million at
year-end 1996.
-12-
Revenues
Consolidated revenues in 1998 totaled $28.6 million, representing an increase of
15% over 1997 revenues of $24.8 million, which were 20% over 1996 revenues of
$20.6 million. INOVOJECT(R) revenues totaled $27.4 million in 1998 compared to
$23.6 million in 1997 and $19.3 million in 1996, representing increases of 16%
from 1997 to 1998, and 22% from 1996 to 1997, with the 1998 increase coming
principally from increased placement and throughput of INOVOJECT(R) systems in
North America, Europe and Asia.
The 1998 revenues include INOVOJECT(R) lease fees derived from multi-year
contracts and paid trials in the U.S. and foreign countries, and the sale of
INOVOJECT(R) systems to distributors. Embrex estimates that as of December 31,
1998, it was vaccinating in excess of 80% of the estimated 8.0 billion broiler
birds grown in the U.S. in 1998, 1997 and 1996. Given its market penetration,
the Company expects only moderate INOVOJECT(R) systems revenue growth in this
market.
Management anticipates moderate revenue and earnings growth in 1999 from
existing INOVOJECT(R) operations in the United States and Canada, new
INOVOJECT(R) system leases in other countries, and sales of Bursaplex(R) product
to poultry producers in the United States and other countries. However, the rate
at which the marketplace will accept the INOVOJECT(R) technology outside the
United States and Canada, the timing of regulatory approvals of third-party
vaccines for in ovo use outside the United States and Canada, start-up costs in
new markets, possible variability in U.S. hatchery bird production as a result
of grain price fluctuations, 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 Bursaplex(R), the Company's proprietary vaccine for the treatment of
avian Infectious Bursal Disease, was the principal source of $931,000 of product
revenues in 1998 and $1.1 million of product revenues in 1997. The Company's
ability to generate revenue from product sales has been constrained by the
previously announced delay associated with Ft. Dodge's obtaining British
regulatory approval for the sale of Bursamune(TM) in the United Kingdom, lower
levels of breeder and broiler flock vaccination rates, and fewer reported
incidences of bursal disease in the United States. Product sales consequently
declined 12% during 1998 from the $1.1 million recorded for the same period in
1997. Sales of VNF(R) for inclusion in IBD vaccines were the principal source of
previous years' product revenues, which generated $1.2 million and $817,000 in
1996 and 1995, respectively.
Cost of Product Sales and INOVOJECT(R) Revenues
Cost of revenues as a percentage of revenues decreased from 49% and 53% of total
revenues in 1997 and 1996, respectively, to 47% of total revenues in 1998. The
improvement in 1998 is primarily attributable to INOVOJECT(R) system-related
cost reductions and some price increases in selected markets.
Operating Expenses
Operating expenses totaled $11.8 million in 1998 compared to $9.8 million in
1997, and $7.8 million in 1996.
General and administrative ("G&A") expenses were $6.2 million in 1998, up 24%
from $5.0 million in 1997, and up 52% from $3.3 million in 1996. The 1998 and
1997 G&A increases over 1996 were primarily attributable to development costs in
Asia and Latin America as well as legal expenses incurred in connection with
various patent infringement lawsuits filed by the Company.
Sales and marketing expenses totaled $633,000 in 1998 compared to $587,000 and
$510,000 in 1997 and 1996, respectively. Fluctuations during these periods
resulted from various levels of activity in the Company's sales and customer
service functions to support market expansion and field support of INOVOJECT(R)
systems, as well as stepped-up international activity, principally in Europe.
Certain 1997 and 1996 operating expenses were reclassified to cost of revenues
to conform to the 1998 presentation. These reclassifications had no effect on
previously reported net income or shareholders' equity.
-13-
Research and development ("R&D") expenses were $5.0 million in 1998 compared to
$4.2 million in 1997 and $4.0 million in 1996. The increase in R&D expense from
1996 to 1998 largely reflects an increase in outside contract research, supplies
consumption, operating expenses for the new research facility and INOVOJECT(R)
design and development and global technical support activity. The Company
continues to manage its research and development effort to leverage its
know-how, patent position, market presence and expenditures.
Other Income and Expense
Interest income totaled $402,000, $488,000, and $355,000 in years 1998, 1997,
and 1996, respectively. The 1998 decrease relative to 1997 resulted principally
from lower cash balances and lower interest rates, while the increase in 1997
relative to 1996 was a function of higher cash balances.
Interest expense totaled $645,000 in 1998 compared to $1.1 million in 1997, and
$1.6 million in 1996. In 1998, the decrease in interest expense reflected the
repayment of approximately $2.8 million of external financing, primarily in the
form of equipment leases. In 1997 and 1996, the amount of interest expense was
principally attributable to the Company's funding of its growing installed base
of INOVOJECT(R) systems with the use of capital lease financing. Management
expects to continue to rely on the use of internally generated funds to finance
the cost of additional INOVOJECT(R) systems in 1999, as was the case in 1998.
Effect of Inflation
Management expects cost of product sales and INOVOJECT(R) systems revenues,
operating expenses and capital equipment costs to change in line with periodic
inflationary changes in price levels. While management generally believes that
the Company will be able to offset the effect of price level changes by
adjusting selling/lease prices and effecting operating efficiencies, any
material unfavorable changes in price levels could have a material adverse
affect on its results of operations.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company's cash and short-term investment balances
totaled $7.2 million compared to $8.6 million and $9.9 million at December 31,
1997 and 1996, respectively. The decrease reflected the ability of the Company
to fund capital expenditures with internal cash instead of equipment lease
financing. Working capital increased to $8.3 million in 1998 from $7.6 million
in 1997, as a decrease in cash was more than offset by a reduction in the
short-term portions of both capital lease obligations and long-term debt.
During 1998, operating activities generated $5.7 million in cash, primarily due
to non-cash depreciation and net income. Within investing activities,
INOVOJECT(R) systems, the Company's new research facility, and equipment
purchases required $4.9 million. In addition, $2.8 million was used to repay
long-term debt and capital lease obligations.
In October 1998, the Company established a share repurchase program which
provides for shares of the Company's Common Stock to be purchased by the Company
in open market or privately negotiated transactions. See "Notes to Consolidated
Financial Statements."
As of December 31, 1998, the Company had outstanding purchase commitments of
approximately $3.5 million related to the production of the Company's
Bursaplex(R) product, VNF(R) for the manufacture of Bursaplex(R) and
Bursamune(TM), and materials and supplies for construction and maintenance of
INOVOJECT(R) egg injection systems.
The Company maintained during 1998 a $2.0 million secured line of credit with a
bank in the United Kingdom, which could be used to finance the construction of
additional INOVOJECT(R) systems for Europe, the Middle East and Africa. The
Company utilized $0.4 million of this line during 1998. This line of credit was
repaid and terminated by year-end 1998.
