UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2000
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)
1040 Swabia Court, Durham, North Carolina 27703
(Address of principal executive offices) (Zip Code)
(919) 941-5185
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.01 Par Value Per Share (and Rights Attached Thereto)
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of February 28, 2001, the aggregate market value of the voting stock held by
non-affiliates was $107,432,787 million, based on a price per common share of
$14.125 at the close of business on that date.
As of February 28, 2001, there were 7,923,306 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 17,
2001, to be filed with the Securities
and Exchange Commission
INDEX
PART I PAGE
ITEM 1. BUSINESS.................................................................................... 3
ITEM 2. PROPERTIES.................................................................................. 9
ITEM 3. LEGAL PROCEEDINGS........................................................................... 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......................................... 11
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......................................................... 13
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK........................................................................................ 16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................................................. 16
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE......................................................... 34
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......................................... 34
ITEM 11. EXECUTIVE COMPENSATION...................................................................... 35
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................................................. 35
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............................................. 35
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K................................................................................. 35
SIGNATURES............................................................................................................. 40
2
PART I
ITEM 1. BUSINESS
GENERAL
Embrex, Inc. ("Embrex" or the "Company") develops and markets biological
delivery technology and biological products to increase the productivity and
profitability of the global poultry industry. The Company was incorporated in
1985 in North Carolina.
Embrex has developed and commercialized the Inovoject(R) system, a proprietary,
automated in-the-egg injection system which can inoculate 20,000 to 50,000 eggs
per hour and eliminates the need for manual, post-hatch injection of certain
vaccines. The Inovoject(R) system is designed to inject vaccines and other
compounds in precisely calibrated volumes into targeted compartments within the
egg. Embrex markets the Inovoject(R) system to commercial poultry producers,
charging a fee for each egg injected.
In addition to the Inovoject(R) system, Embrex has developed and is marketing
its Viral Neutralizing Factor ("VNF(R)") technology, useful in the development
of certain avian vaccines. The Company also has developed and is marketing
Bursaplex(R), a VNF(R)-based vaccine for protection against avian infectious
bursal disease ("IBD"). Embrex also is developing various other proprietary
pharmaceutical and biological products to improve bird health, reduce bird
production costs and provide other economic benefits to the poultry industry.
These products are in various stages of development, and some are being
developed in collaboration with major drug companies, the United States
Department of Agriculture (the "USDA"), and several leading universities in the
field of avian science. These products are being designed to be delivered
through the Inovoject(R) system, and some may also be administered prior to
incubation as well as 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 2000, the Company converted a number of hatcheries to the Inovoject(R) system
and continued operating Inovoject(R) systems in hatcheries converted prior to
2000. The Company estimates that its Inovoject(R) system inoculates in excess of
80% of all eggs produced for the North American broiler poultry market and,
therefore, expects diminished growth in the number of system installations and
only modest Inovoject(R) system revenue growth in this market. Therefore, the
Company must expand its Inovoject(R) system installations and product sales in
markets outside North America in order to realize significant overall revenue
growth. The Company estimates that approximately 69% of the world broiler
production occurs outside the United States and Canada. Accordingly, the Company
is continuing to implement a strategy of marketing its Inovoject(R) system
outside North America.
During 2000, the Company placed a number of Inovoject(R) systems for trial and
on contract at locations outside the United States and Canada. The Company's
expansion outside the United States and Canada was focused initially on Europe,
the Middle East, and Africa. In the second half of 1997, the Company began
expansion efforts in Asia and, in 1998, in Latin America. At year-end 2000, the
Company had Inovoject(R) systems either installed or on trial in 31 countries.
Overall, the placement of Inovoject(R) systems outside the United States and
Canada is dependent on market acceptance of various in ovo ("in the egg")
vaccines and obtaining regulatory approval of these vaccines in numerous
countries.
Certain poultry diseases are more prevalent in some geographic regions than in
others. For example, Marek's disease, for which the Inovoject(R) system
primarily is used in the United States, is not as widespread in Europe as in
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North America. Infectious Bursal Disease (also known as Gumboro disease) is
prevalent in Northern Europe, Asia, parts of Latin America 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 four issued U.S. patents, a pending U.S.
patent application, and several foreign patents and foreign patent applications.
The U.S. patents are owned by the University of Arkansas and exclusively
licensed to Embrex on a royalty basis for the life of the patents. Embrex also
is researching application of VNF(R) technology for other avian disease
vaccines, including Newcastle disease and infectious bronchitis, although there
is no assurance such research will result in product opportunities.
To date, the Company's research efforts with its VNF(R) technology have been
focused primarily on avian uses. Based on initial experimental data, the Company
now believes that the potential exists for VNF(R) to be used in several
non-primate species. A U.S. patent claiming the use of VNF(R) viral vaccines in
all non-primate animals was allowed in 1997 and issued in February 1999. The
Company is in the early stages of exploring collaborative relationships with
other companies for the development and licensing of VNF(R) for non-primate
uses. In August 1999, Embrex entered into a renewable research collaboration
with Boehringer Ingelheim Vetmedica, Inc., part of the Boehringer Ingelheim
worldwide group of companies, North Carolina State University, and The William
R. Kenan Institute for Engineering Technology and Science, with the objective of
developing VNF(R)-based vaccines for animal species other than poultry. Embrex
has not initiated any regulatory approval processes with respect to non-primate
uses of VNF(R) technology, nor is there any assurance that its efforts in this
area will result in products or other collaborative agreements.
Infectious Bursal Disease (IBD) Vaccines
VNF(R) technology is especially useful in vaccines against avian IBD, which
weakens a bird's immune system. Birds infected by IBD typically exhibit poor
growth or can succumb to other diseases because of a compromised immune system.
This disease is currently widespread in Northern Europe, Asia, parts of Latin
America and, to a lesser extent, in the United States. To date, IBD has been
treated post-hatch via manually delivered vaccines or in drinking water.
Existing vaccines are associated with certain limitations, and some vaccines
cannot be used safely or effectively in ovo. The Company estimates the worldwide
market for IBD vaccines is approximately $60 million annually.
Embrex currently is seeking regulatory approval in selected Latin American and
Asian markets for in ovo and post-hatch use of Bursaplex(R) and in December 2000
Shionogi & Co., LTD, Embrex's Japanese distributor, received regulatory approval
of the product in Japan, the world's ninth largest market in number of broilers
produced. While Embrex has received regulatory approval in some of these
markets, there is no assurance that the remaining approvals will be obtained.
The placement of Inovoject(R) systems outside the United States and Canada
depends, in part, on market acceptance of various in ovo vaccines as well as
regulatory approval. To date, regulatory approval for Bursaplex(R) has been
received in 16 countries besides the United States, and regulatory approval is
temporary or pending in nine countries.
In August 1995, the Company entered into an agreement with Cyanamid Websters, a
unit of Fort Dodge Animal Health ("Ft. Dodge"), a division of American Home
Products Corp., for the joint development of another IBD vaccine containing
VNF(R), which is being marketed by Ft. Dodge in certain European countries and,
upon receipt of appropriate regulatory approvals, will be marketed by Ft. Dodge
throughout the rest of Europe, the Middle East, and Africa, under Ft. Dodge's
trade name "Bursamune(R)". To date, Bursamune(R) has received regulatory
approval in
4
Italy, Spain, Poland, the United Kingdom and South Africa. In April 2000, Ft.
Dodge received marketing authorization from the Veterinary Products Committee in
the U.K. for the in ovo administration of Bursamune(R) to broiler chickens.
While approval of Bursamune(R) by the U.K. Veterinary Products Committee may
expedite the regulatory approval process for Bursamune(R) in ovo in other
European countries which may allow "mutual recognition" in reliance on the U.K.
approval, there can be no assurances that other European countries will speed
approval in reliance on the U.K. approval. In October 1999, French regulatory
authorities granted a one-year provisional approval for the utilization of
Bursamune(R) for in ovo administration. The French regulatory authorities have
requested additional information before renewing this provisional marketing
approval. Embrex is currently assisting Ft. Dodge in responding to this request,
but there can be no assurances that the French regulatory authorities will grant
the renewal.
PRODUCTS UNDER DEVELOPMENT
Embrex is developing individually, and in collaboration with others, additional
products which address poultry health and performance needs when administered in
ovo and, in some cases, after hatching. These additional products are in various
stages of development. There can be no assurance that Embrex will successfully
develop or market any of these products. Marketing products developed jointly
with others may require royalty or other payments by Embrex to its
co-developers. Embrex has not initiated the regulatory approval process for any
of these potential products, and there is no assurance regulatory approval will
be obtained.
In Ovo Products For Control Of Coccidiosis
In 1995, the Company began an initiative aimed at developing a novel in ovo
biological control method for coccidiosis. Coccidiosis is caused by a protozoan
parasite, which attacks the gut of the chicken, causing significant problems
with the intake and digestion of feed and, therefore, the physical and economic
performance of the bird. Currently, virtually all broiler chickens, and most
poultry in general, receive anti-coccidiosis compounds called coccidiostats
incorporated into poultry feed. Over the years, coccidia have developed levels
of resistance to these coccidiostats and thus effectiveness has been somewhat
reduced. A limited number of live vaccines have also been developed and are
administered orally soon after hatch. However, due to difficulties in providing
a precise oral dose to each bird, growth depression can occur in broiler flocks.
Therefore, such live vaccines are used primarily in parent stock. Using its
Inovoject(R) system technology and its knowledge of avian embryology, the
Company has begun this initiative to develop a novel, efficacious and
cost-effective means of preventing coccidiosis in broiler chickens. This program
is aimed at overcoming many of the problems associated with current practices.
In 1997, the Company established the feasibility of an in ovo biological control
method for coccidiosis. During 1998, this project met the required internal
milestones regarding results and timeliness. In 1999, Embrex entered into a
collaborative research and development agreement with Pfizer Inc. to research
and develop a live coccidiosis vaccine for in ovo delivery to poultry. During
2000, Embrex initiated large-scale field trials, with a major U.S. poultry
producer, of a laboratory manufactured in ovo coccidiosis vaccine which, to
date, has met the parties' objectives for safety, efficacy and bird performance.
Continued development of this project will involve further extensive clinical
and field trials. There can be no assurances that any of these development
efforts will be successful. Embrex has not initiated the regulatory approval
process with respect to these development efforts, and does not expect any
coccidiosis product developed by the Company to reach the market in the near
future.
Other Products Under Development
During 2000, Embrex continued to evaluate technologies which, when coupled with
Embrex's proprietary in ovo enabling delivery know-how, might have the potential
to yield improvements in the areas of feed conversion, muscle mass and leanness
within broiler chickens. These technologies may be applied at egg transfer or
prior to incubation in order to have the desired effect. While the Company plans
to continue its research efforts in these areas in 2001, there is no assurance
that these efforts will yield product opportunities.
