EXHIBIT 99
RISK FACTORS
DEPENDENCE ON CERTAIN CUSTOMERS
The Company's revenues are highly dependent on expenditures by the poultry
producing industry. The Company's operations could be materially and adversely
affected by a general economic decline in this industry. The Company has in the
past derived, and may in the future derive, a significant portion of its
revenues from a relatively limited number of customers. In 1997, one customer,
Tyson Foods, Inc., accounted for approximately 28% of the Company's consolidated
revenues. Also, Perdue Farms and ConAgra Poultry accounted for approximately 8%
and 7%, respectively, of consolidated 1997 revenues. The Company continues to
experience such concentration in the current year and is likely to do so in
future years. The loss of any such customer could materially adversely affect
the Company's revenues.
EFFECT OF ECONOMIC FACTORS ON REVENUES AND EARNINGS
The Company's revenues and earnings may be impacted by domestic and global
economic factors that are beyond the Company's control, such as fluctuations in
the price of poultry feed, export demand for U.S. poultry products, and the
extent to which its cost of products and operating expenses could increase
faster than contractual price adjustments with its customers. A principal
component of the Company's revenues is fees charged to customers for the number
of eggs injected with the INOVOJECT(R) system. Rising poultry feed prices
increase the production costs of commercial poultry producers and may cause them
to reduce production which, in turn, could adversely impact the Company's
revenues. Adverse economic conditions in markets outside the United States could
also have a negative impact on the Company's revenues and earnings in those
markets.
INTERNATIONAL SALES AND MARKETING
The Company intends to continue its efforts to expand into markets outside of
North America. Sales outside of North America have accounted for approximately
9%, 10%, and 6% of revenues in fiscal 1997, 1996 and 1995, respectively. The
volume and consistency of such sales is subject to economic and political
conditions in the markets in which Embrex does business, which are beyond the
Company's control. In addition, there is no assurance that the INOVOJECT(R)
system will be successfully marketed outside of North America since market
acceptance is often dependent on the need for biological products to be
administered and on regulatory approval of in ovo administration of these
products.
NO ASSURANCE OF MARKET ACCEPTANCE OR DEVELOPMENT OF NEW PRODUCTS
Embrex's principal existing product, the INOVOJECT(R) system, has only been in
full commercial use since 1993. The market acceptance of new technologies,
including those of the Company, is subject to a number of factors, including the
ability of the technology to meet potential customers' needs more effectively
than competitive products or technologies, and any concerns which may be
associated with the use of new technology, such as reliability and maintenance.
Furthermore, future growth in INOVOJECT(R) system revenue will be dependent on
markets outside the United States where barriers to entry include commercial
acceptance of the INOVOJECT(R) system for prevailing poultry diseases and
regulatory approval of both the INOVOJECT(R) system and biological products.
In addition to the presently marketed INOVOJECT(R) system, Embrex, both itself
and together with collaborators, is developing vaccines for control of viral and
parasitic diseases and products for health and performance modification which
are in various stages of development. These products are subject to the risks
inherent in the development of products based on innovative technologies and are
subject to various regulatory approval requirements.
Embrex has developed and commercialized a technology using its proprietary viral
neutralizing factor ("VNF(R)") which permits a single dose immunization of an
egg embryo for the life of the bird. The Company markets a vaccine known as
Bursaplex(TM) which uses Embrex's VNF(R). The vaccine has been approved by the
United States Department of Agriculture ("USDA") for in ovo and post-hatch use.
However, Bursaplex(TM) has only recently been sold in commercial quantities and
there is no assurance that the product will continue to be sold in commercial
quantities even if it is shown to be effective.
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The development and commercialization of additional new products will require
substantial testing and development and regulatory approval.
DEPENDENCE ON OTHERS
Embrex plans to continue to conduct its operations with third party
collaborators, licensors or licensees. While Embrex believes its present and
future collaborators, licensors and licensees will have an economic motivation
to succeed in performing their obligations under its agreements with them, the
amount and timing of funds and other resources to be devoted under such
agreements will be controlled by such other parties and are subject to financial
or other difficulties that may befall such other parties.