-14-
Based on its current operations, management believes that the Company's
available cash and short-term investments, together with cash flow from
operations, will be sufficient to meet its foreseeable cash requirements.
YEAR 2000 ISSUE
The Company established a team to address the Year 2000 issue in June 1998. The
team has conducted an inventory and assessment of the Company's computer
hardware and software systems, as well as embedded systems in its INOVOJECT(R)
system, manufacturing and laboratory equipment and office facilities, such as
security and fire alarm systems. The team is currently developing remediation,
testing, and implementation plans for imbedded systems, including the
INOVOJECT(R) system. The Company anticipates completing its test plans no later
than May 1999. The Company expects to complete all remediation, testing and
implementation no later than October 1999.
To date, the Company has determined that its general ledger and primary
financial accounting software, a DOS-based application, uses only two digits to
identify a year in the date field. The Company is currently on schedule to
replace this application with a Year 2000-compliant Windows-based system by
October 1999; however, the Company had planned to make this upgrade irrespective
of the Year 2000 problem in order to meet the demands of its business. The
Company is in the process of upgrading its computer software and hardware
systems as necessary to address both its increased internal needs and the impact
of the Year 2000 on its systems. The inability of the Company or its software or
hardware vendors to upgrade the Company's systems in a manner that fully
addresses the Company's needs and the Year 2000 issue could adversely impact the
Company's ability to produce the information necessary to manage its business,
communicate with its customers and prepare its financial statements.
The Company has surveyed nearly all of its customers and vendors through a Year
2000 questionnaire regarding the strategies, activities and contingency plans
undertaken by those parties to achieve Year 2000 compliance. The information
being received in response to the questionnaire will assist the Company in
assessing its readiness for the Year 2000 issue and identify any potential
negative impact to the Company from possible disruptions in other parties'
ability to do business with the Company after December 31, 1999. There is no
assurance that the systems of other parties on which the Company relies will be
compliant on a timely basis. The inability of the Company's vendors and
customers to fully address the Year 2000 issue could have an adverse impact on
the Company's ability to operate and manage the INOVOJECT(R) system at its
customers' hatcheries, to manage its business and to communicate with its
customers and suppliers, any of which could have a material adverse effect on
the Company's financial results.
The Company is in the process of developing contingency plans to address what
would happen if its execution of these plans were to fail to address the Year
2000 issue. These contingency plans may include the purchasing and redeployment
to various locations of additional materials and supplies needed to operate the
business and provide services and products to its customers, and the
preservation of perishable biological products in the event of electrical power
interruptions at the Company's facilities.
The Company expects to incur no more than $500,000 in addressing Year 2000
issues, including an estimated $20,000 spent to date. The Company's estimates
regarding the cost and timing of addressing the Year 2000 issue are based upon
presently available information and assumptions about future events. Embrex
cannot guarantee that its assumptions will be correct or that its estimates will
be achieved. Actual results could differ materially from the Company's
expectations as a result of numerous factors, including the continued
availability of certain resources, the cooperation of third parties, the ability
to locate and correct all relevant computer codes, unforeseen circumstances that
would cause the Company to allocate its resources elsewhere, and similar
uncertainties.
FORWARD-LOOKING STATEMENTS
Information set forth in this Annual Report on Form 10-K contains various
"forward looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of
-15-
1934, which statements represent the Company's judgment concerning the future
and are subject to risks and uncertainties that could cause the Company's actual
operating results and financial position to differ materially. Such forward
looking statements can be identified by the use of forward looking terminology
such as "may," "will," "expect," "anticipate," "estimate," "believe," or
"continue," or the negative thereof or other variations thereof or comparable
terminology.
The Company cautions that any such forward looking statements include statements
with respect to future products, services, markets and financial results. These
statements involve risks and uncertainties that could cause actual results to
differ materially, including without limitation the ability of the Company to
penetrate new markets, the outcome of its patent litigation, the Company's
ability to complete commercial development of potential future products or
obtain regulatory approval of its products, which approval is dependent upon a
number of factors, such as results of trials, the discretion of regulatory
officials, and potential changes in regulations, and the Company's dependence on
certain customers. Additional information on these risks and other factors which
could affect the Company's financial results are included in the Risk Factors
described in Exhibit 99 to this report and in the Company's other filings with
the SEC, including the Company's Forms 10-Q, 10-K and 8-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A portion of the Company's operations are in jurisdictions outside North
America. The Company leases INOVOJECT(R) systems and sells products in Europe,
Asia, and South America. As a result, the Company's financial results could be
affected by factors such as changes in foreign currency exchange rates or weak
economic conditions in the foreign markets in which the Company distributes its
products. At December 31, 1998, the Company's operations outside North America
were not material to the Company's consolidated results as a whole, and a
significant change in currency exchange rates or economic conditions in the
jurisdiction outside North America in which the Company operates would not have
a material effect on the Company's consolidated financial results.
-16-
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, 1998 and 1997, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1998. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Embrex, Inc. and
subsidiaries at December 31, 1998 and 1997, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Raleigh, North Carolina
March 1, 1999
-17-
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31,
------------
ASSETS 1998 1997
---- ----
Current Assets
Cash and cash equivalents................... $7,167 $8,580
Restricted cash (Note 2).................... 275 275
Inventories:
Materials and supplies................. 925 898
Product................................ 1,281 603
Accounts receivable - trade................. 3,454 2,772
Other current assets........................ 738 599
--- ---
Total Current Assets............. 13,840 13,727
INOVOJECT(R) Systems under construction......... 568 690
INOVOJECT(R) Systems............................ 24,161 21,024
Less accumulated depreciation............... (16,297) (12,149)
-------- --------
7,864 8,875
Equipment, furniture and fixtures............... 5,060 3,601
Less accumulated depreciation................ (2,468) (2,041)
------- -------
2,592 1,560
OTHER ASSETS:
Patents and exclusive licenses of patentable
technology (net of accumulated amortization of $196
in 1998 and $80 in 1997)................. 126 309
TOTAL ASSETS.................................... $24,990 $25,161
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable............................ $ 393 $1,312
Accrued expenses............................ 2,033 1,976
Deferred revenue............................ 175 -0-
Product warranty accrual.................... 322 171
Current portion of capital lease obligations 2,618 2,391
Current portion of long-term debt (Note 4).. -0- 292
--- ---
Total Current Liabilities........ 5,541 6,142
Capital lease obligations, less current portion 634 3,269
(Note 3)........................................
Long-term debt, less current portion (Note 4)... 10 9
Shareholders' Equity (Notes 5, 6, 7 and 8)
Common Stock, $.01 par value per share
Authorized - 30,000,000 shares
Issued and outstanding - 8,264,490
and 8,239,946 shares 83 82
at December 31, 1998 and 1997, respectively
Additional paid-in capital.................. 54,894 54,788
Accumulated other comprehensive income...... 113 (196)
Accumulated deficit......................... (36,072) (38,933)
Treasury stock.............................. (213) -0-
----- ---
Total Shareholders' Equity....... 18,805 15,741
------ ------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY...... $24,990 $25,161
======= =======
See accompanying notes.