Embrex is also evaluating technologies and developing capabilities for
characterizing and sorting eggs before or after injection by the Inovoject(R)
system. One of these evaluation programs has resulted in the development and
introduction of the Vaccine Saver(R) option for the Inovoject(R) system which
identifies infertile and early-dead eggs and selectively prevents vaccination to
these eggs. It is designed for use in select markets where vaccine prices are
high. The Vaccine Saver(R) option was introduced in Europe in the fourth quarter
of 1999. Embrex is also
5
developing a related system that will work in conjunction with the Inovoject(R)
system to remove infertile and early-dead eggs from setter trays. This product
is currently undergoing hatchery field trials. Other capabilities being
developed by Embrex include automated gender sorting. Early gender sorting
improves processing plant efficiencies through improved carcass uniformity as a
result of gender-specific growth pattern differences. Single gender feed rations
may also improve feed conversion and have a significant impact on production
costs. In 1999, Embrex received a small business research grant to support the
development of an automated device to sort poultry eggs by gender and, in
October 2000, Embrex was awarded a $270,000 follow-on Phase II Small Business
Innovation Research (SBIR) grant to support development of an automated device
for sorting poultry eggs by gender. The U.S. Department of Agriculture's
Cooperative State Research, Education and Extension Service (CSREES) supported
the grant. Embrex has made substantial progress in developing a gender sorting
prototype and in laboratory trials has determined gender in a series of eggs
with 100% accuracy. There is no assurance, however, that such research will
result in product opportunities.
In June 2000, Embrex announced that it had embarked on a research collaboration
with Origen Therapeutics, Inc., a privately held biotechnology company based in
Burlingame, California, aimed at combining Origen's avian embryonic stem (ES)
cell technology with Embrex's in ovo technology. The goal of the collaboration
is to develop methods that enhance poultry production economics through
intervention early in embryonic development.
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.
PATENTS AND PROPRIETARY RIGHTS
Embrex controls (either through direct ownership or exclusive license) 31 issued
U.S. patents, 12 pending U.S. patent applications, 70 issued foreign patents and
65 pending foreign patent applications. In addition, Embrex has executed
confidentiality agreements with its collaborators, subcontractors, employees and
directors.
The Inovoject(R) system utilizes a process of injecting viral, bacterial or
fungal vaccines into avian eggs that was patented in the United States by the
USDA in 1984. Embrex holds the exclusive license to this patent through its
expiration in June 2002. Embrex has supplemented the USDA patent with seven
additional issued U.S. patents (and numerous 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 1995.
A U.S. patent claiming the use of VNF(R) viral vaccines in all non-primate
animals was allowed in 1997 and issued in February 1999. These patents and
additional patent applications encompass the use of VNF(R) vaccine compounds
regardless of the source of the VNF(R). These VNF(R) patents additionally
include composition-of-matter claims to VNF(R) vaccines against IBD virus
disease and composition-of-matter claims to VNF(R) vaccines for combating viral
diseases in non-primate animals. These patent claims cover the vaccine
preparation, regardless of the manner in which the preparation is used. The
Company filed three new U.S. patent applications in 1998, 10 new U.S. patent
applications in 1999, and six new U.S. patent applications in 2000. During 2000,
Embrex also filed two new foreign patent applications. Each application covered
various aspects of in ovo technology.
Embrex continues its efforts to patent methods of delivering compounds in ovo,
including early intervention methods and devices. During the years 1998 through
2000, 14 U.S. patents were issued or allowed, further expanding Embrex's
proprietary position with respect to in ovo technology.
Additionally, Embrex has federally registered the trademarks Embrex(R),
Inovoject(R), VNF(R), Bursaplex(R) and Vaccine Saver(R) in the United States,
and has applied for federal and foreign registration of other various
trademarks.
6
COMPETITION
The competition for the Inovoject(R) system is the manual, post-hatch
administration of biological products. Since most of Embrex's products and
potential products are being designed to be administered through the
Inovoject(R) system, the Inovoject(R) system must continue to be accepted within
the poultry industry and operated as intended under long-term commercial
conditions for these potential products to be marketed successfully.
The Company holds the exclusive license to the U.S. patent for injecting
vaccines into an avian embryo, which expires in June 2002. Embrex has
supplemented this patent with seven 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 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 third-party and in-house in ovo products, achieving and retaining scientific
expertise and technological superiority, identifying and pursuing scientifically
feasible and commercially viable opportunities, obtaining proprietary protection
for its research achievements, obtaining adequate funding and timely regulatory
approvals, and attracting corporate sponsors or partners in developing, testing,
producing, and marketing products, none of which can be assured. In addition, a
primary competitive factor affecting Embrex is its ability to conduct research
and development. Embrex's ability to successfully compete also is dependent on
its ability to attract and retain key personnel. Maintaining financial and human
resources, therefore, are important factors for success.
PRODUCTION, MARKETING AND DISTRIBUTION
Production
Embrex currently subcontracts the production of all of its mechanical and
biological products and expects to continue to do so for the foreseeable future.
The Company believes that alternative sources of manufacture and supply
generally exist.
Inovoject(R) System
Embrex's in-house engineering staff designs the Inovoject(R) system, which
incorporates proprietary mechanical, pneumatic and electronic sub-systems and
concepts. The Company uses one contract manufacturer to fabricate its
Inovoject(R) systems. While other machine fabricators exist and have constructed
limited numbers of Inovoject(R) systems, a change in fabricators could cause a
delay in manufacturing and a possible delay in the timing of future Inovoject(R)
system installations and revenues from those installations.
VNF(R) (Viral Neutralizing Factor) Vaccines
In 1993, Embrex signed multi-year agreements with SPAFAS, Inc. ("SPAFAS"), a
subsidiary of Charles River Laboratories, Inc., under which SPAFAS supplies the
VNF(R) component for the bursal vaccines Bursaplex(R) and Bursamune(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 and Aventis
company) exclusive rights to manufacture, in the United States, IBD vaccines
containing Embrex's VNF(R) product, known as Bursaplex(R), for Embrex to market
in North America, Latin America and Asia. Embrex has also granted Ft. Dodge (a
unit of American Home Products Corp.) rights to manufacture IBD vaccines
containing the Company's VNF(R) product, known as Bursamune(R), to be marketed
in Europe, the Middle East and Africa. Abic Ltd. has been granted similar rights
to manufacture and market an IBD vaccine, known as GuMBryo(TM), in Israel. The
manufacture of the IBD vaccines being produced by Select, Ft. Dodge and Abic,
and the Company's VNF(R) product, generally must be
7
performed in licensed facilities or under approved regulatory methods. Although
there are other manufacturers who are capable of manufacturing IBD products and
producing products such as VNF(R), a change of supplier for the Company could
adversely affect Embrex's future operating results due to the time it would take
a new supplier to obtain regulatory approval of its production process or
manufacturing facilities. The Company seeks to minimize this exposure through
multi-year supply agreements and the maintenance of adequate inventories.
Marketing and Distribution
Because of the geographical and industrial concentration of the poultry industry
in the United States, Embrex markets its products and provides ongoing service
directly to the industry. Embrex's marketing is focused principally on the
broiler chicken segment of the poultry industry, but the Company also has
adapted its products for use by, and initiated trials and entered into
commercial contracts with broiler breeder companies, layer companies and a
limited number of turkey producers.
In order to encourage proper use of the Inovoject(R) system technology within an
appropriate production environment, Embrex leases and licenses Inovoject(R)
systems to hatcheries. The agreements cover the use of the mechanical equipment
and ongoing field service, maintenance and technical support provided by Embrex.
The agreements also include a license with royalty fees for use of Embrex's
proprietary injection process. Products which are delivered in ovo are sold
separately and generate some royalty revenue for the Company.
The Company has initiated arrangements for international distribution of
Bursaplex(R), subject in each case to the availability of required regulatory
approvals. The Company has agreements with other parties to distribute
Bursaplex(R) in Chile, Peru and Pakistan. Of these countries, regulatory
approval has been granted in Peru and Pakistan. An agreement for Israel also
entitles a distributor, Abic Ltd., to manufacture and market 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. In 1997 and
1998, the Company entered into agreements with other parties to distribute
Bursaplex(R) in Venezuela, Colombia, South Korea, Malaysia, Taiwan, Japan and
Vietnam, subject to regulatory approvals. To date, regulatory approval for
Bursaplex(R) has been granted in 16 countries besides the United States, and
regulatory approval is temporary or pending in nine countries. Embrex also added
staff for selected Asian and Latin American markets and installed Inovoject(R)
systems on a commercial or trial basis in certain Asian markets. In 1998, Embrex
established Embrex BioTech Trade (Shanghai) Co., Ltd. in China, which will focus
on marketing and distribution of Embrex products in China. Also in 1998, Embrex
established Embrex Inc. Sucursal Argentina, a branch office in Argentina,
responsible for commercial development and customer service and support.
Initially, this office will serve only Argentina, but may extend to other
regional markets such as Chile, Paraguay or Uruguay. In 1999, Embrex established
a subsidiary in Brazil, Inovoject do Brasil Ltda. Also, in April 1999,
Bangkok Livestock Processing Company, Ltd. began administering Bursaplex(R)
using Embrex's Inovoject(R) system in Thailand.
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. The Japanese Ministry of Agriculture, Fisheries and Forestry
granted veterinary medical device regulatory approval in 1999. Ishii is
marketing the Inovoject(R) egg injection system to poultry producers throughout
Japan. In December 2000, Shionogi & Co., LTD, Embrex's exclusive distributor in
Japan for Bursa-BDA [NP], the Japanese product name for Bursaplex(R),
successfully gained the necessary regulatory registration of the product
Bursa-BDA [NP] for the Japanese market.
The Company's revenues attributable to international operations in 2000, 1999,
and 1998 were 29%, 23% and 20% of the Company's consolidated revenues,
respectively. The Company's identifiable assets attributable to international
operations in 2000, 1999 and 1998 were 36%, 30% and 26% of the Company's
consolidated assets, respectively.
8
The Company's gross profit attributable to international operations in 2000,
1999 and 1998 were 20%, 19% and 14% of the Company's consolidated gross profit
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 facility has increased the Company's clinical trial
capabilities. Research and development expense was $5.0 million in 1998, $5.9
million in 1999 and $6.7 million in 2000. The increase in research and
development expense from 1998 to 2000 largely reflects increases in outside
contract research, supplies consumption, operating activities at the new
research facility, and Inovoject(R) system design and development and global
technical support activity. Research and development is principally Company
sponsored and funded primarily from internal sources.
GOVERNMENTAL REGULATION
Regulation by governmental authorities in the United States and other countries
is a significant factor in the production and marketing of Embrex's products and
in its on-going research and development activities. Although the use of the
Inovoject(R) system is not subject to regulatory approval in the United States,
animal health products 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 in the U.S., the USDA has
regulatory authority over products which are biological in origin or which
stimulate or affect an animal's immune system, and the FDA has authority over
all other products. The time and cost of USDA approvals are generally less than
those for FDA approvals. FDA approval generally requires more extensive animal
and toxicology testing than USDA approvals and may take five or more years to
obtain, whereas USDA approvals generally take one to three years to obtain. The
Company's products also are subject to regulatory approval in other countries.
