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
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
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
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.
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
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.
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.
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
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.
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.
See "Risk Factors" filed as Exhibit 99 to this report.
ITEM 4.
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.
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.
ITEM 6.
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)
5-YEAR SUMMARY OF SELECTED FINANCIAL DATA
- ---------------------------
(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.
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.
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
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
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.
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.
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
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
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
See accompanying notes.
CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying notes.
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.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
See accompanying notes.
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.
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.
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.
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.
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:
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
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:
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:
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):
Consolidated Quarterly Balance Sheets (Unaudited) (Dollars in thousands)
Statements of Cash Flows (Unaudited) (in thousands)
(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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10.
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.
ITEM 11.
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.
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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
PART IV
ITEM 14.
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
(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
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
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
(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.
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.
FINANCIAL STATEMENT SCHEDULE
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS EMBREX, INC. AND CONSOLIDATED SUBSIDIARIES
(a) Specific account write offs. (b) To adjust allowance for change in estimates. (c) Not fully amortized - intangible asset write off.