-18-
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Year ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
REVENUES
INOVOJECT(R) revenue......................... $27,426 $23,614 $19,263
Product revenue.............................. 931 1,062 1,217
Other revenue................................ 258 113 152
--- --- ---
Total Revenues.......................... 28,615 24,789 20,632
Cost of Product Sales and INOVOJECT(R) Revenues... 13,341 12,244 11,032
------ ------ ------
15,274 12,545 9,600
OPERATING EXPENSES
General and administrative................... 6,204 5,020 3,265
Sales and marketing.......................... 633 587 510
Research and development..................... 4,995 4,188 4,036
----- ----- -----
Total Operating Expenses................ 11,832 9,795 7,811
------ ----- -----
Operating Income................................. 3,442 2,750 1,789
Other Income (Expense)
Interest income.............................. 402 488 355
Interest expense............................. (645) (1,070) (1,608)
Other........................................ 38 14 -0-
-- -- ---
Total Other Expense.................... (205) (568) (1,253)
----- ----- -------
Income Before Taxes.................... 3,237 2,182 536
Income Taxes (Note 9)............................ 376 422 195
--- --- ---
Net Income....................................... $2,861 $1,760 $341
====== ====== ====
Net Income per share of Common Stock
Basic........................................ $0.35 $0.21 $0.05
Diluted...................................... $0.34 $0.21 $0.06
Number of Shares Used in Per Share Calculation
Basic........................................ 8,255 8,184 7,218
Diluted...................................... 8,339 8,339 7,520
See accompanying notes.
-19-
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands) Year ended December 31,
1998 1997 1996
---- ---- ----
Operating Activities
Net income.......................................... $2,861 $1,760 $341
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization.................. 4,884 4,043 4,021
Changes in operating assets and liabilities:
Accounts receivable, inventories and other
current assets.......................... (1,526) (797) (515)
Accounts payable and accrued expenses...... (537) 1,083 119
----- ----- -----
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,682 6,089 3,966
Investing Activities
Sales of short-term investments -0- 876 1,096
Collateralization of Lease (Note 2) -0- (275) -0-
Purchases of INOVOJECT(R) systems, equipment, furniture
and fixtures (4,850) (3,962) (4,888)
Reductions to patents and other noncurrent assets 248 280 93
--- --- --
NET CASH USED IN INVESTING ACTIVITIES (4,602) (3,081) (3,699)
Financing Activities
Issuance of Common Stock 107 257 3,438
Repayment of long-term debt (286) (119) 476
Proceeds from capital lease obligations 101 102 2,139
Payments on capital lease obligations (2,511) (3,328) (2,818)
Repurchase of Common Stock (213) -0- -0-
----- ------- -----
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (2,802) (3,088) 3,235
------- ------- -----
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,722) (80) 3,502
CURRENCY TRANSLATION ADJUSTMENTS 309 (376) 180
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 8,580 9,036 5,354
----- ----- -----
CASH AND CASH EQUIVALENTS AT END OF PERIOD $7,167 $8,580 $9,036
====== ====== ======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Total interest paid was $645,000, $1,070,000 and $1,593,000 for the years ended
December 31, 1998, 1997, and 1996, respectively.
Total income taxes paid were $277,000, $70,000 and $170,000 for the years ended
December 31, 1998, 1997, and 1996, respectively.
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITY:
During 1996, $3.3 million of outstanding 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.
During 1997, $425,000 of outstanding debentures along with $139,000 of accrued
interest were converted into 98,267 shares of Common Stock net of unamortized
debt issuance costs totaling $1,000. In addition, 419 shares of Embrex Common
Stock were issued pursuant to the non-cash exercise of warrants related to the
initial sale of the debentures in May 1995. As of December 1, 1997, all
debentures had been converted into Common Stock.
On May 27, 1997, 34,320 shares of Common Stock were issued in exchange for
substantially all of the assets of Agrimatic Corporation.
See accompanying notes.
-20-
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands)
Accumulated
Additional Other
Common Paid-in Comprehensive Accumulated Treasury
Stock Capital Income Deficit Stock Total
----- ------- ------ ------- ----- -----
BALANCE AT DECEMBER 31, 1995 (as
restated)............................... $ 46,122 $ 821 $ 0 ($41,034) $ 0 $ 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 cost of $1)........ 2,947 494 3,441
Upon exercise of warrants.............. 3,084 3,084
Establishment of $.01 par value
(Note 5)......................... (52,427) 52,427 -0-
Other Comprehensive Income, Net of Tax
(Note 1)
Currency translation adjustments.... 180 180
Net income.......................... 341 341
---
Comprehensive income................ 521
---
BALANCE AT DECEMBER 31, 1996................... 80 53,742 180 (40,693) 0 13,309
Stock issued:
Upon exercise of options............... 1 201 202
Under employee stock purchase plan..... 55 55
Upon conversion of long-term debt
(net of issuance cost of $111)..... 1 563 564
Upon issuance of shares for
Agrimatic acquisition............... 227 227
Other Comprehensive Income, Net of Tax
(Note 1)
Currency translation adjustments.... (376) (376)
Net income.......................... 1,760 1,760
-----
Comprehensive income................ 1,384
-----
BALANCE AT DECEMBER 31, 1997................... $82 $54,788 ($196) ($38,933) 0 $15,741
Stock Repurchased (213) (213)
Stock issued:
Upon exercise of options............... 1 1
Under employee stock purchase plan..... 1 105 106
Other Comprehensive Income, Net of Tax
(Note 1)
Currency translation adjustments.... 309 309
Net income.......................... 2,861 2,861
-----
Comprehensive income................ 3,170
-----
BALANCE AT DECEMBER 31, 1998................... $83 $54,894 $113 ($36,072) (213) $18,805
See accompanying notes.
-21-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Embrex, Inc. has developed and commercialized the INOVOJECT(R) system, a
proprietary, automated, in-the-egg injection system which eliminates the need
for manual, post-hatch injection of certain vaccines for newly hatched broiler
chicks. Embrex also develops and markets proprietary pharmaceutical and
biological products to improve bird health, reduce bird production costs and
provide other economic benefits to the poultry industry.
ACQUISITION
On May 27, 1997, the Company issued 34,320 shares of Common Stock in exchange
for substantially all of the assets of Agrimatic Corporation. In 1998, the book
value of the assets acquired in this acquisition was written off. This
transaction and subsequent write-off had an immaterial effect on the operations
of Embrex.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Embrex, Inc. and
its wholly owned subsidiaries, Embrex Europe Limited and Embrex Sales, Inc. (the
"Company"). All significant intercompany transactions and accounts have been
eliminated. Currently, foreign operations account for approximately 20% of the
Company's revenues.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
INVENTORIES
Items recorded as inventory are generally purchased from others and recorded at
the lower of cost or market using the average cost method. Materials and
supplies inventories include spare parts for the INOVOJECT(R) systems as well as
laboratory and general supplies. Product inventories are comprised of biological
compounds, principally the Company's Viral Neutralizing Factor product (VNF(R)).