Management believes that compliance with environmental regulations currently has
no material adverse effect on the Company's capital expenditures, earnings or
competitive position.
EMPLOYEES
At December 31, 2000, Embrex employed 199 persons, 198 of whom were full-time
employees, an increase of 30 persons from the 169 full-time employees at
December 31, 1999.
SIGNIFICANT CUSTOMERS
Tyson Foods, Inc. ("Tyson") accounted for approximately 21% of Embrex's
consolidated 2000 revenues. Based on millions of pounds of ready-to-cook poultry
meat produced in 2000, Tyson accounted for approximately 23% of the broilers
grown in the United States. During 1997, Tyson extended its contract with Embrex
through 2004. There are no customers besides Tyson that represent 10% or greater
of total revenues. However, Embrex's three largest customers, including Tyson,
accounted for approximately 34% of consolidated 2000 revenues, down from 38% in
1999. The decrease in 2000 is largely the result of the expansion of the
Company's customer base.
See "Risk Factors" filed as Exhibit 99 to this report.
ITEM 2. PROPERTIES
Embrex leases its corporate headquarters and research and development
facilities, which occupy approximately 23,000 square feet and are located
adjacent to Research Triangle Park, North Carolina. Two-thirds of the space is
devoted to research and development. The lease is a fifteen-year term expiring
March 31, 2002. Embrex paid an annual rent of approximately $214,000 during
2000. Annual rent increases thereafter amount to approximately 3% until
expiration on March 31, 2002. In addition to research and development activities
conducted at its corporate headquarters, Embrex opened a new 12,800 square-foot
research facility near its headquarters in 1998. The lease is a
9
ten-year term expiring November 14, 2007, with a five-year renewal option. The
annual rent paid in 2000 was approximately $142,000, with annual increases of
approximately 3% through the first ten years and approximately 4% during the
five-year renewal term. During the fourth quarter 1999, Embrex entered into a
six-year lease for a larger corporate headquarters and research and development
facility near its present facilities. This building has been leased in two
phases. The first phase encompasses approximately 20,000 square feet. The second
phase encompasses another 21,000 square feet. The annual rent is approximately
$400,000 for the combined space, with annual increases of approximately 3%
through the initial six-year term and approximately 4% during an additional
six-year renewal term. The Company intends to vacate its present corporate
headquarters once the second phase is ready for occupancy during the fourth
quarter of 2001.
Embrex leases approximately 3,000 square feet of warehouse space in Springdale,
Arkansas, on a year-to-year basis, which is used to support the Embrex customer
service function in the region. The Company also leases office and warehouse
space in Braintree, 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.
ITEM 3. LEGAL PROCEEDINGS
In September 1996, Embrex filed a patent infringement suit in the U.S. District
Court for the Eastern District of North 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) system injection method, infringes
at least one claim of U.S. Patent No. 4,458,630 exclusively licensed to Embrex
for the in ovo injection of vaccines into an avian embryo (the "Sharma Patent").
Further, Embrex claimed that the defendants had violated the terms of a Consent
Judgment and Settlement Agreement entered into with Embrex in November 1995 in
which prior litigation was concluded with Service Engineering Corporation and
Edward G. Bounds, Jr. agreeing not to engage in future activities violating the
Sharma Patent. Embrex sought injunctive relief to prevent infringement of the
Sharma Patent as well as monetary damages. In November 1996, Service Engineering
Corporation and Edward G. Bounds, Jr., responded to Embrex's patent infringement
suit by asserting various affirmative defenses and denying the substantive
allegations in Embrex's complaint. This suit concluded on July 30, 1998 with a
jury verdict in favor of Embrex. The verdict fully upheld the validity of all
claims of the Sharma Patent, finding that the defendants had willingly infringed
all asserted claims of the patent. The jury also found that Service Engineering
Corporation and Edward G. Bounds, Jr., had breached the 1995 Consent Judgment
and Settlement Agreement and that such breach was not in good faith. The jury
awarded Embrex damages of $500,000 plus litigation expenses and court costs. The
U.S. District Court for the Eastern District of North Carolina entered a
Judgment in favor of Embrex on September 28, 1998, which included a monetary
award of $2,612,885 and an injunction prohibiting Service Engineering
Corporation and Edward G. Bounds, Jr., from practicing methods claimed in, or
otherwise infringing, the Sharma Patent. Following an appeal by Service
Engineering Corporation and Edward G. Bounds, Jr. to the U.S. Court of Appeals
for the Federal Circuit seeking a reversal of the Judgment, in July 2000, the
United States Court of Appeals for the Federal Circuit affirmed the district
court's decision to award to Embrex litigation expenses plus interest valued at
approximately $1.5 million. In addition, the appeals court upheld the finding
that Service Engineering Corporation and Edward Bounds had willfully infringed
all asserted claims of the Sharma Patent. However, the appeals court vacated the
award of direct infringement damages finding that the district court erroneously
awarded direct damages without proper evidence to support the award. Therefore,
the appeals court remanded that award ($500,000 which was trebled) to the
district court for further proceedings for determination of a reasonable royalty
for the infringement of the patented method by Service Engineering Corporation
and Edward G. Bounds, Jr. These proceedings were opened on August 28, 2000 and
are proceeding.
On April 15, 1999, Machining Technologies, Inc. of Hebron, Maryland served on
Embrex a Complaint for Declaratory Judgment against Embrex in the U.S. District
Court for the District of Maryland. Machining Technologies, Inc. sought a
declaration that the Sharma Patent is not infringed, invalid and/or not
enforceable. Machining Technologies, Inc. was a manufacturer of egg injection
machine parts to Edward G. Bounds, Jr. and Service Engineering Corporation.
Embrex believed the action was without legal basis and, on June 4, 1999, filed a
motion to dismiss the action. On March 7, 2000, the U.S. District Court for the
District of Maryland granted Embrex's motion to dismiss this action and ordered
this case closed.
10
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, 2000.
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 under the symbol
EMBX. The quarterly trading ranges of the Company's Common Stock for the last
two fiscal years were as shown in the table below:
Common Stock
Price Per Share
---------------
Quarter Ended High Low
- ------------- ---- ---
March 31, 1999 $ 5.50 $ 4.13
June 30, 1999 $ 8.50 $ 4.19
September 30, 1999 $ 10.00 $ 7.94
December 31, 1999 $ 12.63 $ 7.00
March 31, 2000 $ 20.00 $ 10.75
June 30, 2000 $ 19.88 $ 11.63
September 30, 2000 $ 15.75 $ 10.88
December 31, 2000 $ 17.75 $ 12.19
At February 28, 2001, there were 409 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)
The selected financial data below should be read in conjunction with the
Company's financial statements and related notes appearing elsewhere in this
report.
(In Thousands, Except Per Share Amounts)
2000 1999
---- ----
Restated(1) Restated(1) Restated(1)
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
------- ------- ------- ------- ------- ------- ------- -------
Revenues $9,291 $9,674 $9,727 $10,104 $8,016 $8,411 $8,249 $9,074
Operating expenses 3,511 3,581 3,526 4,448 3,314 3,551 3,250 3,923
Net income 1,541 1,615 1,660 1,815 1,137 1,330 1,552 1,725
2000 1999
---- ----
Restated(1) Restated(1) Restated(1)
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
------- ------- ------- ------- ------- ------- ------- -------
Net income (per share of Common Stock)
Basic $0.19 $0.21 $0.21 $0.23 $0.14 $0.16 $0.19 $0.22
Diluted $0.18 $0.19 $0.19 $0.21 $0.14 $0.16 $0.18 $0.20
Number of Shares Used in Per Share
Calculation
Basic 7,945 7,870 7,910 7,880 8,293 8,250 8,135 7,927
Diluted 8,733 8,701 8,554 8,569 8,368 8,456 8,683 8,443
5-YEAR SUMMARY OF SELECTED FINANCIAL DATA
(In Thousands, Except Per Share Amounts) 2000 1999 1998 1997 1996
---- ---- ---- ---- ----
STATEMENTS OF OPERATIONS DATA
Revenues $38,796 $33,750 $28,615 $24,789 $20,632
Research and development expenses 6,725 5,857 4,995 4,188 4,036
Other operating expenses 8,341 8,181 6,837 5,607 3,775
Net income 6,631 5,744 2,861 1,760 341
Net income per share of Common
Stock
Basic $0.84 $0.70 $0.35 $0.21 $0.05
Diluted $0.77 $0.68 $0.34 $0.21 $0.06
Number of Shares Used in Per Share
Calculation
Basic 7,901 8,151 8,255 8,184 7,218
Diluted 8,639 8,488 8,339 8,339 7,520
BALANCE SHEET DATA
Working capital $7,695 $7,858 $8,299 $7,585 $7,552
Total assets 26,770 26,233 24,990 25,161 25,554
Long-term liabilities 37 20 644 3,278 5,814
Accumulated deficit (23,698) (30,328) (36,072) (38,933) (40,693)
Shareholders' equity 22,660 21,035 18,805 15,741 13,309
- ---------------------------
12
(1) The Company has restated its previously reported financial statements for
the first three quarters of 2000, as set forth in Note 12 of "Notes to
Consolidated Financial Statements" below.
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 2000 was $6.6 million compared to $5.7 million in
1999 and $2.9 million in 1998. Diluted earnings per share increased from $0.34
in 1998 and $0.68 in 1999 to $0.77 in 2000. For the year ended 2000, shares
outstanding on a diluted basis were 8.6 million, up from 8.5 million for the
year ended 1999 and 8.3 million for the year ended 1998. The increase in diluted
average shares outstanding from 1998 to 2000 is attributable primarily to the
increase in the number of in-the-money stock options included in the diluted
average shares outstanding calculation. This occurred due to an appreciation in
the price of the Company's Common Stock, which began in the second half of 1999
and continued into 2000. The increase relating to stock options was offset in
part by stock repurchases under the Company's share repurchase program described
below.
REVENUES
Consolidated revenues in 2000 totaled $38.8 million, representing an increase of
15% over 1999 revenues of $33.8 million, which were 18% over 1998 revenues of
$28.6 million. Inovoject(R) system revenues totaled $36.2 million in 2000
compared to $32.3 million in 1999 and $27.4 million in 1998, representing
increases of 12% from 1999 to 2000, and 18% from 1998 to 1999, with the 2000
increase coming principally from additional installations of Inovoject(R)
systems and increased injection activity in Europe, Asia and Latin America as
well as Inovoject(R) system sales in North America and Europe.
