FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1997 Commission file number 000-19495
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Embrex, Inc.
(Exact name of registrant as specified in its charter)
North Carolina 56-1469825
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
1035 Swabia Court, Durham, North Carolina 27703
(Address of principal executive offices) (Zip Code)
(919) 941-5185
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value Per Share (and Rights Attached Thereto)
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
As of February 27, 1998, the aggregate market value of the voting stock held by
non-affiliates was $43.9 million based on a price per common share of $5.50 at
the close of business on that date.
As of February 27, 1998, there were 8,224,046 shares of the registrant's common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Document Where Incorporated
Proxy Statement with respect to the Annual Part III
Meeting of Shareholders to be held on May 21,
1998, to be filed with the Securities and
Exchange Commission
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INDEX
PAGE
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PART I
ITEM 1. BUSINESS.......................................................
ITEM 2. PROPERTIES.....................................................
ITEM 3. LEGAL PROCEEDINGS..............................................
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS............................................
ITEM 6. SELECTED FINANCIAL DATA........................................
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE............................
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..............
ITEM 11. EXECUTIVE COMPENSATION..........................................
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT......................................................
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K.....................................................
SIGNATURES..................................................................
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PART I
ITEM 1. BUSINESS
GENERAL
Embrex, Inc. ("Embrex" or the "Company") develops and markets biological
delivery technology and biological products to increase the productivity and
profitability of the global poultry industry. The Company was incorporated in
1985 in North Carolina.
Embrex has developed and commercialized the INOVOJECT(R) system, a proprietary,
automated in-the-egg injection system which can inoculate 20,000 to 50,000 eggs
per hour and eliminates the need for manual, post-hatch injection of certain
vaccines. The INOVOJECT(R) system is designed to inject vaccines and other
compounds in precisely calibrated volumes into targeted compartments within the
egg. Embrex markets the INOVOJECT(R) system to commercial poultry producers,
charging a fee for each egg injected.
In addition to the INOVOJECT(R) system, Embrex has developed and is marketing
its Viral Neutralizing Factor ("VNF(R)") antibody, useful in the development of
certain avian vaccines. The Company also has developed and is marketing
Bursaplex(TM), 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 compounds include vaccines, immune enhancers, performance modifiers and
genetic materials designed to increase poultry productivity and health while
reducing costs. These products are in various stages of development, and some
are being developed in collaboration with major drug companies, the United
States Department of Agriculture (the "USDA"), and several leading universities
in the field of avian science. These compounds are being designed to be
delivered through the INOVOJECT(R) system, and some may also be administered via
post-hatch injection.
EXISTING PRODUCTS
Patented Egg Injection System (INOVOJECT(R))
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 1997, the Company converted a number of hatcheries to the INOVOJECT(R) system
and continued operations of INOVOJECT(R) systems in hatcheries converted prior
to 1997. As a result, at December 31, 1997, Embrex had over 300 INOVOJECT(R)
systems installed in the United States ("U.S.") and Canada, as compared with
over 250 at year end 1996. The Company estimates that its INOVOJECT(R) system
inoculates in excess of 80% of all eggs produced for the North America broiler
poultry market and, therefore, expects only modest INOVOJECT(R) system revenue
growth in this market.
During 1997, the Company also placed a number of INOVOJECT(R) systems for trial
and on contract at locations outside the U.S. and Canada. The Company's
expansion outside the U.S. and Canada has been focused initially on Europe, the
Middle East, Africa and, during the second half of 1997, on Asia. At year end,
the Company had INOVOJECT(R) systems either installed or on trial in the United
Kingdom, Ireland, France, Spain, the Netherlands, Belgium, Italy, the Czech
Republic, Israel, Egypt, South Africa, Turkey, Australia, South Korea and
Thailand. Overall, the placement of INOVOJECT(R) systems outside the U.S. and
Canada is dependent on market acceptance of various in ovo ("in the egg")
vaccines and obtaining regulatory approval of these vaccines in numerous
countries.
Certain poultry diseases are more prevalent in some geographic regions than in
others. For example, Marek's disease, for which the INOVOJECT(R) system is used
in the U.S., is not as widespread in Europe as in North America. Similarly,
Infectious Bursal Disease or IBD (also known as Gumboro disease) is prevalent
both in the United States and in Northern
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Europe and Asia. The Company expects that primary usage of its INOVOJECT(R)
systems will vary by geographic region according to the prevailing diseases and
regulatory approval of vaccines for in ovo delivery.
Viral Neutralizing Factor (VNF(R))
Embrex has developed and commercialized a Viral Neutralizing Factor technology
which permits single-dose immunization of the avian embryo effective for the
life of the bird. By combining VNF(R), an antibody, with a vaccine virus,
immunization is provided in a single step, reducing or eliminating many of the
multiple vaccinations carried out in the industry. VNF(R) can neutralize a
virulent vaccine virus without impairing the virus' ability to stimulate an
immune response. By using VNF(R) in this manner, the virulent vaccine virus can
be made into a safe and effective vaccine which can be used in ovo or after
hatching.
The VNF(R) technology is the subject of two issued U.S. patents, a pending U.S.
patent application, and several foreign patents and foreign patent applications.
The U.S. patents are owned by the University of Arkansas and exclusively
licensed to Embrex on a royalty basis for the life of the patents. Embrex also
is researching application of VNF(R) for other avian disease vaccines, including
Newcastle's disease and infectious bronchitis, although there is no assurance
such research will result in product opportunities.
To date, the Company's research efforts with its VNF(R) compound have been
focused 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-avian
species. The Company is in the early stages of exploring collaborative
relationships with other companies for the development and licensing of VNF(R)
for non-avian uses. Embrex has not initiated any regulatory approval processes
with respect to non-avian uses of VNF(R), nor is there any assurance that its
efforts in this area will result in products or collaborative agreements. During
1997, the Company obtained a patent for the use of VNF(R) vaccines in all
non-primate mammals.