INOVOJECT(R) SYSTEMS
INOVOJECT(R) systems are comprised of egg injection and related equipment
available for lease to customers. The equipment is recorded at the lower of cost
or estimated net realizable value. Depreciation is computed principally by using
accelerated and straight-line methods over the estimated useful life of the
equipment and commences after construction is complete and the equipment is
placed in service.
EQUIPMENT, FURNITURE AND FIXTURES
Equipment, furniture and fixtures are recorded at cost. Depreciation is computed
principally by using accelerated and straight-line methods over the estimated
three-to-five years useful lives of the assets placed in service.
PATENTS AND EXCLUSIVE LICENSES OF PATENTABLE TECHNOLOGY
Costs incurred to acquire exclusive licenses of U.S. patentable technology and
to apply for and obtain U.S. patents on internally developed technology are
capitalized and amortized using the straight-line method. Exclusive license
agreements are amortized over the period of the license. Patents are amortized
over the shorter of the useful or legal life of the patent.
-22-
FOREIGN CURRENCY TRANSLATION
All assets and liabilities in the balance sheets of the Company's foreign
subsidiary, Embrex Europe Limited, and its Asian operations, are translated at
year-end exchange rates except shareholders' equity which is translated at
historical rates. Revenues, costs and expenses are recorded at average rates of
exchange during the year. Translation gains and losses are accumulated as a
component of shareholders' equity. Foreign currency transaction gains and losses
are included in determining net income.
REVENUE RECOGNITION
INOVOJECT(R) system fees are recognized based on eggs processed during the
period. Product sales are recognized when the products are shipped. Contract
research revenue is recognized as services are performed over the term of the
contract. Revenue received, but not yet earned, is classified as deferred
revenue.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs, including costs incurred to complete contract
research, are charged to operations when incurred and are included in operating
expenses.
INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). SFAS 109 requires recognition of deferred tax assets and liabilities for
the expected future tax consequences of temporary basis differences that have
arisen between financial statement and income tax reporting.
NET INCOME PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 128, "Earnings per Share" which established new standards for
computing and presenting net income per share information. As required, the
Company adopted the provisions of Statement No. 128 in its 1997 financial
statements and has restated all prior year net income per share information.
Basic net income per share was determined by dividing net income available for
common shareholders by the weighted average number of common shares outstanding
during each year. Diluted net income per share reflects the potential dilution
that could occur assuming conversion or exercise of all convertible securities
and issued and unexercised stock options. A reconciliation of the net income
available for common shareholders and number of shares used in computing basic
and diluted net income per share is in Note 11.
USE OF ESTIMATES
The presentation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from these estimates.
PRINCIPAL CUSTOMERS
Tyson Foods, Inc. ("Tyson") accounted for approximately 27, 28 and 33 percent of
consolidated 1998, 1997 and 1996 revenues, respectively. Based on the millions
of pounds of ready-to-eat poultry meat produced in 1998, Tyson accounted for
approximately 24 percent of the broilers grown in the U.S. In 1998, Tyson was
the only customer that represented greater than 10 percent of total revenues.
-23-
CONCENTRATION OF CREDIT RISK
The Company's principal financial instrument, subject to potential concentration
of credit risk, is accounts receivable which are unsecured. As of December 31,
1998, Tyson Foods, Inc. accounted for approximately 16% of consolidated accounts
receivable, and substantially all of the Company's accounts receivable are due
from companies in the poultry industry.
SOURCES OF SUPPLY
The Company has developed a strategic relationship with 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 Merial Select, Inc. ("Select") (a Merck Rhone-Poulenc
company) exclusive rights to manufacture IBD vaccines containing Embrex's
proprietary VNF(R) product for Embrex to market in North America, Latin America
and Asia under the trade name Bursaplex(R). In 1995, Embrex granted Cyanamid
Websters ("Websters"), a unit of Ft. Dodge Animal Health, which is a division of
American Home Products Corp. ("Ft. Dodge"), rights to manufacture and market
bursal disease vaccines containing the Company's VNF(R) product to be marketed
in Europe, the Middle East and Africa under the trade name Bursamune(TM).
Additionally, the Company has one contract supplier of its VNF(R) product. The
manufacture of the bursal disease vaccines being produced by Select and Ft.
Dodge and the Company's VNF(R) product generally must be performed in licensed
facilities and/or under methods approved by regulatory agencies. Although there
are other manufacturers who are capable of manufacturing bursal disease products
and producing products such as VNF(R), a change of suppliers could adversely
effect the Company's future operating results due to the time it would take a
new supplier to obtain regulatory approval of its production process and/or
manufacturing facilities. The Company seeks to minimize this exposure through
multi-year supply agreements and the maintenance of adequate inventories.
RECLASSIFICATION
Certain 1997 and 1996 amounts in the accompanying financial statements have been
reclassified to conform to the 1998 presentation. These reclassifications had no
effect on previously reported net income or shareholders' equity.
COMPREHENSIVE INCOME
In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive Income
(SFAS 130). This Statement establishes standards for reporting and display of
comprehensive income and its components in the financial statements. In
accordance with SFAS 130, the Company has determined total comprehensive income,
net of tax, to be $3.2 million, $1.4 million and $521,000 for the years ended
December 31, 1998, 1997 and 1996, respectively. Embrex's total comprehensive
income represents net income plus the after-tax effect of foreign currency
translation adjustments for the years presented.
SEGMENTS
Effective January 1, 1998, the Company adopted SFAS 131, "Disclosures about
Segments of an Enterprise and Related Information". This pronouncement
superseded SFAS 14, "Financial Reporting for Segments of a Business Enterprise".
SFAS 131 establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports. SFAS 131 also establishes standards for
related disclosures about products and services, geographic areas and major
customers. The adoption of SFAS 131 did not affect results of operations or
financial position. The Company is considered to have only one operating segment
based on SFAS 131.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments
and for Hedging Activities". This pronouncement is effective for annual periods
beginning after June 15, 1999. SFAS 133 requires all derivatives to be recorded
on the balance sheet and establishes accounting rules for hedging activities.
The effect of the hedge accounting rules is to offset changes in value or cash
flows of both the hedge and hedged item in earnings in the same period. Changes
in the fair value of derivatives that do not qualify for hedge accounting are
reported in earnings in the period of the change. Based on the fact that the
Company does not currently use derivatives, adoption of this pronouncement is
not expected to have a material impact on the Company's financial position or
results of operations.
During 1998, the Company adopted SOP 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use", which requires capitalization
of certain costs incurred in connection with developing or obtaining internal
use software. The impact of adoption was not material.