The 2000 revenues include Inovoject(R) system lease fees derived from multi-year
contracts and paid trials in the United States and foreign countries, and the
sale of Inovoject(R) systems to distributors. The sale of Inovoject(R) systems
to distributors may cause variability in revenue and gross profit on an annual
and quarterly basis. Embrex estimates that as of December 31, 2000, it was
vaccinating in excess of 80% of the estimated 8.0 billion broiler birds grown in
the United States in 2000, 1999, and 1998. 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 2001 from
existing Inovoject(R) system operations in the United States and Canada, higher
revenue and earnings growth from new Inovoject(R) system leases in other
countries, and sales of Bursaplex(R) product to poultry producers worldwide.
However, the rate at which the marketplace will accept the Inovoject(R) system
technology outside the United States and Canada, the timing of regulatory
approvals of third-party vaccines for in ovo use outside the United States and
Canada, start-up costs in new markets, possible variability in United States
hatchery bird production as a result of grain price fluctuations, and
variability in the demand for, and pricing of, U.S. poultry and poultry products
both inside and outside the United States, will impact the pace of revenue
growth, if any, and the sustaining of profitability from the installation and
operational throughputs of Inovoject(R) systems.
Sales of Bursaplex(R), the Company's proprietary vaccine for the treatment of
avian infectious bursal disease, and VNF(R) to Ft. Dodge, generated $2.3 million
of product revenues in 2000 while Bursaplex sales were the principal source of
$1.3 million of product revenues in 1999 and $931,000 of product revenues in
1998. This represents product revenue increases of 86% for 2000 over 1999 and
34% for 1999 over 1998. Bursaplex(R) sales alone increased 58% as continued
demand in the Asian and Latin American markets out paced 1999 and the North
American region began selling Bursaplex(R) to its Japanese distributor during
the third quarter. The Company's ability to generate revenue from product sales
has been constrained by lower levels of breeder and broiler flock vaccination
rates, fewer reported incidences of bursal disease in the United States and the
previously announced delay associated with Ft. Dodge's obtaining British
regulatory approval for the sale of Bursamune(R) in the United Kingdom. However,
in April 2000, Ft. Dodge received marketing authorization from the Veterinary
Products Committee in the United Kingdom for the in ovo administration of
Bursamune(R) to broiler chickens.
13
COST OF PRODUCT SALES AND INOVOJECT(R) REVENUES
Cost of revenues equaled 43% of total revenues in 2000 as compared to 39% and
47% of total revenues in 1999 and 1998, respectively. The increase from 1999 to
2000 is primarily attributable to the $619,000 audit adjustment due to
misappropriation at the Company's Embrex Europe subsidiary (as described below
under "Recent Development"). These adjustments included changes to accounts
receivable and prepaid expenses, which flowed through to cost of revenue. In
addition, various international start-up-operating expenses were reclassified
as cost of revenue, beginning in January 2000. Operating income was not affected
by the operating expense classification change.
OPERATING EXPENSES
Operating expenses totaled $15.1 million in 2000 compared to $14.0 million in
1999, and $11.8 million in 1998.
General and administrative ("G&A") expenses were $6.5 million in 2000, down 12%
from $7.4 million in 1999, and up 4% from $6.2 million in 1998. The 2000
decrease was primarily due to the previously mentioned reclassification of
international start-up expenses from G&A to sales and marketing and cost of
revenue while the 1999 G&A increases over 1998 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 $1.9 million in 2000 compared to $795,000
in 1999 and $633,000 in 1998. Increases during these periods resulted from
growth 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, Asia and Latin America. The
reclassification of international start-up expenses from G&A to sales and
marketing also contributed to the 2000 increase.
Research and development ("R&D") expenses were $6.7 million in 2000 compared to
$5.9 million in 1999 and $5.0 million in 1998. The increase in R&D expense from
1998 to 2000 largely reflects an increase in outside contract research, supplies
consumption, operating expenses for the new research facility and Inovoject(R)
system 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 $180,000, $315,000, and $402,000 in years 2000, 1999,
and 1998, respectively. The decreasing interest income from 1998 to 2000
resulted principally from lower cash balances, which were primarily attributable
to the common stock repurchase program (described below).
Interest expense totaled $80,000 in 2000 compared to $311,000 in 1999 and
$645,000 in 1998. In 2000, the decrease in interest expense reflected the
repayment of approximately $565,000 of capital equipment leases. In 1999, the
decrease in interest expense reflected the repayment of approximately $2.7
million of external financing, primarily in the form of equipment leases.
Management expects to continue to rely on the use of internally generated funds
to finance the cost of additional Inovoject(R) systems in 2001, as was the case
in 2000.
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, 2000, the Company's cash and short-term investment balances
totaled $3.2 million compared to $5.1 million and $7.2 million at December 31,
1999 and 1998, respectively. The decrease reflected the ability of the
14
Company to fund capital expenditures with internal cash instead of equipment
lease financing. Working capital decreased to $7.7 million in 2000 from $7.9
million in 1999.
During 2000, operating activities generated $10.2 million in cash, primarily due
to non-cash depreciation and net income. Within investing activities,
Inovoject(R) systems and equipment purchases required $6.2 million. Financing
activities used $5.4 million, of which $7.0 million was used for common stock
repurchases (see below) and $0.9 million was used to repay capital lease and
line of credit obligations. These expenditures were partially offset by $2.5
million received for issuance of common stock, substantially all of which was
issued in connection with the exercise of stock options during 2000.
In October 1998, the Company announced that the Board of Directors authorized a
share repurchase program (the "1998 Repurchase Program") to purchase up to 10%
of outstanding shares of Common Stock, or up to approximately 830,000 shares
over 18 months, in open market or privately negotiated transactions. During the
second quarter of 2000, Management was authorized by the Board of Directors to
extend the stock repurchase program (the "2000 Repurchase Program"). This
extension allows for the purchase up to 6% of outstanding shares, or up to
approximately 500,000 shares over 18 months in open market or privately
negotiated transactions. During 2000 the Company repurchased 474,400 shares of
its Common Stock for $7.0 million at an average price of $14.74 per share under
the 1998 Repurchase Program, which ended during the third quarter of 2000.
During the entire term of the 1998 Repurchase Program, the Company repurchased
830,000 shares of its Common Stock for $9.1 million at an average price of
$10.85 per share. Through December 31, 2000 the Company has purchased 144,000
shares for $2.0 million at an average price of $13.80 per share under the 2000
Repurchase Program. See "Notes to Consolidated Financial Statements."
In April 1999, the Company obtained a $6.0 million secured revolving line of
credit from its bank, Branch Banking and Trust Company. This line of credit may
be used for working capital purposes and was extended in October 2000 for an
additional 18 months and will now expire in April 2002. At December 31, 2000,
there were no outstanding borrowings under this credit facility.
Based on its current operations, management believes that the Company's
available cash and cash equivalents, together with cash flow from operations and
its bank line of credit, will be sufficient to meet its cash requirements as
these currently exist, but may continue to explore alternative funding
opportunities with respect to collaborative ventures and new product
development.
RECENT DEVELOPMENT
On March 27, 2001, the Company announced that during the 2000 year-end audit,
employee misappropriation and related irregularities were discovered at its
European subsidiary, Embrex Europe, Ltd. These actions resulted in inflated
accounts receivable and understated expenses over the course of the year, which
were adjusted in cost of revenue, general and administrative, sales and
marketing and income tax expenses upon completion of the audit. While revenues
were not affected, net income for the year was adversely impacted by
approximately $1.2 million, or $0.14 per share. After the adjustment, net income
for the fourth quarter was $1.8 million and $6.6 million for the year. In order
to reflect adjustments for the first three quarters, the Company has restated
its previously reported financial statements for the first three quarters of
2000 as set forth in Note 12 of "Notes to Consolidated Financial Statements"
below.
The Company believes that the situation uncovered in Europe involves a mid-level
employee at Embrex Europe who appears to have been engaged in an elaborate
scheme to divert funds and hide expenses while making the financial
15
statements appear normal. The Company is still investigating these actions and
intends to pursue all rights and remedies available. Management and the
Company's accountants are reviewing company controls, but intentional acts of
deceit are difficult to discover no matter what controls are in place.
FORWARD-LOOKING STATEMENTS
Information set forth in this Annual Report on Form 10-K contains various
"forward looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These
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," "plan," "intend," "target," "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 results of our accounting investigation when
complete, the ability to develop new products and technology, the degree of
market acceptance of new products such as but not limited to Bursaplex(R) and
Bursamune(R), the outcome of the Company's patent litigation appeal, the
complete commercial development of potential future products or the ability to
obtain regulatory approval of the Company's products. Such approval is dependent
upon a number of factors, such as results of trials, the discretion of
regulatory officials, and potential changes in regulations. These statements are
also contingent upon continued growth and production levels of the global
poultry industry and the economic viability of certain markets. Additional
information on these risks and other factors which could affect the Company's
financial results are included in the Risk Factors described in Exhibit 99 to
this report and in the Company's other filings with the SEC, including the
Company's Forms 10-Q, 10-K and 8-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of potential loss arising from adverse changes in
market rates and prices. The Company's primary market risk exposure is in
changes in foreign currency exchange rates. Approximately 29%, 23% and 20% of
our revenues for the years ended 2000, 1999 and 1998, respectively, were
derived from our operations outside the United States. Our financial statements
are denominated in U.S. Dollars and, accordingly, changes in the exchange
rates between foreign currencies and the U.S. Dollar will affect the translation
of our subsidiaries' financial results into U.S. Dollars for purposes of
reporting our consolidated financial results. Prior to the 2000 fiscal year,
the Company had considered its market risk for changes in foreign currency
exchange rates to be immaterial.
Accumulated currency translation adjustments recorded as a separate component
(reduction) of shareholders' equity were ($484,000) at December 31, 2000 as
compared with ($76,000) at December 31, 1999. Our most significant foreign
currency exchange rate exposure is in the British pound. To date, the Company
has not utilized any derivatives or other hedging instruments to affect this
exposure.
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, 2000 and 1999, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 2000. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used
16
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, 2000 and 1999, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule when considered in relation to the basic financial statements
taken as a whole, presents fairly in all material respects the information set
forth therein.
/s/ Ernst & Young LLP
Raleigh, North Carolina
March 26, 2001
17
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31,
ASSETS 2000 1999
---- ----
Current Assets
Cash and cash equivalents..................................... $ 2,966 $ 4,799
Restricted cash (Note 2)...................................... 275 275
Inventories:
Materials and supplies........................... 1,516 1,562
Product.......................................... 833 827
Accounts receivable - trade................................... 5,226 4,751
Other current assets..................................................... 951 822
-------- --------
Total Current Assets.............. 11,767 13,036
Inovoject(R) Systems under construction.................................. 1,325 978
Inovoject(R) Systems..................................................... 31,023 27,386
Less accumulated depreciation................................. (22,471) (19,804)
-------- --------
8,552 7,582
Equipment, furniture and fixtures........................................ 8,541 7,195
Less accumulated depreciation................................. (3,682) (2,906)
-------- --------
4,859 4,289
Other Assets:
Patents and exclusive licenses of patentable
technology (net of accumulated amortization of $94
in 2000 and $108 in 1999)............................... 267 348
TOTAL ASSETS............................................................. $26,770 $26,233
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities......................................................