Thus, no assurance can be given that Embrex will generate any revenues from such
agreements.
Embrex does not have large scale facilities for the production of Embrex's
INOVOJECT(R) system and biological products and does not plan to develop such
facilities in the foreseeable future. Embrex therefore will rely principally
upon relationships with contract manufacturers. There can be no assurance that
manufacture and supply agreements will be maintained on terms and at costs
acceptable to Embrex.
The Company has developed a strategic relationship with a single contract
manufacturer to fabricate its INOVOJECT(R) systems. While other machine
fabricators exist and have constructed limited numbers of INOVOJECT(R) systems,
a change in fabricators could cause a delay in manufacturing and a possible
delay in the timing of future INOVOJECT(R) installations and revenues from those
installations.
The Company has granted Select Laboratories, Inc. ("Select"), a wholly-owned
subsidiary of Rhone Merieux SA, exclusive rights to manufacture Infectious
Bursal Disease vaccines containing Embrex's proprietary VNF(R) product for
Embrex to market in North America, Latin America and Asia under the trade name
Bursaplex(TM). Embrex has also granted Cyanamid Websters ("Websters"), a unit of
Ft. Dodge Animal Health, which is a division of American Home Products Corp.,
exclusive rights to manufacture and market Infectious Bursal Disease vaccines
containing the Company's VNF(R) product to be marketed in Europe, the Middle
East and Africa under the trade name Bursamune(TM). Additionally, the Company
has one contract supplier of its VNF(R) product, the only supplier that was
included in the USDA's approval for in ovo use of Bursaplex(TM). The manufacture
of the bursal disease vaccines being produced by Select and Websters, and the
Company's VNF(R) product, generally must be performed in licensed facilities or
under approved regulatory methods. Although there are other manufacturers who
are capable of manufacturing bursal disease products and producing products such
as VNF(R), a change of suppliers could adversely affect 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.
In June 1997, the Company announced that Ft. Dodge Animal Health indicated that
its application for U.K. in ovo regulatory approval of Bursamune(TM) had been
provisionally refused. Both the Company and Ft. Dodge had anticipated approval
by the middle of 1997, however, Ft. Dodge indicated that the U.K. regulatory
authority requested that further data be supplied. The Company is working with
Ft. Dodge and Websters, which are responsible for obtaining the necessary
approvals for Bursamune(TM) in both the U.K. and other European Community
markets, to respond to the U.K. regulatory authority request for data with
respect to Bursamune(TM). While the Company anticipates that regulatory approval
in the U.K., as well as some other European Community markets, will occur during
the summer of 1998, there can be no assurances that such approvals will be
forthcoming.
POSSIBLE NEED FOR ADDITIONAL FINANCING
From its inception in May 1985 through December 31, 1997, Embrex had cumulative
operating losses (accumulated deficit) of $38.9 million. Until the first quarter
of 1996, Embrex had incurred operating losses since its inception. Although the
Company has been profitable in 1996 and 1997, there can be no assurance that
Embrex will continue to operate profitably.
The ability of Embrex to attain revenues sufficient to meet its cash
requirements for operations is dependent upon continued market acceptance of the
INOVOJECT(R) system on lease terms acceptable to Embrex and on the successful
development and commercialization of additional products. The extent of the
Company's future revenues, if any, derived
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from INOVOJECT(R) fees is subject to many variables such as whether additional
agreements for INOVOJECT(R) systems are reached, the timing of any agreements,
whether existing or new installation schedules are met, and the extent to which
customers use the INOVOJECT(R) system.
Although the Company anticipates that its existing funds, as well as revenues
from operations, will be adequate to sustain its existing operations for the
foreseeable future, there are no assurances that such funds will be sufficient.