2. RESTRICTED CASH
On October 13, 1997, the Company executed a ten-year collateralized lease
relative to the facilities housing the Company's new research facility. Such
collateral exists in the form of a certificate of deposit, which is required to
be maintained at least through the end of the seventh year of the lease.
-24-
3. LEASES
At December 31, 1998 and 1997, the Company had assets totaling $11.6 million and
$14.0 million, respectively, financed by capital lease agreements which expire
through December 2001. Accumulated depreciation and amortization includes $8.0
million and $10.1 million of amortization related to these assets at December
31, 1998 and 1997, respectively. Amortization of assets financed by capital
leases is included with depreciation expense.
The Company leases its facilities under a number of operating leases extending
through November 2007. The Company has the option to cancel one of its operating
lease agreements with the payment of a $180,000 penalty. Total rent expense was
$456,000, $312,000, and $334,000 for the years ended December 31, 1998, 1997,
and 1996, respectively.
At December 31, 1998, the Company's minimum future commitments under capital and
operating leases were as follows:
Operating Capital
Leases Leases
------ ------
1999............................................ $461,000 $2,967,000
2000............................................ 468,000 664,000
2001............................................ 481,000 11,000
2002............................................ 299,000 0
2003............................................ 253,000 0
Beyond.......................................... 696,000 0
------- -
Total........................................... $2,658,000 $3,642,000
==========
Less amounts representing interest.............. (311,000)
---------
Present value of future minimum lease payments $3,331,000
==========
4. LONG-TERM DEBT
During 1997, $425,000 of outstanding debentures along with $66,000 of accrued
interest were converted into 98,267 shares of Common Stock net of unamortized
debt issuance costs totaling $1,000. In addition, 419 shares of Embrex Common
Stock were issued pursuant to the non-cash exercise of warrants related to the
initial sale of such debentures.
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, 1998, the Company had reserved a total of 2,296,113 shares of
its Common Stock for future issuance as follows:
For exercise of warrants to purchase Common Stock............... 171,000
For exercise of Common Stock options............................ 2,092,400
For possible future issuance to employees and others
under employee stock purchase plans............................. 32,713
-------
Total reserved.................................................. 2,296,113
==========
-25-
At December 31, 1998, the Company had issued and outstanding warrants to
purchase Common Stock as follows:
Date through Which
Exercise Price Shares Reserved for Warrants are
Per Share Exercise of Warrants Exercisable
--------- -------------------- -----------
$9.50.............................. 30,000 12/31/00
$9.50.............................. 15,000 6/9/01
$6.00.............................. 96,000 4/30/00
$7.28.............................. 30,000 10/30/01
------
171,000
-------
In October 1998, the Company announced that the Board of Directors authorized a
share repurchase program to purchase up to 10 percent of outstanding shares of
Common Stock, or up to approximately 830,000 shares over 18 months, in open
market or privately negotiated transactions. As of December 31, 1998, the
Company had purchased 40,800 shares for $213,000 at an average price of $5.2215.
6. STOCK OPTION PLANS
The Company has elected to follow Accounting Principles Board Option No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation," requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
The Company's stock option plans provide for option grants designated as either
non-qualified or incentive stock options. The options generally vest over a
four-year period and expire ten years from the date of grant. In general, the
exercise price of stock options is the closing price of the Company's Common
Stock on the date of grant.
Most U.S. employees and certain employees outside the 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 Expiration
of Shares Range per Share Date
--------- --------------- ----
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 $2.00
--------
Balance at December 31, 1996, outstanding
options..................................... 866,414 $2.00 to $8.375 1998-2006
Granted ................................ 279,525 $6.063 to $7.125 2007
Exercised............................... (53,773) $2.00 to $7.00
Canceled................................ (53,468) $6.125 to $7.00
--------
Balance at December 31, 1997, outstanding
options..................................... 1,038,698 $2.00 to $8.75 1998-2007
Granted................................. 307,495 $5.00 to $6.375
Exercised............................... (3,900) $2.00
Canceled................................ (47,754) $5.375 to $7.00
--------
Balance at December 31, 1998, outstanding
options..................................... 1,294,539 $2.00 to $8.75 1999-2008
========= ============== =========
-27-
The Company's 1998 Amendment to its 1993 Incentive Stock Option Plan increased
the authorized grant of options to company personnel from 1.2 million shares of
common stock up to 1.9 million shares. All options granted have 10 year terms
and a four year vesting schedule.
Pro forma information regarding net income and income per share is required by
SFAS 123, and has been determined as if the Company accounted for its employee
stock options granted subsequent to December 31, 1994 under the fair value
method of SFAS 123. The fair value for these options was estimated at the date
of grant using a Black-Scholes option pricing model with the following weighted
average assumptions:
1998 1997 1996
---- ---- ----
Risk free interest rate.......... 4.92 6.13 6.42
Dividends........................ -- -- --
Volatility factor................ 0.305 0.358 0.421
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 pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:
For the year ended December 31
------------------------------
1998 1997 1996
---- ---- ----
Pro forma net income (in thousands)........ $2,212 $1,272 $ 107
Pro forma basic income per share........... $ 0.27 $ 0.16 $0.01
The weighted average remaining contractual life of those options is 6.70 years.
The weighted average exercisable price of outstanding options at December 31,
1998 is $5.59.
-28-
7. EMPLOYEE STOCK PURCHASE PLAN
The Company has an Employee Stock Purchase Plan (the "Purchase Plan") to provide
its employees with an additional opportunity to share in the ownership of the
Company. Under terms of the Purchase Plan, all regular full-time employees of
the Company may make voluntary payroll contributions thereby enabling them to
purchase Common Stock. Contributions are limited to 20 percent of an employee's
compensation. Up to 100,000 shares of Common Stock may be issued under the
Purchase Plan. The purchase price of the stock is the lesser of the Fair Market
Value on the first business day of the Purchase Period or 85% of the Fair Market
Value on the date of exercise which can be at any time during the Plan year.
Under the Purchase Plan, during 1998, 1997 and 1996, 20,594, 9,764 and 11,028
shares of Common Stock, respectively, were purchased. To date, 67,287 shares of
Common Stock have been purchased.
8. 401(k) RETIREMENT SAVINGS PLAN
The Company has a 401(k) plan which is available to all employees upon
employment who are at least 18 years of age. Employer contributions are
voluntary at the discretion of the Company.
Company contributions amounted to $62,988 and $44,080 for the years ended
December 31, 1998 and 1997. There were no Company contributions for the year
ended December 31, 1996.