Accounts payable.............................................. $ 677 $538
Accrued expenses.............................................. 3,059 2,738
Deferred revenue.............................................. 200 584
Product warranty accrual...................................... 113 394
Current portion of capital lease obligations.................. 23 568
Line of credit (Note 4)....................................... 0 356
-------- --------
Total Current Liabilities......... 4,072 5,178
Capital lease obligations, less current portion (Note 3)................. 0 20
Long-term debt, less current portion (Note 4)........................... 37 0
18
Shareholders' Equity (Notes 5, 6 and 7) Common Stock, $.01 par value per share
Authorized 30,000,000 shares
issued and outstanding -
7,879,525 net of 974,000 treasury shares and
7,922,627 net of 499,600 treasury shares at
December 31, 2000 and 1999, respectively...................... 88 84
Additional paid-in capital.................................................. 57,700 55,231
Accumulated other comprehensive income...................................... (447) 37
Accumulated deficit......................................................... (23,697) (30,328)
Treasury stock.............................................................. (10,983) (3,989)
-------- --------
Total Shareholders' Equity.................... 22,661 21,035
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............... $26,770 $26,233
======== ========
See accompanying notes.
19
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts) Year ended December 31,
-----------------------
2000 1999 1998
---- ---- ----
REVENUES
Inovoject(R) revenue $36,189 $32,314 $27,426
Product revenue 2,332 1,252 931
Other revenue 275 184 258
------- ------- -------
Total Revenues 38,796 33,750 28,615
Cost of Product Sales and Inovoject(R) Revenues 16,770 13,119 13,341
------- ------- -------
22,026 20,631 15,274
OPERATING EXPENSES
General and administrative 6,474 7,386 6,204
Sales and marketing 1,867 795 633
Research and development 6,725 5,857 4,995
------- ------- -------
Total Operating Expenses 15,066 14,038 11,832
------- ------- -------
Operating Income 6,960 6,593 3,442
Other Income (Expense)
Interest income 180 315 402
Interest expense (80) (311) (645)
Other 78 (12) 38
------- ------- -------
Total Other Income (Expense) 178 (8) (205)
------- ------- -------
Income Before Taxes 7,138 6,585 3,237
Income Taxes (Note 9) 507 841 376
------- ------- -------
Net Income $6,631 $5,744 $2,861
======= ======= =======
Net Income per share of Common Stock (Note 11)
Basic $0.84 $0.70 $0.35
Diluted $0.77 $0.68 $0.34
Number of Shares Used in Per Share Calculation (Note 11)
Basic 7,901 8,151 8,255
Diluted 8,639 8,488 8,339
See accompanying notes.
20
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) Year ended December 31,
-----------------------
2000 1999 1998
---- ---- ----
Operating Activities
Net income $6,631 $5,744 $2,861
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 4,289 4,096 4,884
Changes in operating assets and liabilities:
Accounts receivable, inventories and other
current assets. (564) (1,564) (1,526)
Accounts payable, accrued expenses and
other current liabilities (205) 1,331 (537)
----- ----- -----
NET CASH PROVIDED BY OPERATING ACTIVITIES 10,151 9,607 5,682
Investing Activities
Purchases of Inovoject(R) systems, equipment, furniture
and fixtures (6,167) (5,903) (4,850)
(Additions)/reductions to patents and other noncurrent assets 72 (240) 248
-- ----- ---
NET CASH USED IN INVESTING ACTIVITIES (6,095) (6,143) (4,602)
Financing Activities
Issuance of Common Stock 2,473 338 107
Net change in line of credit (356) 356 -0-
Repayment of long-term debt -0- (10) (286)
Proceeds from long-term debt 37 -0- -0-
Proceeds from capital lease obligations -0- -0- 101
Payments on capital lease obligations (565) (2,664) (2,511)
Repurchase of Common Stock (6,994) (3,776) (213)
------- ------- -----
NET CASH USED IN FINANCING ACTIVITIES (5,405) (5,756) (2,802)
------ ------ -------
DECREASE IN CASH AND CASH EQUIVALENTS (1,349) (2,292) (1,722)
CURRENCY TRANSLATION ADJUSTMENTS (484) (76) 309
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,799 7,167 8,580
----- ----- -----
CASH AND CASH EQUIVALENTS AT END OF PERIOD $2,966 $4,799 $7,167
====== ====== ======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Total interest paid was $80,000, $311,000, and $645,000 for the years ended
December 31, 2000, 1999 and 1998, respectively.
Total income taxes paid were $582,000, $618,000, and $277,000 for the years
ended December 31, 2000, 1999 and 1998, respectively.
See accompanying notes.
21
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
Accumulated
Additional Other
Common Paid-in Comprehensive Accumulated Treasury
Stock Capital Income Deficit Stock Total
----- ------- ------ ------- ----- -----
BALANCE AT JANUARY 1, 1998 $82 $54,788 $(196) $(38,933) $0 $15,741
Stock Repurchased (213) (213)
Stock issued:
Upon exercise of options 1 1
Under employee stock purchase plan 1 105 106
Other Comprehensive Income, Net of Tax
(Note 1)
Currency translation adjustments 309 309
Net income 2,861 2,861
---- ------- ------ ----- ---- -----
Comprehensive income 3,170
-----
BALANCE AT DECEMBER 31, 1998 83 54,894 113 (36,072) (213) 18,805
Stock Repurchased (3,776) (3,776)
Stock issued:
Upon exercise of options and issuance
of bonus stock 1 401 402
Under employee stock purchase plan 87 87
Upon exercise of warrants (151) (151)
Other Comprehensive Income, Net of Tax
(Note 1)
Currency translation adjustments (76) (76)
Net income 5,744 5,744
---- ------- ------ ----- ------- -----
Comprehensive income 5,668
-----
BALANCE AT DECEMBER 31, 1999 84 55,231 37 (30,328) (3,989) 21,035
Stock Repurchased (6,994) (6,994)
Stock issued:
Upon exercise of options 3 1,912 1,915
Under employee stock purchase plan 198 198
Upon exercise of warrants 1 99 100
Employee Compensation 260 260
Other Comprehensive Income, Net of Tax
(Note 1)
Currency translation adjustments (484) (484)
Net income 6,631 6,631
---- ------- ------ ----- ---- -----
Comprehensive income 6,147
-----
BALANCE AT DECEMBER 31, 2000 $ 88 $ 57,700 $ (447) $ (23,697) $ (10,983) $ 22,661
===== ========= ======== =========== ========== =========
See accompanying notes.
22
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.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Embrex, Inc. and
its wholly owned subsidiaries, Embrex Europe Limited, Embrex France s.a.s.,
Embrex BioTech Trade (Shanghai) Co., Ltd. and Inovoject do Brasil Ltda. (the
"Company"). All significant intercompany transactions and accounts have been
eliminated. Currently, non-U.S. operations account for approximately 29% 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.
23
FOREIGN CURRENCY TRANSLATION
All assets and liabilities in the balance sheets of the Company's foreign
subsidiaries, Embrex Europe Limited, Embrex France s.a.s., Embrex BioTech Trade
(Shanghai) Co., Ltd. and Inovoject do Brasil Ltda, are translated at year-end
exchange rates except shareholders' equity which is translated at historical
rates. Revenues, costs and expenses are recorded at average rates of exchange
during the year. Translation gains and losses are accumulated as a component of
shareholders' equity. Foreign currency transaction gains and losses are included
in determining net income.
REVENUE RECOGNITION
Inovoject(R) system fees are recognized based on eggs processed during the
period. Product sales are recognized when the products are shipped. Contract
research revenue is recognized as services are performed over the term of the
contract. Revenue received, but not yet earned, is classified as deferred
revenue.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs, including costs incurred to complete contract
research, are charged to operations when incurred and are included in operating
expenses.
INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). SFAS 109 requires recognition of deferred tax assets and liabilities for
the expected future tax consequences of temporary basis differences that have
arisen between financial statement and income tax reporting.
NET INCOME PER SHARE
Basic net income per share was determined by dividing net income available for
common shareholders by the weighted average number of common shares outstanding
during each year. Diluted net income per share reflects the potential dilution
that could occur assuming conversion or exercise of all convertible securities
and issued and unexercised stock options. A reconciliation of the net income
available for common shareholders and number of shares used in computing basic
and diluted net income per share is in Note 11.
USE OF ESTIMATES
The presentation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from these estimates.
PRINCIPAL CUSTOMERS
Tyson Foods, Inc. ("Tyson") accounted for approximately 21%, 24% and 27% of
consolidated 2000, 1999 and 1998 revenues, respectively. Based on the millions
of pounds of ready-to-eat poultry meat produced in 2000, Tyson accounted for
approximately 23% of the broilers grown in the United States. In 2000, Tyson was
the only customer that represented greater than 10% of total revenues.
CONCENTRATION OF CREDIT RISK
The Company's principal financial instrument, subject to potential concentration
of credit risk, is accounts receivable which are unsecured. As of December 31,
2000, Tyson Foods, Inc. accounted for approximately 13% of consolidated accounts
receivable, and substantially all of the Company's accounts receivable are due
from companies in the poultry industry.
24
SOURCES OF SUPPLY
The Company has developed a strategic relationship with one contract
manufacturer to fabricate its Inovoject(R) systems. While other machine
fabricators exist and have constructed limited numbers of Inovoject(R) systems,
a change in fabricators could cause a delay in manufacturing and a possible
delay in the timing of future Inovoject(R) installations and revenues from
those installations.
The Company has granted Merial Select, Inc. ("Select") (a Merck and Aventis
company) exclusive rights to manufacture, in the United States, 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, a unit of Ft. Dodge Animal Health, which is a
division of American Home Products Corp. ("Ft. Dodge"), rights to manufacture
and market bursal disease vaccines containing the Company's VNF(R) product to be
marketed in Europe, the Middle East and Africa under the trade name
Bursamune(R). Abic Ltd. has been granted similar rights to manufacture and
market an IBD vaccine, known as GuMBryo(TM), in Israel. Additionally, the
Company has one contract supplier of its VNF(R) product. The manufacture of the
bursal disease vaccines being produced by Select, Ft. Dodge and Abic and the
Company's VNF(R) product generally must be performed in licensed facilities
and/or under methods approved by regulatory agencies. Although there are other
manufacturers who are capable of manufacturing bursal disease products and
producing products such as VNF(R), a change of suppliers could adversely effect
the Company's future operating results due to the time it would take a new
supplier to obtain regulatory approval of its production process and/or
manufacturing facilities. The Company seeks to minimize this exposure through
multi-year supply agreements and the maintenance of adequate inventories.