If additional funds become necessary to sustain existing operations or
anticipated growth, the Company will be required to seek additional financing,
and there can be no assurance that such financing will be obtainable or that, if
available, such financing will be on terms favorable or acceptable to the
Company. Obtaining additional financing for such purposes may be difficult or
impossible, or financing may only be available on terms unfavorable or
unacceptable to the Company.
GOVERNMENT REGULATION AND NEED FOR REGULATORY APPROVAL
Although the use of the INOVOJECT(R) system is not subject to regulatory
approval in the U.S., the research and development activities of Embrex as well
as the investigation, manufacture and sale of poultry health and performance
enhancement products are subject to regulation either by the USDA or the United
States Food and Drug Administration ("FDA") and state and foreign agencies.
Foreign agencies may also require approval of the INOVOJECT(R) system. The
process of obtaining governmental approval is costly and at the USDA generally
takes from one to three years and at the FDA five or more years. There can be no
assurance that any future product that Embrex may develop will be approved by
the USDA, the FDA or any other regulatory agency. Delays in obtaining regulatory
approval may adversely affect the marketing of any products developed by Embrex
and the ability of Embrex to receive product revenues and royalties. There can
be no assurance that regulatory approvals for Embrex's future products will be
obtained without lengthy delays, if at all.
Moreover, Embrex is, or may become, subject to various federal, state and local
laws, regulations and recommendations relating to safe working conditions,
laboratory and manufacturing practices and the use and disposal of hazardous
substances used in conjunction with Embrex's research work. In addition, Embrex
cannot predict the extent of governmental regulations which might have an
adverse effect on the production and marketing of Embrex's products.
Embrex has entered into and intends to continue to enter into licensing or joint
development agreements pursuant to which costs associated with the regulatory
approval process for some products are and will be borne by the licensees or
joint developers. To the extent that Embrex is unable to generate sufficient
funds from operations or enter into licensing or joint development agreements to
develop products, it may not have the financial resources to complete the
regulatory approval process with respect to all or any of the products currently
under development. Products developed by Embrex may not be marketed commercially
in any jurisdiction in which required approvals have not been obtained.
PATENTS AND PROPRIETARY RIGHTS
Certain of Embrex's products and certain of the processes by which Embrex is
able to produce its products are proprietary. Embrex has ownership rights to
some of the technologies employed in these processes, and some are owned by
others and exclusively licensed to Embrex. Embrex believes that patent
protection of materials or processes it develops and any products that may
result from Embrex's and licensors' research and development efforts are
important to the possible commercialization of Embrex's products. The patent
position of companies such as Embrex generally is highly uncertain and involves
complex legal and factual questions. To date no consistent policy has emerged
regarding the breadth of claims allowed in biotechnology patents. Accordingly,
there can be no assurance that patent applications relating to Embrex's products
or technology will result in patents being issued or that, if issued, the
patents will afford protection against competitors with similar technology.
Moreover, some patent licenses held by Embrex may be terminated upon the
occurrence of certain events or become non-exclusive after a specified period.
In addition, companies that obtain patents claiming products or processes that
are necessary for or useful to the development of Embrex's products could bring
legal actions against Embrex claiming infringement. Embrex is currently not the
subject of any patent infringement claim. There can be no assurance that Embrex
will have the financial resources necessary to enforce any patent rights it may
hold. Also, Embrex may be required to obtain licenses from others to develop,
manufacture or market its products. There can be no assurance that Embrex will
be able to obtain such licenses on commercially reasonable terms or that the
patents underlying the licenses will be valid and enforceable.
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Embrex also relies upon unpatented, proprietary technology, and no assurance can
be given that others will not independently develop substantially equivalent
proprietary information or techniques or properly gain access to Embrex's
proprietary technology, or disclose such technology, or that Embrex can
meaningfully protect its rights in such unpatented proprietary technology.
Embrex attempts and will continue to attempt to protect its proprietary
materials and processes by relying on trade secret laws and non-disclosure and
confidentiality agreements with its employees and certain other persons who have
access to its proprietary materials or processes or who have licensing or
research arrangements with Embrex. Despite these protections, no assurance can
be given that others will not independently develop or obtain access to such
materials or processes or that Embrex's competitive position will not be
adversely affected thereby.