9. INCOME TAXES
The components of income tax expense for the year ended December 31 are as
follows:
1998 1997 1996
---- ---- ----
Current:
Federal........................................... $197,000 $59,000 $45,000
State.............................................. 34,000 84,000 30,000
Foreign........................................... 145,000 279,000 120,000
------- ------- -------
$376,000 $422,000 $195,000
======= ======= =======
The Company's consolidated effective tax rate differed from the statutory rate
as set forth below for the year ended December 31:
1998 1997 1996
---- ---- ----
Federal taxes at statutory rate................ $1,101,000 $742,000 $182,000
State and local income taxes, net of Federal
benefit........................................ 162,000 84,000 30,000
Non-deductible expenses........................ 75,000 24,000 220,000
Foreign losses for which no benefit has been
recognized................................ 230,000 346,000 114,000
Change in valuation allowance.................. (1,337,000) (1,112,000) (516,000)
Alternative minimum and foreign withholding
taxes.......................................... 145,000 338,000 165,000
------- ------- -------
$376,000 $422,000 $195,000
======== ======== ========
-29-
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,
---------------
1998 1997
---- ----
Deferred tax assets:
Book over tax depreciation........................... $278,000 $718,000
Net operating loss carryforwards..................... 9,710,000 11,430,000
Research and experimental tax credit carryforwards... 2,228,000 1,915,000
Charitable contributions carryforward................ 22,000 16,000
Accrued liabilities and reserves..................... 457,000 158,000
Alternative Minimum Tax credit carryforward.......... 205,000 0
------------- -------------
Total deferred tax assets........................ $12,900,000 $14,237,000
Valuation allowance for deferred tax assets..............($12,900,000) ($14,237,000)
------------- -------------
Net deferred tax assets............................ $0 $0
== ==
During 1998 and 1997, the valuation allowance decreased by ($1,337,000) and
($1,264,000), respectively.
At December 31, 1998, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $25.6 million which are available
to offset future taxable income. These net operating loss carryforwards 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 carryforwards 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 carryforwards
incurred subsequent to the 1991 IPO are not subject to these change in ownership
limitations.
In addition, the Company has Research and Experimental Tax Credit carryforwards
totaling approximately $2.2 million which are available to offset future federal
income taxes. These credits expire during the years 2000 through 2013.
10. COMMITMENTS
As of December 31, 1998, the Company had outstanding purchase commitments of
approximately $3.5 million related to the production of the Company's
Bursaplex(R) product, VNF(R) for the manufacture of Bursaplex(R) and
Bursamune(TM), and materials and supplies for the construction and maintenance
of INOVOJECT(R) egg injection systems.
-30-
11. NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net income
per share (in thousands, except per share amounts):
1998 1997 1996
---- ---- ----
Numerator:
Net Income Available To Common Stockholders............... $2,861 $1,760 $341
Effect of dilutive securities:
Regulation S Debentures........................... 0 9 122
- - ---
Numerator for diluted earnings per share-income
available to common stockholders after assumed
conversions.................................... $2,861 $1,769 $463
====== ====== ====
Denominator:
Denominator for basic net income per share--weighted-average
shares.................................................... 8,255 8,184 7,218
Effect of Dilutive Securities:
Employee Stock Options............................ 84 143 188
Warrants.......................................... 0 8 12
Convertible Debentures............................ 0 4 102
- - ---
Dilutive Potential Shares...................... 84 155 302
Denominator for diluted net income per
share--adjusted weighted-average shares and
assumed conversions............................ 8,339 8,339 7,520
===== ===== =====
Basic net income per share................................ $0.35 $0.21 $0.05
===== ===== =====
Diluted net income per share.............................. $0.34 $0.21 $0.06
===== ===== =====
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
-31-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information on the executive officers and directors is incorporated by reference
from the Company's Proxy Statement (under the headings "Management" and
"Proposal 1: Election of Directors," respectively), with respect to the Annual
Meeting of Shareholders to be held on May 20, 1999, 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 20, 1999, 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
20, 1999, to be filed with the Securities and Exchange Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
-32-
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, 1998 and 1997
Consolidated Statements of Operations for each of the three fiscal years
ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for each of the three fiscal years
ended December 31, 1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity for each of the three
fiscal years ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
(a)(2). The financial statements of the Company's Employee Stock Purchase Plan
listed below are filed herewith, pursuant to Form 10-K, General
Instruction F.
Report of Independent Auditors
Financial Statements
Statements of Net Assets Available for Plan Benefits at December 31, 1998
and 1997
Statements of Changes in Net Assets Available for Plan Benefits for the
three years ended December 31, 1998, 1997 and 1996
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 10.40.
Exhibits Description
3.1(1) Restated Articles of Incorporation
3.2(2) Articles of Amendment to Restated Articles of Incorporation,
effective March 21, 1996
3.3(3) Articles of Amendment to Restated Articles of Incorporation,
effective May 28, 1996
3.4 Amended and Restated Bylaws, effective May 21, 1998
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4
4.2(4) Specimen of Common Stock Certificate
4.3(5) Warrant to Purchase Common Stock of Embrex issued to Schwartz
Investments, Inc.
4.4(6) Rights Agreement dated as of March 21, 1996 between Embrex and
Branch Banking and Trust Company, as Rights Agent
10.1(7) Exchange Agreement dated May 28, 1991, between Embrex and
American Cyanamid Company, Advent First Limited Partnership A,
Biotechnology Venture Fund S.A., Biotechnology Investments
Limited, Domain Partners, L.P., Elf Technologies, Inc., Prince
Venture Partners III, L.P., 3I Securities Corporation, and
Charles E. Austin
10.2(7) License Agreement dated December 11, 1991, between Embrex and the
National Technical Information Service, a primary operating unit
of the United States Department of Commerce
10.3(7) Collaborative Research Agreement dated January 17, 1989 between
Embrex and the University of Arkansas
10.4(7) License Agreement dated October 1, 1998 between Embrex and the
National Technical Information Service, a primary operating unit
of the United States Department of Commerce
10.5(7) Lease Agreement dated December 9, 1986 between Embrex, as tenant,
and Imperial Center Partnership and Petula Associates, Ltd., as
landlord, as amended by First Amendment dated June 11, 1987,
Second Amendment dated December 1, 1988, and Third Amendment
dated May 2, 1989
10.6(4) Fourth Amendment of Lease dated October 1, 1994 between the
Company and Glaxo Inc. (as successor in interest to Imperial
Center Partnership and Petula Associates, Ltd.)
10.7(4) Fifth Amendment of Lease dated December 13, 1996 between the
Company and Glaxo Wellcome Inc. (as successor in interest to
Glaxo Inc.)
10.8(8) Lease for Royal Center II dated October 13, 1997 between the
Company and Petula Associates, Ltd.