COMPREHENSIVE INCOME
In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive Income
(SFAS 130). This Statement establishes standards for reporting and display of
comprehensive income and its components in the financial statements. In
accordance with SFAS 130, the Company has determined total comprehensive income,
net of tax, to be $6.1 million, $5.7 million and $3.2 million for the years
ended December 31, 2000, 1999 and 1998, 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. The table below presents the Company's operations by
geographic area:
2000 1999 1998
Net Revenue:
United States $27,591 $26,038 $23,007
International 11,205 7,712 5,608
Total Assets:
United States $17,168 $18,424 $18,610
International 9,602 7,809 6,380
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments
and for Hedging Activities". This pronouncement was originally effective for
annual periods beginning after June 15, 1999. The FASB amended SFAS 133 to defer
the effective date of adoption until all fiscal quarters of all fiscal years
beginning after June 15, 2000. SFAS 137, "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133", was issued in June 1999. SFAS 133 requires all derivatives to be recorded
on the balance sheet and establishes accounting rules for hedging activities.
The effect of the hedge accounting rules is to offset changes in value or cash
flows of both the hedge and hedged item in earnings in the same period. Changes
in the fair value of derivatives that do not qualify for hedge accounting are
reported in earnings in the period of the change. Based on the fact that the
Company does not currently use derivatives, adoption of this pronouncement is
not expected to have a material impact on the Company's financial position or
results of operations.
25
2. RESTRICTED CASH
On October 13, 1997, the Company executed a ten-year collateralized lease
relative to the facilities housing the Company's new research facility. Such
collateral exists in the form of a certificate of deposit, which is required to
be maintained at least through the end of the seventh year of the lease.
3. LEASES
At December 31, 2000 and 1999, the Company had assets totaling $23,000 and
$588,000, respectively, financed by capital lease agreements which expire
through December 2001. Accumulated depreciation and amortization includes $9,000
and $486,000 of amortization related to these assets at December 31, 2000 and
1999, 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
$791,000, $483,000 and $456,000 for the years ended December 31, 2000, 1999 and
1998, respectively.
At December 31, 2000, the Company's minimum future commitments under capital and
operating leases were as follows:
Operating Capital
Leases Leases
--------- -------
2001 $894,000 23,000
2002 740,000 0
2003 683,000 0
2004 696,000 0
2005 591,000 0
Thereafter 361,000 0
---------- -------
Total $3,965,000 $23,000
========== =======
Less amounts representing interest. (1,000)
-------
Present value of future minimum lease payments $22,000
=======
4. DEBT
In April 1999, the Company obtained a $6.0 million secured revolving line of
credit facility from its bank, Branch Banking and Trust Company. This facility
may be used for working capital purposes and was extended in October 2000 for an
additional 18 months and will now expire in April 2002. The entire unpaid
balance of the line of credit then-outstanding plus accrued interest is due in
full at maturity. Borrowings drawn down under this facility bear interest at a
rate over LIBOR and are collateralized by a security interest in the Company's
inventory and accounts receivable. At December 31, 2000, there were no
outstanding borrowings under this credit facility.
A $10,000 note from the State of North Carolina with an interest rate of 8.75%
was repaid along with accrued interest in 1999.
26
5. SHAREHOLDERS' EQUITY
At December 31, 2000, the Company had reserved a total of 2,315,511 shares of
its Common Stock for future issuance as follows:
For exercise of warrants to purchase Common Stock................... 15,000
For exercise of Common Stock options and Bonus Stock................ 2,212,290
For possible future issuance to employees and others
under employee stock purchase plans................................. 88,221
------
Total reserved...................................................... 2,315,511
=========
At December 31, 2000, 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
-------------- -------------------- ------------------
$9.02 15,000 6/9/01
In October 1998, the Company announced that the Board of Directors authorized a
share repurchase program (the "1998 Repurchase Program") to purchase up to 10%
of outstanding shares of Common Stock, or up to approximately 830,000 shares
over 18 months, in open market or privately negotiated transactions. During the
second quarter of 2000, Management was authorized by the Board of Directors to
extend the stock repurchase program (the "2000 Repurchase Program"). This
extension allows for the purchase up to 6% of outstanding shares, or up to
approximately 500,000 shares over 18 months in open market or privately
negotiated transactions. During 2000 the Company repurchased 474,400 shares of
its Common Stock for $7.0 million at an average price of $14.74 per share under
the 1998 Repurchase Program, which ended during the third quarter of 2000.
During the entire term of the 1998 Repurchase Program, the Company repurchased
830,000 shares of its Common Stock for $9.1 million at an average price of
$10.85 per share. Through December 31, 2000 the Company has purchased 144,000
shares for $2.0 million at an average price of $13.80 per share under the 2000
Repurchase Program.
6. STOCK OPTION PLANS
The Company has elected to follow Accounting Principles Board Option No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation," requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
The Company's stock option plans provide for option grants designated as either
non-qualified or incentive stock options. The options generally vest over a
four-year period and expire ten years from the date of grant. In general, the
exercise price of stock options is the closing price of the Company's Common
Stock on the date of grant.
Most U.S. employees and certain employees outside the United States are eligible
to receive a grant of stock options periodically with the number of shares
generally determined by the employee's salary grade and performance level. In
addition, certain management and professional level employees may receive a
stock option grant upon hire. Non-employee directors of the Company receive
annual grants of stock options in amounts specified in the applicable plan.
Stock option information with respect to all of the Company's stock option plans
follows:
27
Number Option Price Expiration
of Shares Range per Share Date
--------- --------------- ---------
Balance at December 31, 1997, outstanding
options 1,038,698 $2.00 to $8.75 1998-2007
Granted 307,495 $5.00 to $6.375
Exercised (3,900) $2.00
Canceled (47,754) $5.375 to $7.00
Balance at December 31, 1998, outstanding
options 1,294,539 $2.00 to $8.75 1999-2008
Granted 340,416 $4.625 to $6.125
Exercised (159,513) $2.00 to $7.00
Canceled (75,412) $5.125 to $7.125
Balance at December 31, 1999, outstanding
options 1,400,030 $2.00 to $8.75 2000-2009
Granted 407,328 $10.50 to $17.25
Exercised (354,692) $2.00 to $10.50
Canceled (80,996) $5.00 to $10.50
Balance at December 31, 2000, outstanding
options 1,371,670 $2.00 to $17.25 2001-2010
An amendment in May 2000 to the Company's Incentive Stock Option and
Nonstatutory Stock Option Plan increased the authorized grant of options to
company personnel from 1.9 million shares of common stock up to 2.6 million
shares. All options granted have ten-year terms and a four-year vesting
schedule.
Pro forma information regarding net income and income per share is required by
SFAS 123, and has been determined as if the Company accounted for its employee
stock options granted subsequent to December 31, 1994 under the fair value
method of SFAS 123. The fair value for these options was estimated at the date
of grant using a Black-Scholes option-pricing model with the following weighted
average assumptions:
2000 1999 1998
---- ---- ----
Risk free interest rate 6.62% 4.76% 4.92%
Dividends ---- ---- ----
Volatility factor 0.500 0.500 0.305
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
2000 1999 1998
---- ---- ----
Pro forma net income (in thousands) $5,464 $5,017 $2,212
28
Pro forma basic income per share. $0.69 $0.62 $0.27
At December 31, 2000, 1999 and 1998, exercisable options for 727,789, 857,962
and 791,468 shares, respectively were outstanding.
The weighted average remaining contractual life of those options is 6.7 years.
The weighted average exercisable price of outstanding options at December 31,
2000 is $7.14.
7. EMPLOYEE STOCK PURCHASE PLAN
The Company maintains an Employee Stock Purchase Plan for its U.S.-based
employees (the "U.S. Purchase Plan") and a similar plan for its employees
outside the U.S. (the "Non-U.S. Purchase Plan") to provide an additional
opportunity for the Company's employees to share in the ownership of the
Company. Under terms of both plans, all regular full-time employees of the
Company (or the Company's subsidiaries) may make voluntary payroll contributions
thereby enabling them to purchase Common Stock. Contributions are limited to 20%
of an employee's compensation. An amendment in May 2000 to the Company's
Purchase Plans increased the maximum number of shares of Common Stock that may
be purchased under the U.S. Purchase Plan from 100,000 to 200,000. Shares issued
under the Non-U.S. Purchase Plan decrease the number of shares that may be
issued under the U.S. Purchase Plan by a corresponding amount. Thus, the maximum
number of shares that may be issued under both Purchase Plans together shall not
exceed 200,000. The purchase price of the stock is the lesser of 85% of the Fair
Market Value on the first business day of the Purchase Period or 85% of the Fair
Market Value on the date of exercise which can be at any time during the Plan
year.
Under the Purchase Plans, during 2000, 1999 and 1998, 23,418, 21,074 and 20,594
shares of Common Stock, respectively, were purchased. To date, 111,779 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 $178,436, $74,542 and $62,988 for the years
ended December 31, 2000, 1999 and 1998, respectively.
9. INCOME TAXES
The components of income tax expense for the year ended December 31 are as
follows:
2000 1999 1998
---- ---- ----
Current:
Federal $154,000 $348,000 $197,000
State 77,000 169,000 34,000
Foreign 276,000 324,000 145,000
------- ------- -------
$507,000 $841,000 $376,000
======== ======== ========
The Company's consolidated effective tax rate differed from the statutory rate
as set forth below for the year ended December 31:
2000 1999 1998
---- ---- ----
Federal taxes at statutory rate $2,427,000 $2,178,000 $1,101,000
State and local income taxes, net of Federal
benefit 286,000 321,000 162,000
Non-deductible expenses (138,000) 488,000 75,000
29
Foreign losses for which no benefit has been
recognized 203,000 (67,000) 230,000
Change in valuation allowance (2,547,000) (2,403,000) (1,337,000)
Alternative minimum and foreign withholding
taxes 276,000 324,000 145,000
------- ------- -------
$507,000 $841,000 $376,000
======== ======== ========
Deferred income taxes reflect the net effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. The Company has no deferred tax
liabilities. Significant components of the Company's deferred tax assets are as
follows:
At December 31,
---------------
2000 1999
---- ----
\Deferred tax assets:
Book over tax depreciation and amortization $ 486,000 $88,000
Net operating loss carryforwards 4,230,000 7,450,000
Research and experimental tax credit carryforwards 2,754,000 2,487,000
Charitable contributions carryforward 31,000 27,000
Accrued liabilities and reserves 99,000 245,000
Alternative Minimum Tax credit carryforward 350,000 200,000
----------- ------------
Total deferred tax assets $7,950,000 $10,497,000
Valuation allowance for deferred tax assets ($7,950,000) ($10,497,000)
----------- ------------
Net deferred tax assets $ 0 $ 0
=========== ============
During 2000 and 1999, the valuation allowance decreased by $2,547,000 and
$2,403,000, respectively.