In September 1996, Embrex filed a patent infringement suit in the United States
District Court for the Eastern District of North Carolina against Service
Engineering Corporation, a Maryland corporation, and Edward G. Bounds, Jr., a
Maryland resident and officer of Service Engineering Corporation. The suit
alleged that each of the defendants' development of an in ovo injection device,
designed to compete with Embrex's patented INOVOJECT(R) injection method,
infringes at least one claim of the U.S. patent No. 4,458,630 exclusively
licensed to Embrex for the in ovo injection of vaccines into an avian embryo
(the "Sharma Patent"). Further, Embrex claims that the defendants have violated
the terms of a Consent Judgment and Settlement Agreement entered into with
Embrex in November 1995 in which prior litigation was concluded with Service
Engineering and Bounds agreeing not to engage in future activities violating the
Sharma Patent. Embrex sought injunctive relief to prevent infringement of the
Sharma Patent as well as monetary damages. In November 1996, Service Engineering
Corporation and Edward G. Bounds responded to Embrex's patent infringement suit
by asserting various affirmative defenses and denying the substantive
allegations in Embrex's complaint. This suit is still pending and final
disposition is expected in 1998. The outcome of this litigation is uncertain and
there is no assurance that Embrex will prevail on the merits or successfully
defend the validity of its patent.
In March 1997, Service Engineering Corporation, a Maryland corporation, and
Edward G. Bounds, Jr., a Maryland resident and an officer of Service Engineering
Corporation, filed suit against the United States Department of Agriculture in
the United States District Court for the District of Maryland with respect to
its grant to Embrex of an exclusive license for the Sharma Patent. The complaint
alleges that the USDA did not adequately comply with statutory and regulatory
requirements in making the grant to Embrex of an exclusive license to the Sharma
Patent, the revision of the exclusive license in 1991 and the revision of the
exclusive license in 1994, which extended the period of exclusivity, originally
set to terminate on December 31, 1996, through the patent expiration date.
Plaintiffs allege that in December 1996 (after Embrex had instituted the above
referenced action for patent infringement and breach of contract), the
Plaintiffs requested the USDA to grant them a license of the Sharma Patent. The
Plaintiffs allege that the USDA refused to do so because the USDA said that the
license was not available and that the Plaintiffs had no basis for relief.
Plaintiffs also allege that the USDA wrongfully consented to Embrex's bringing
suit against the Plaintiffs. Plaintiffs are seeking to have the court set aside
the extension of the exclusive license, the USDA's grant of permission for
Embrex to sue Service Engineering Corporation, Edwards G. Bounds, Jr. and IGI,
Inc. for patent infringement, the USDA's refusal to grant to Service Engineering
Corporation a non-exclusive license to the Sharma Patent and the USDA's refusal
to act favorably upon Service Engineering Corporation's appeal from the refusal
to grant it a non-exclusive license. In addition, Plaintiffs seek to have the
court issue an order requiring the USDA, prior to granting any exclusive license
under the Sharma Patent, including by extending the term of a pre-existing
exclusive license, to observe the procedures set forth under laws and
regulations governing the grant of licenses to patents owned by the USDA, and to
remand the matter to the USDA to take action in accordance with the order.
Plaintiffs also seek attorneys' fees and costs from the USDA. This suit was
stayed in January 1998 for 60 days pending resolution of the suit between Embrex
and Service Engineering Corporation and Edward G. Bounds, Jr. The outcome of
this litigation is uncertain and there is no assurance that its resolution will
be favorable to Embrex.
DEPENDENCE ON KEY PERSONNEL
Embrex's ability to develop marketable products and maintain a competitive
research and technological position will depend on its ability to continue to
attract and retain experienced and highly educated scientific and management
personnel and advisors. Competition for qualified employees among biotechnology
companies is intense and the loss of key scientific or management personnel
would adversely affect Embrex. Embrex has obtained insurance in the amount of
$1,000,000 on the life of Randall L. Marcuson, its President and Chief Executive
Officer, of which Embrex is the sole beneficiary. There can be no assurance that
Embrex will be able to continue to attract and retain qualified staff.