10.9(7) Facility Agreement dated March 1, 1991, between Embrex and
Mississippi Agriculture and Forestry Experiment Station,
Mississippi State University
10.10(7) Unrestricted Grant Agreement dated April 1, 1988, between Embrex
and North Carolina State University, as amended by Amendment
dated September 15, 1989 and Amendment dated April 22, 1991
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10.11(7) Unrestricted Grant Agreement dated November 1, 1986, between
Embrex and North Carolina State University, as amended by
Amendment dated May 3, 1989, Amendment dated September 15, 1989,
and Amendment dated April 22, 1991
10.12(7) Basic Research Agreement dated October 24, 1989, between Embrex
and University of Arkansas, as amended on October 23, 1990,
February 1, 1991 and July 22, 1991
10.13(7) 1988 Incentive Stock Option Plan and form of Incentive Stock
Option Agreement
10.14(7) 1989 Nonstatutory Stock Option Plan and form of Nonstatutory
Stock Option Agreement
10.15(7) 1991 Nonstatutory Stock Option Plan and form of Nonstatutory
Stock Option Agreement
10.16(9) Incentive Stock Option and Nonstatutory Stock Option Plan and
forms of Stock Option Agreements - June 1993
10.17(3) Amendment dated May 16, 1996 to Incentive Stock Option and
Nonstatutory Stock Option Plan - June 1993
10.18(10) Amended and Restated Incentive Stock Option and Nonstatutory
Stock Option Plan - May 1998
10.19(4) Amended and Restated Employee Stock Purchase Plan
10.20(7) Employment Agreement dated November 15, 1989, between Embrex and
Randall L. Marcuson
10.21(4) Amendment to Employment Agreement dated May 21, 1996 between
Embrex and Randall L. Marcuson
10.22(4) Change In Control Severance Agreement dated May 21, 1996 between
Embrex and Randall L. Marcuson
10.23 Amendment to Change in Control Severance Agreement dated October
1, 1998 between Embrex and Randall L. Marcuson
10.24(7) Employment Agreement dated October 16, 1989, between Embrex and
Catherine A. Ricks
10.25(4) Change In Control Severance Agreement dated May 21, 1996 between
Embrex and Catherine A. Ricks
10.26 Amendment to Change in Control Severance Agreement dated October
1, 1998 between Embrex and Catherine A. Ricks
10.27(2) General Provisions to Employment Agreement between Embrex and
Brian V. Cosgriff dated August 18, 1995
10.28(4) Change In Control Severance Agreement dated May 21, 1996 between
Embrex and Brian V. Cosgriff
10.29 Amendment to Change in Control Severance Agreement dated October
1, 1998 between Embrex and Brian V. Cosgriff
10.30(2) Terms and Conditions of Employment between Embrex Europe Limited
and David M. Baines dated May 12, 1994
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10.31(4) Change In Control Severance Agreement dated June 9, 1996 between
Embrex and David M. Baines
10.32 Amendment to Change in Control Severance Agreement dated October
1, 1998 between Embrex and David M. Baines
10.33(4) Letter Agreement and General Provisions to Employment Agreement
dated August 20, 1996 between Embrex and Don T. Seaquist and
Amendment to Employment Agreement dated September 9, 1996 between
Embrex and Don T. Seaquist
10.34(4) Change In Control Severance Agreement dated September 9, 1996
between Embrex and Don T. Seaquist
10.35 Amendment to Change in Control Severance Agreement dated October
1, 1998 between Embrex and Don T. Seaquist
10.36 Letter Agreement and General Provisions to Employment Agreement
dated May 31, 1991 between Embrex and V. Hayes Fenstermacher and
Amendment to Employment Agreement dated July 18, 1996 between
Embrex and V. Hayes Fenstermacher
10.37 Change In Control Severance Agreement dated October 16, 1996
between Embrex and V. Hayes Fenstermacher
10.38 Amendment to Change in Control Severance Agreement dated October
1, 1998 between Embrex and V. Hayes Fenstermacher
10.39 Letter Agreement and General Provisions to Employment Agreement
dated February 3, 1999 between Embrex and Brian C. Hrudka
10.40 Change In Control Severance Agreement dated March 24, 1999
between Embrex and Brian C. Hrudka
10.41(7) Shareholders' Agreement dated August 14, 1991 by and among
Embrex, Advent Euroventures Limited Partnership, and Plant
Resource Venture Fund II Limited Partnership
10.42(8) INOVOJECT(R) Egg Injection System Lease, Limited License, Supply
and Service Agreement dated September 1, 1994 between Embrex and
Tyson Foods, Inc. (asterisks located within the exhibit denote
information which has been deleted pursuant to a request for
confidential treatment filed with the Securities and Exchange
Commission)
10.43(8) Amendment dated March 26, 1997 to the INOVOJECT(R) Egg Injection
System Lease, Limited License, Supply and Service Agreement dated
September 1, 1994 between Embrex and Tyson Foods, Inc. (asterisks
located within the exhibit denote information which has been
deleted pursuant to a request for confidential treatment filed
with the Securities and Exchange Commission)
10.44(11) Master Lease Agreement dated December 3, 1993 between Embrex and
Capital Associates International, Inc. with a form of equipment
schedule and collateral assignment of lease attached
10.45(11) Master Lease Agreement dated January 28, 1994 between Embrex and
Aberlyn Capital Management Limited Partnership with a form of
lease schedule and collateral assignment of lease attached
10.46(11) Agreement to Issue Warrant dated January 28, 1994 between Embrex
and Aberlyn Capital Management Limited Partnership
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10.47(11) Common Stock Purchase Warrant issued to Aberlyn Capital
Management Limited Partnership
10.48(11) Agreement to Issue Warrant dated January 28, 1994 between Embrex
and Aberlyn Holding Company, Inc.
10.49(11) Common Stock Purchase Warrant issued to Aberlyn Holding Company,
Inc.
10.50(12) 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
10.51(12) License Agreement dated as of December 7, 1994 between Financing
for Science International, Inc. and Embrex with Sublicense
Agreement attached
10.52(12) Common Stock Purchase Warrant dated January 17, 1995 issued to
Financing for Science International, Inc.
10.53(12) Agreement for Sale of Equipment and Rights Under User Agreement
dated as of December 7, 1994 between Financing for Science
International, Inc. and Embrex
10.54(2) Limited License and Supply Agreement dated as of July 20, 1995
between Embrex and Webster
10.55(4) Amendments dated August 1, 1996 and November 11, 1996 to Limited
License and Supply Agreement dated as of July 20, 1995 between
Embrex and Webster
10.56(2) Agreement dated as of January 22, 1996 between Embrex and Select
10.57(2) Letter Agreement dated as of January 22, 1996 between Select and
Embrex
10.58(2) License dated as of January 22, 1996 granted by Select to Embrex
10.59(2) Commitment letter accepted June 14, 1995 between Embrex and
Financing for Science International, Inc. for $2.0 million
capital lease financing facility
10.60(2) Stock Purchase Warrant dated June 9, 1995 issued to Financing for
Science International, Inc.
10.61(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
10.62(2) License Agreement dated October 30, 1995 between Embrex and Lease
Management Services, Inc.
10.63(2) Sublicense Agreement dated as of October 30, 1995 between Embrex
and Lease Management Services, Inc.
10.64(2) Movable Hypothec on Equipment and Contracts dated as of October
30, 1995 between Embrex and Lease Management Services, Inc.