At December 31, 2000, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $11.1 million which are available
to offset future taxable income. These net operating loss carryforwards expire
during the years 2001 through 2006. Any loss carryforward amounts exceeding the
limitation can be carried forward to future years within the carryforward
period.
In addition, the Company has Research and Experimental Tax Credit carryforwards
totaling approximately $2.8 million which are available to offset future federal
income taxes. These credits expire during the years 2001 through 2014.
10. COMMITMENTS AND CONTINGENCIES
The Company is engaged in certain legal and administrative proceedings
incidental to its normal business activities. While it is not possible to
determine the ultimate outcome of those actions, in the opinion of management
after discussion with legal counsel, it is unlikely that the outcome of such
litigation and other proceedings will have a material adverse effect on the
results of the Company's operations or its financial position.
11. NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net income
per share (in thousands, except per share amounts):
30
2000 1999 1998
---- ---- ----
Numerator:
Net Income Available To Common Stockholders $6,631 $5,744 $2,861
Effect of dilutive securities:
Numerator for diluted earnings per share-income
available to common stockholders after assumed
conversions $6,631 $5,744 $2,861
====== ====== ======
Denominator:
Denominator for basic net income per share--weighted
- -average 7,901 8,151 8,255
Effect of Dilutive Securities:
Employee Stock Options 714 336 84
Warrants 24 1 0
-- - -
Dilutive Potential Shares 738 337 84
Denominator for diluted net income per
share--adjusted weighted-average shares
and assumed conversions 8,639 8,488 8,339
===== ===== =====
Basic net income per share $0.84 $0.70 $0.35
===== ===== =====
Diluted net income per share $0.77 $0.68 $0.34
===== ===== =====
31
12. RESTATED QUARTERLY FINANCIAL STATEMENTS (UNAUDITED)
Condensed Statements of Quarterly Operations (Unaudited)
(In thousands except per share amounts)
March 31, 2000 June 30, 2000 September 30, 2000
Previously Previously Previously
Reported Restated(1) Reported Restated(1) Reported Restated(1)
----------------------------- -------------------------------- -------------------------------
Revenues $9,291 $9,291 $9,674 $9,674 $9,727 $9,727
Cost of revenues 3,898 4,049 4,160 4,311 4,222 4,373
--------------- ------------ --------------- ------------ -------------- ----------
Gross profit 5,393 5,242 5,514 5,363 5,505 5,354
Operating expenses
General & Administrative 1,408 1,575 1,420 1,587 1,341 1,508
Sales & Marketing 441 448 412 419 443 450
Research & Development 1,488 1,488 1,576 1,575 1,568 1,568
--------------- ------------ --------------- ------------ -------------- ----------
Total operating expenses 3,337 3,511 3,408 3,581 3,352 3,526
--------------- ------------ --------------- ------------ -------------- ----------
Operating profit 2,056 1,731 2,106 1,782 2,153 1,828
Other (income) expense (23) (23) (30) (30) 6 6
--------------- ------------ --------------- ------------ -------------- ----------
Income before taxes 2,079 1,754 2,137 1,812 2,147 1,822
Income taxes 236 213 220 197 185 162
--------------- ------------ --------------- ------------ -------------- ----------
Net income $1,843 $1,541 $1,917 $1,615 $1,962 $1,660
=============== ============ =============== ============ ============== ==========
Net income per share:
Basic 0.23 0.19 0.24 0.21 0.25 0.21
Diluted 0.21 0.18 0.22 0.19 0.23 0.19
Number of shares of Common
Stock used in per share calculation:
Basic 7,945 7,945 7,870 7,870 7,910 7,910
Diluted 8,733 8,733 8,701 8,701 8,554 8,554
32
Consolidated Quarterly Balance Sheets (Unaudited)
(Dollars in thousands)
March 31, 2000 June 30, 2000 September 30, 2000
Previously Previously Previously
Reported Restated(1) Reported Restated(1) Reported Restated(1)
--------- ----------- -------- ----------- --------- -----------
ASSETS
Current Assets
Cash and cash equivalents $ 4,442 $ 4,424 $ 1,638 $ 1,602 $ 1,731 $ 1,677
Restricted Cash 275 275 275 275 275 275
Accounts Receivable - trade 4,777 4,416 5,021 4,299 5,421 4,338
Inventories:
Materials and supplies 1,396 1,396 1,471 1,471 1,455 1,455
Product 805 860 674 784 596 762
Other current assets 1,394 1,302 1,646 1,460 1,994 1,716
--------- --------- ---------- ---------- ---------- ---------
Total Current Assets $ 13,089 $ 12,673 $ 10,725 $ 9,891 $ 11,472 $ 10,223
INOVOJECT Systems Under Construction 1,033 1,028 1,237 1,227 1,321 1,306
INOVOJECT Systems 28,092 28,092 29,131 29,131 30,162 30,162
Less accumulated depreciation (20,477) (20,475) (21,089) (21,085) (21,742) (21,736)
--------- --------- ---------- ---------- ---------- ---------
7,615 7,617 8,042 8,046 8,420 8,426
Equipment, Furniture, and Fixtures 7,627 7,627 8,291 8,291 8,559 8,559
Less accumulated depreciation and amortization (3,137) (3,137) (3,474) (3,474) (3,779) (3,779)
--------- --------- ---------- ---------- ---------- ---------
4,490 4,490 4,817 4,817 4,780 4,780
Other Assets:
Patents and exclusive licenses of patentable technology 425 425 377 377 368 367
--------- --------- ---------- ---------- ---------- ---------
Total Assets $ 26,652 $ 26,233 $ 25,198 $ 24,358 $ 26,361 $ 25,102
========= ========= ========== ========== ========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 307 $ 307 $ 624 $ 624 $ 662 $ 662
Accrued expenses 2,890 2,837 3,308 3,202 3,003 2,844
Deferred revenue 382 382 198 198 28 28
Warranty accrual 401 337 404 274 410 215
Current portion of capital lease obligations 263 263 117 117 31 31
Line of Credit 2,029 2,029 209 209 936 936
--------- --------- ---------- ---------- ---------- ---------
Toatal Current Liabilities $ 6,272 $ 6,155 $ 4,860 $ 4,624 $ 5,070 $ 4,716
--------- --------- ---------- ---------- ---------- ---------
Capital Lease Obligations, less current portion 20 20 20 20 20 20
Long-Term Debt, less current portion 0 0 0 0 35 35
Shareholders' Equity
Common stock, $.01 par value:
Authorized - 30,000,000 shares
Issued and outstanding -
7,903,990 net of 718,300 treasury shares at
March 31, 2000
7,885,835 net of 866,800 treasury shares at
June 30, 2000
7,889,100 net of 974,000 treasury shares at
September 30, 2000 86 86 86 86 87 87
Additional paid-in capital 56,126 56,126 56,642 56,642 57,141 57,141
Accumulated other comprehensive income 9 9 0 (309) - (403)
Accumulated deficit (28,485) (28,785) (26,878) (27,172) (25,009) (25,512)
Treasury stock (7,376) (7,376) (9,533) (9,533) (10,983) (10,982)
--------- --------- ---------- ---------- ---------- ---------
Total Shareholders' Equity 20,360 20,060 20,318 19,714 21,236 20,331
--------- --------- ---------- ---------- ---------- ---------
Total Liabilities and Shareholders' Equity $ 26,652 $ 26,233 $ 25,198 $ 24,358 $ 26,361 $ 25,102
========= ========= ========== ========== ========== =========
33
Statements of Cash Flows (Unaudited)
(in thousands)
Three Months Ended Six Months Ended Nine Months Ended
March 31, 1999 June 30, 1999 September 30, 1999
Previously Previously Previously
Reported Restated(1) Reported Restated(1) Reported Restated(1)
--------- ----------- -------- ----------- --------- -----------
Operating activities
Net Income $ 1,843 $1,541 $3,760 $3,156 $5,722 $4,816
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation & Amortization 1,069 1,070 2,296 2,296 3,372 3,372
Changes in operating assets and liabilities:
Accounts receivable, inventories, and other current assets (410) (12) (850) (52) (1,506) (309)
Accounts payable, accrued expenses (273) (364) 307 71 (124) (478)
--------- --------- --------- --------- --------- ---------
Net cash provided by operating activites 2,229 2,235 5,513 5,471 7,464 7,401
--------- --------- --------- --------- --------- ---------
Investing activities
Purchase of INOVOJECT systems, equipment, furniture, and fixtures (1,356) (1,354) (3,538) (3,532) (5,037) (5,028)
Decrease in patents and other noncurrent assets (79) (79) (34) (34) (26) (26)
--------- --------- --------- --------- --------- ---------
Net cash used in investing activities (1,435) (1,433) (3,572) (3,566) (5,063) (5,054)
--------- --------- --------- --------- --------- ---------
Financing Activities
Issuance of common stock 896 897 1,413 1,413 1,913 1,913
Additions to short-term debt 1,672 1,673 (147) (147) 580 580
Payments on long-term debt - (27) 5 (27) 8 8
Payments on capital lease obligation (305) (305) (483) (451) (537) (537)
Repurchase of Common Stock (3,387) (3,387) (5,544) (5,544) (6,993) (6,993)
--------- --------- --------- --------- --------- ---------
Net Cash used in financing activities (1,124) (1,149) (4,756) (4,756) (5,029) (5,029)
--------- --------- --------- --------- --------- ---------
Increase in cash and cash equivalents (330) (347) (2,815) (2,851) 2,628) (2,682)
Currency Translation Adjustment (27) (28) (346) (346) (440) (440)
Cash and cash equivalents at beginning of year 4,799 4,799 4,799 4,799 4,799 4,799
--------- --------- --------- --------- --------- ---------
Cash and cash equivalents at end of period $ 4,442 $4,424 $1,638 $1,602 $1,731 $1,677
========= ========= ========= ========= ========= =========
(1) On March 27, 2001, the Company announced that during the 2000 year-end
audit, employee misappropriation and related irregularities were
discovered at its European subsidiary, Embrex Europe, Ltd. These
actions resulted in inflated accounts receivable and understated
expenses over the course of the year, which were adjusted in cost of
revenue, general and administrative, sales and marketing and income tax
expenses upon completion of the audit. While revenues were not
affected, net income for the year was adversely impacted by
approximately $1.2 million, or $0.14 per share. After the adjustment,
net income for the fourth quarter was $1.8 million and $6.6 million for
the year.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information on the executive officers and directors is incorporated by reference
from the Company's Proxy Statement (under the headings "Management" and
"Proposal 1: Election of Directors," respectively), with respect to the Annual
Meeting of Shareholders to be held on May 17, 2001, to be filed with the
Securities and Exchange Commission.
34
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 17, 2001, 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
17, 2001, to be filed with the Securities and Exchange Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1). The financial statements listed below are included in Item 8 of this
report.