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SUPPORT AND MAINTENANCE REQUIREMENTS
The Company is required to supply, support, and maintain large numbers of
INOVOJECT(R) systems at its customers' hatcheries on a timely basis at a
reasonable cost to the Company. There can be no assurance that the Company will
be able to continue to provide such services on a cost-effective basis.
TECHNOLOGY AND COMPETITION
The areas of technology in which Embrex is involved are subject to rapid and
significant technological change. Competitors include independent companies that
specialize in biotechnology as well as major chemical and pharmaceutical
companies, universities, and public and private research organizations, many of
which are well established and have substantially greater marketing, financial,
technological and other resources than Embrex. There can be no assurance that a
competitive delivery method, either within or outside the United States, will
not be developed and gain commercial acceptance. Also, there can be no assurance
that competitors will not succeed in developing technologies and products that
are more effective than any which have been or are being developed by Embrex or
which would render Embrex's technology and products obsolete or non-competitive.
ISSUANCE OF PREFERRED STOCK; SHAREHOLDER RIGHTS PLAN; ANTI-TAKEOVER EFFECTS
The Board of Directors has the authority to issue up to 15,000,000 shares of
Preferred Stock in one or more series and to determine the designations,
preferences and relative participating, optional or other special rights and
qualifications, limitations or restrictions thereof, of the shares constituting
any series of Preferred Stock, without any further vote or action by the
shareholders. The issuance of Preferred Stock by the Board of Directors could
affect the rights of the holders of Common Stock. For example, such issuance
could result in a class of securities outstanding that would have preferences
with respect to voting rights and dividends and in liquidation over the Common
Stock, and could (upon conversion or otherwise) enjoy all of the rights
appurtenant to Common Stock.
The authority of the Board of Directors to issue Preferred Stock could
potentially be used to discourage attempts by others to obtain control of the
Company through merger, tender offer, proxy contest or otherwise by making such
attempts more difficult to achieve or more costly. The Board of Directors may
issue the Preferred Stock without shareholder approval and with voting and
conversion rights which could adversely affect the voting power of the holders
of Common Stock. There are no agreements or understandings for the issuance of
Preferred Stock and the Board of Directors has no present intention to issue any
Preferred Stock.
Embrex adopted a shareholder rights plan which could have the effect of
discouraging a takeover of the Company. The rights plan, if triggered, would
make it more difficult to acquire the Company by, among other things, allowing
existing shareholders to acquire additional shares at a substantial discount,
thus substantially inhibiting an acquiror's ability to obtain control of the
Company.
UPGRADE TO COMPANY'S INTERNAL SYSTEMS AND YEAR 2000 COMPLIANCE
The efficient management of information is critical to the Company as it grows
and the complexity of its business increases. The Company believes that keeping
pace with technological advances in this area is important to the Company's
continued success. As a result, the Company intends to continue to upgrade its
internal systems and software. As the year 2000 approaches, an important
business issue have emerged regarding how existing application software and
operating systems can accommodate this date value. Many existing application
software products, including the Company's, were designed to accommodate only a
two-date year. For example, "98" may be stored on a system to represent 1998 and
"00" represents 1900. Irrespective of the Year 2000 issue, the Company needs to
upgrade its accounting system to meet the demands of its business. The Company
is developing plans for the upgrade of its software and hardware as necessary to
address both its increased internal needs and the impact of the year 2000 on its
systems. The Company believes that the additional costs associated with the Year
2000 aspects of the upgrade will be immaterial. The inability of the Company or
its software and hardware vendors to upgrade the Company's systems in a manner
that fully addresses the Company's needs and the year 2000 issue could have an
adverse impact on the Company's ability to produce the information necessary to
manage its business, communicate with its customers and suppliers, and prepare
financial statements.
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