10.65(2) Warrant to Purchase 30,000 Shares of Common Stock dated October
30, 1995 issued to Lease Management Services, Inc.
10.66(2) Intercreditor Agreement dated as of October 31, 1995 among
Financing for Science International, Inc., Lease Management
Services, Inc., and Embrex.
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21 Subsidiaries
23 Consent of Ernst & Young LLP to the inclusion of their report
dated March 1, 1999 with respect to the consolidated 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 Nos. 33-51582, 33-63318, 333-04109, and
333-56279), as filed with the Securities and Exchange Commission
on September 1, 1992, May 25, 1993, May 20, 1996, and June 8,
1998, respectively, and to the incorporation by reference in the
Registration Statement on Form S-8 (Registration No. 33-63318)
pertaining to the Employee Stock Purchase Plan of their report
dated March 30, 1999 with respect to the financial statements of
the Embrex, Inc. Employee Stock Purchase Plan included in this
Form 10-K.
24 Powers of Attorney (included in the signature page for this
report)
27 Financial Data Schedule to the Company's Form 10-K for the year
ended December 31, 1998.
99 Risk Factors relating to the Company
(1) Exhibit to the Company's Form 10-K as filed with the Securities and
Exchange Commission for fiscal year ending December 31, 1991 and
incorporated herein by reference
(2) Exhibit to the Company's Form 10-K as filed with the Securities and
Exchange Commission for the fiscal year ending December 31, 1995 and
incorporated herein by reference
(3) Exhibit to the Company's Form 10-Q as filed with the Securities and
Exchange Commission for the three months ended June 30, 1996 and
incorporated herein by reference
(4) Exhibit to the Company's Form 10-K as filed with the Securities and
Exchange Commission for fiscal year ending December 31, 1996 and
incorporated herein by reference
(5) Exhibit to the Company's Form 10-Q as filed with the Securities and
Exchange Commission for the three months ended June 30, 1995 and
incorporated herein by reference
(6) Exhibit to the Company's Registration Statement on Form 8-A as filed with
the Securities and Exchange Commission on March 22, 1996 and incorporated
herein by reference
(7) Exhibit to the Company's Registration Statement on Form S-1 as filed with
the Securities and Exchange Commission (Registration No. 33-42482)
effective November 7, 1991 and incorporated herein by reference
(8) Exhibit to the Company's Form 10-K as filed with the Securities and
Exchange Commission for the fiscal year ending December 31, 1997 and
incorporated herein by reference.
(9) Exhibit to the Company's Form 10-K as filed with the Securities and
Exchange Commission for the fiscal year ending December 31, 1992 and
incorporated herein by reference
(10) Exhibit to the Company's Registration Statement on Form S-8 as filed with
the Securities and Exchange Commission (Registration No. 333-56279)
effective June 8, 1998 and incorporated herein by reference
(11) Exhibit to the Company's Form 10-KSB, as amended, as filed with the
Securities and Exchange Commission for the fiscal year ending December 31,
1993 and incorporated herein by reference
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(12) Exhibit to the Company's Form 10-K as filed with the Securities and
Exchange Commission for the fiscal year ending December 31, 1994 and
incorporated herein by reference
(b). No reports on Form 8-K were filed during the last quarter of the fiscal
year ended December 31, 1998.
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SIGNATURES AND POWER OF ATTORNEY
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
EMBREX, INC.
/s/ Randall L. Marcuson
By:________________________
Date : March 31, 1999 Randall L. Marcuson
President and Chief
Executive Officer
We, the undersigned directors and officers of Embrex, Inc. (the
"Company"), do hereby constitute and appoint Randall L. Marcuson and Don T.
Seaquist or either of them, our true and lawful attorneys-in-fact and agents,
with full power of substitution, to execute and deliver an Annual Report on Form
10-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended (the "Act"), with respect to the year ended December 31, 1998, to be
filed with the Securities and Exchange Commission, and to do any and all acts
and things and to execute any and all instruments for us and in our names in the
capacities indicated below, which said attorneys-in-fact and agents, or either
of them, may deem necessary or advisable to enable the Company to comply with
the Act and any rules, regulations, and requirements of the Securities and
Exchange Commission in connection with such Report, including without limitation
the power and authority to execute and deliver for us or any of us in our names
and in the capacities indicated below any and all amendments to such Report; and
we do hereby ratify and confirm all that the said attorneys-in-fact and agents,
or either of them, shall do or cause to be done by virtue of this power of
attorney.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Randall L. Marcuson
____________________ President, Chief Executive Officer March 31, 1999
Randall L. Marcuson and Director
/s/ Don T. Seaquist
____________________ Vice President, Finance and March 31, 1999
Don T. Seaquist Administration (Principal Financial
and Accounting Officer)
/s/ Charles E. Austin
____________________ Chairman of the March 31, 1999
Charles E. Austin Board of Directors
/s/ C. Daniel Blackshear
____________________ Director March 31, 1999
C. Daniel Blackshear
/s/ Lester M. Crawford
____________________ Director March 31, 1999
Lester M. Crawford, D.V.M. Ph.D.
/s/ Peter J. Holzer
____________________ Director March 31, 1999
Peter J. Holzer
/s/ Kenneth N. May
____________________ Director March 31, 1999
Kenneth N. May, Ph.D.
/s/ Arthur M. Pappas
____________________ Director March 31, 1999
Arthur M. Pappas
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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, 1998
and 1997, and the related statements of changes in net assets available for plan
benefits for each of the three years in the period ended December 31, 1998.
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, 1998 and 1997, and the changes
in net assets available for plan benefits for each of the three years in the
period ended December 31, 1998 in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Raleigh, North Carolina
March 30, 1999
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STATEMENTS OF NET ASSETS AVAILABLE FOR PLAN BENEFITS
EMBREX, INC. EMPLOYEE STOCK PURCHASE PLAN
At December 31,
1998 1997
---- ----
Receivable from Company.......................... $46,243 $38,666
------- -------
Net assets available for Plan benefits........... $46,243 $38,666
======= =======
See accompanying notes.
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STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS
EMBREX, INC. EMPLOYEE STOCK PURCHASE PLAN
Years Ended December 31,
1998 1997 1996
---- ---- ----
Employee contributions................................... $137,454 $87,189 $79,487
Deductions:
Purchases of Common Stock................. 99,354 46,355 59,116
Withdrawals............................... 30,523 28,245 31,394
------ ------ ------
129,877 74,600 90,510
------- ------ ------
Net (decrease) increase.................................. 7,577 12,589 (11,023)
Net assets available for Plan benefits at
beginning of period....................... 38,666 26,077 37,100
------ ------ ------
Net assets available for Plan benefits at
end of period............................. $46,243 $38,666 $26,077
======= ======= =======
Shares of Common Stock purchased
during year 20,594 8,209 11,028
====== ===== ======
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EMBREX, INC. EMPLOYEE STOCK PURCHASE PLAN
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
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.
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