Report of Independent Auditors
Financial Statements
Consolidated Balance Sheets at December 31, 2000 and 1999
Consolidated Statements of Operations for each of the three years ended
December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for each of the three years ended
December 31, 2000, 1999 and 1998
Consolidated Statements of Shareholders' Equity for each of the three
years ended December 31, 2000, 1999 and 1998
Notes to Consolidated Financial Statements
(a)(2). Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts
35
(a)(3). The exhibits listed below are filed as part of this report. Executive
compensation plans and arrangements are listed in Exhibits 10.14 through 10.42.
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(4) Amended and Restated Bylaws,
effective September 21, 2000
4.1 Reference is made to Exhibits 3.1,
3.2, 3.3 and 3.4
4.2(5) Specimen of Common Stock
Certificate
4.3(6) Rights Agreement dated as of March
21, 1996 between Embrex and Branch
Banking and Trust Company, as Rights
Agent
10.1(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
10.2(7) Collaborative Research Agreement
dated January 17, 1989 between Embrex and
the University of Arkansas
10.3(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
10.4(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
10.5(5) 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.)
10.6(5) Fifth Amendment of Lease dated
December 13, 1996 between the Company and
Glaxo Wellcome Inc. (as successor in
interest to Glaxo Inc.)
10.7(8) Lease for Royal Center II dated
October 13, 1997 between the Company and
Petula Associates, Ltd.
10.8(16) Sublease Agreement dated October
1, 1999, between Embrex, as subtenant,
and Wandel & Goltermann Technologies,
Inc., as sublandlord
10.9(16) First Amendment to Sublease
Agreement dated February 29, 2000, among
Wandel & Goltermann Technologies, Inc.,
Embrex and W & G Associates
10.10(7) Facility Agreement dated March
1, 1991, between Embrex and Mississippi
Agriculture and Forestry Experiment
Station, Mississippi State University
10.11(7) Unrestricted Grant Agreement
dated April 1, 1988, between Embrex and
North Carolina State University, as
Amended by Amendment dated September 15,
1989 and Amendment dated April 22, 1991
10.12(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
10.13(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
10.14(7) 1988 Incentive Stock Option Plan
and form of Incentive Stock Option
Agreement
36
10.15(7) 1989 Nonstatutory Stock Option
Plan and form of Nonstatutory Stock
Option Agreement
10.16(7) 1991 Nonstatutory Stock Option
Plan and form of Nonstatutory Stock
Option Agreement
10.17(9) Incentive Stock Option and
Nonstatutory Stock Option Plan and forms
of Stock Option Agreements - June 1993
10.18(3) Amendment dated May 16, 1996 to
Incentive Stock Option and Nonstatutory
Stock Option Plan - June 1993
10.19(10) Amended and Restated Incentive
Stock Option and Nonstatutory Stock
Option Plan - May 1998
10.20(13) Amended and Restated Incentive
Stock Option and Nonstatutory Stock
Option Plan - January 1999 and form Of
Stock Option Agreement
10.21(11) Amended and Restated Incentive
Stock Option and Nonstatutory Stock
Option Plan - July 2000
10.22(5) Amended and Restated Employee
Stock Purchase Plan - November 1996
10.23(11) Amended and Restated Employee
Stock Purchase Plan - July 2000
10.24(11) Amended and Restated Employee
Stock Purchase Plan for Non-U.S.
Employees - July 2000
10.25(7) Employment Agreement dated
November 15, 1989, between Embrex and
Randall L. Marcuson
10.26(5) Amendment to Employment
Agreement dated May 21, 1996 between
Embrex and Randall L. Marcuson
10.27(5) Change In Control Severance
Agreement dated May 21, 1996 between
Embrex and Randall L. Marcuson
10.28(12) Amendment to Change in Control
Severance Agreement dated October 1, 1998
between Embrex and Randall L. Marcuson
10.29(7) Employment Agreement dated
October 16, 1989, between Embrex and
Catherine A. Ricks
10.30(5) Change In Control Severance
Agreement dated May 21, 1996 between
Embrex and Catherine A. Ricks
10.31(12) Amendment to Change in Control
Severance Agreement dated October 1, 1998
between Embrex and Catherine A. Ricks
10.32(2) General Provisions to Employment
Agreement between Embrex and Brian V.
Cosgriff dated August 18, 1995
10.33(5) Change In Control Severance
Agreement dated May 21, 1996 between
Embrex and Brian V. Cosgriff
10.34(12) Amendment to Change in Control
Severance Agreement dated October 1, 1998
between Embrex and Brian V. Cosgriff
10.35(2) Terms and Conditions of
Employment between Embrex Europe Limited
and David M. Baines dated May 12, 1994
10.36(5) Change In Control Severance
Agreement dated June 9, 1996 between
Embrex and David M. Baines
10.37(12) Amendment to Change in Control
Severance Agreement dated October 1, 1998
between Embrex and David M. Baines
10.38(5) Letter Agreement and General
Provisions to Employment Agreement dated
August 20, 1996 between Embrex and DonT.
Seaquist and Amendment to Employment
Agreement dated September 9, 1996 between
Embrex and Don T. Seaquist
10.39(5) Change In Control Severance
Agreement dated September 9, 1996 between
Embrex and Don T. Seaquist
10.40(12) Amendment to Change in Control
Severance Agreement dated October 1, 1998
between Embrex and Don T. Seaquist
37
10.41(12) Letter Agreement and General
Provisions to Employment Agreement dated
February 3, 1999 between Embrex and Brian
C. Hrudka
10.42(12) Change In Control Severance
Agreement dated March 24, 1999 between
Embrex and Brian C. Hrudka
10.43(13) Agreement among Embrex, Micro
Cap Partners, L.P., Palo Alto Investors,
Inc., Walter Smiley and William L.
Edwards dated as of April 18, 1999
10.44(13) Indemnification Agreement among
Embrex, Randall L. Marcuson, Charles E.
Austin, C. Daniel Blackshear, Lester M.
Crawford, Peter J. Holzer, Kenneth N.
May, and Arthur M. Pappas dated as of
April 1, 1999
10.45(15) Letter Agreement among Embrex,
Micro Cap Partners, L.P., Palo Alto
Investors, Inc., and William L. Edwards
dated as of February 11, 2000
10.46(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)
10.47(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)
10.48(2) Limited License and Supply
Agreement dated as of July 20, 1995
between Embrex and Webster
10.49(5) 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
10.50(2) Agreement dated as of January
22, 1996 between Embrex and Select
10.51(2) Letter Agreement dated as of
January 22, 1996 between Select and
Embrex
10.52(2) License dated as of January 22,
1996 granted by Select to Embrex
10.53(2) Stock Purchase Warrant dated
June 9, 1995 issued to Financing for
Science International, Inc.
10.54(14) Loan Agreement between Embrex
and Branch Banking and Trust Company
dated as of April 7, 1999
21 Subsidiaries
23 Consent of Ernst & Young LLP to the
inclusion in the Annual Report (Form
10-K) of Embrex, Inc. of their report
dated March 26, 2001 with respect to the
consolidated financial statements,
schedule of Embrex, Inc., and
subsidiaries, the incorporation by
reference in the Registration Statements
on Form S-3 (Nos. 333-18231 and
333-31811) and the Registration
Statements on Form S-8 (Nos. 33-51582,
33-63318, 333-04109, 333-56279 and
333-42676) of their report dated
March 26, 2001 with respect to the
consolidated financial statements and
schedule of Embrex, Inc. and subsidiaries
included in the Annual Report (Form 10-K)
for the year ended December 31, 2000.
24 Powers of Attorney (included in the
signature page for this report)
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
38
(4) Exhibit to the Company's Form 10-Q as filed with the Securities and Exchange
Commission for the three months ended September 30, 2000 and incorporated herein
by reference
(5) Exhibit to the Company's Form 10-K as filed with the Securities and Exchange
Commission for the fiscal year ending December 31, 1996 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 S-8 as filed with the Securities and Exchange
Commission on July 31, 2000 and incorporated herein by reference
(12) Exhibit to the Company's Form 10-K as filed with the Securities and
Exchange Commission for the fiscal year ending December 31, 1998 and
incorporated herein by reference
(13) Exhibit to the Company's Form 10-Q as filed with the Securities and
Exchange Commission for the three months ended March 31, 1999 and incorporated
herein by reference
(14) Exhibit to the Company's Form 10-Q as filed with the Securities and
Exchange Commission for the three months ended June 30, 1999 and incorporated
herein by reference
(15) Exhibit to the Company's Form 8-K as filed with the Securities and Exchange
Commission on February 22, 2000 and incorporated herein by reference
(16) Exhibit to the Company's Form 10-K as filed with the Securities and
Exchange Commission for the fiscal year ending December 31, 1999 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, 2000.
39
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 30, 2001 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, 2000, 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 30, 2001
- ----------------------- and Director
Randall L. Marcuson
/s/ Don T. Seaquist Vice President, Finance and March 30, 2001
- ------------------- Administration (Principal Financial
Don T. Seaquist and Accounting Officer)
/s/ C. Daniel Blackshear Director March 30, 2001
- ------------------------
C. Daniel Blackshear
/s/ Lester M. Crawford Director March 30, 2001
- ----------------------
Lester M. Crawford, D.V.M. Ph.D.
/s/ Peter J. Holzer Director March 30, 2001
- -------------------
Peter J. Holzer
/s/ Kenneth N. May Director March 30, 2001
- ------------------
Kenneth N. May, Ph.D.
40
/s/ Arthur M. Pappas Director March 30, 2001
- --------------------
Arthur M. Pappas
/s/ Walter V. Smiley Director March 30, 2001
- --------------------
Walter V. Smiley
41
FINANCIAL STATEMENT SCHEDULE
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
EMBREX, INC. AND CONSOLIDATED SUBSIDIARIES
ADDITIONS
(1) (2)
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF COSTS AND OTHER END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- ----------- ------------ ---------- ---------- ---------- ----------
YEAR ENDED DECEMBER 31, 2000
Allowance for doubtful accounts $171,306 $90,346(b) 0 $(66,114)(b) $195,538
Inventory valuation allowance 447,988 72,287(b) 0 (325,866)(b) 194,409
Amortization of intangible assets 83,907 9,543(b) 0 0 93,450
YEAR ENDED DECEMBER 31, 1999
Allowance for doubtful accounts $133,521 $66,231(a) 0 $(28,446)(a) $171,306
Inventory valuation allowance 585,049 110,000(a) 0 (247,061)(a) 447,988
Amortization of intangible assets 74,364 9,543(a) 0 0 83,907
YEAR ENDED DECEMBER 31, 1998
Allowance for doubtful accounts $ 48,665 $94,227(a) 0 $ (9,371)(a) $133,521
Inventory valuation allowance 333,416 313,924(a) 0 (62,309)(a) 585,049
Amortization of intangible assets 79,952 55,143(a) 0 (60,731)(c) 74,364
(a) Specific account write offs.
(b) To adjust allowance for change in estimates.
(c) Not fully amortized - intangible asset write off.