Infectious Bursal Disease (IBD) Vaccines
VNF(R) is especially useful in vaccines against avian IBD, which weakens a
bird's immune system. Birds infected by IBD typically exhibit poor growth or can
succumb to other diseases because of a compromised immune system. This disease
is widespread in the U.S., Northern Europe and Asia. To date, IBD has been
treated post-hatch via manually delivered vaccines or in drinking water.
Existing vaccines are associated, however, with certain limitations, and some
cannot be used safely or effectively in ovo. The Company estimates the worldwide
market for IBD vaccines to be approximately $60 million annually.
In January 1995, USDA approval was obtained for post-hatch administration of
Bursaplex(TM), the Company's VNF(R)-based vaccine for IBD in broiler chickens.
USDA approval was obtained in January 1997 for in ovo use of Bursaplex(TM),
specifically for administration via Embrex's INOVOJECT(R) egg injection systems.
During 1997, the Company conducted clinical trials of Bursaplex(TM) involving
more than 43.5 million birds, which Embrex believes demonstrated clear economic
benefits of this IBD vaccine.
In August 1995, the Company entered into an agreement with Cyanamid Websters
("Websters"), a unit of Ft. Dodge Animal Health, which is a division of American
Home Products Corp., for the joint development of another IBD vaccine containing
VNF(R), which will be marketed by Websters in Europe, the Middle East, and
Africa under Websters' trade name "Bursamune(TM)" upon receipt of regulatory
approvals. In June 1997, the Company announced that Ft. Dodge Animal Health
indicated that its application for U.K. in ovo regulatory approval of
Bursamune(TM) had been provisionally refused. Both the Company and Ft. Dodge had
anticipated approval by the middle of 1997, however, Ft. Dodge indicated that
the U.K. regulatory authority requested that further data be supplied. The
Company is working with Ft. Dodge and Websters, which are responsible for
obtaining the necessary approvals for Bursamune(TM) in both the U.K. and other
European Community markets, to respond to the U.K. regulatory authority requests
for data with respect to Bursamune(TM). The Company anticipates that regulatory
approval in the U.K., as well as some other European Community markets, will
occur during summer of 1998.
Embrex intends to seek regulatory approval in selected Latin American and Asian
markets for in ovo and post-hatch use of Bursaplex(TM). Although Embrex is
beginning to initiate this process, there is no assurance that any such
regulatory approvals will be obtained. Moreover, the placement of INOVOJECT(R)
systems outside the U.S. and Canada is
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dependent on regulatory approval and market acceptance of various in ovo
vaccines. To date, regulatory approval for Bursaplex(TM) has been received in
Peru, Ecuador, Pakistan and, on a provisional basis, in South Korea.
PRODUCTS UNDER DEVELOPMENT
Embrex is developing individually and in collaboration with others additional
products which address poultry health and performance needs when administered in
ovo. These additional products are in various stages of development. There can
be no assurance that Embrex will successfully develop or market any of these
products. Marketing products developed jointly with others may require royalty
or other payments by Embrex to its co-developers. Embrex has not initiated the
regulatory approval process for any of these potential products, and there is no
assurance regulatory approval will be obtained.
In Ovo Products for Control of Coccidiosis
In 1995, the Company began an initiative aimed at development of a novel in ovo
biological control method for coccidiosis. Coccidiosis is caused by a protozoan
parasite which attacks the gut of the chicken, causing significant problems with
the intake and digestion of feed and, therefore, the physical and economic
performance of the bird. Currently, virtually all broiler chickens, and most
poultry in general, receive anti-coccidiosis compounds called coccidiostats
incorporated into poultry feed. Over the years, coccidia have developed levels
of resistance to these coccidiostats and thus effectiveness has been somewhat
reduced. A limited number of live vaccines have also been developed and are
administered orally soon after hatch. However, due to difficulties in providing
a precise oral dose to each bird, growth depression can occur in broiler flocks.
Therefore, such live vaccines are used primarily in parent stock. Using its
INOVOJECT(R) technology and its knowledge of avian embryology, the Company has
begun this initiative to develop a novel, efficacious and cost-effective means
of preventing coccidiosis in broiler chickens, aimed at overcoming many of the
problems associated with current practices. In 1997, the Company established the
feasibility of an in ovo biological control method for coccidiosis. Further
development of this project will involve extensive clinical trials. Embrex
intends to pursue this research with collaborative partners. There can be no
assurances that any of these development efforts will be successful. Embrex has
not initiated the regulatory approval process with respect to these development
efforts, and does not expect for any coccidiosis product developed by the
Company to reach the market in the near future.
Other Products Under Development
During 1997, Embrex continued the evaluation process for several compounds which
the Company believes may have the potential to yield improvements in the areas
of feed conversion, muscle mass and leanness within broiler chickens. These
compounds need to be administered in the first several days of embryonic
development in order to have the desired effect. While the Company plans to
continue its research efforts in this area in 1998, there is no assurance that
these efforts will yield product opportunities.
Embrex also is researching technology alternatives to enhance or automate sexing
and gender sorting practices for poultry. Early gender sorting improves
processing plant efficiencies by enabling gender-specific feed rations and
improved feed conversion. There is no assurance, however, that such research
will result in product opportunities.
Embrex routinely enters into collaborative agreements with various animal health
companies, pharmaceutical companies and research and academic institutions to
evaluate the utility of certain of their compounds or devices when delivered or
applied in ovo. Depending upon the outcome of these tests, Embrex may or may not
proceed with these collaborations for further development. There is no assurance
that these efforts will yield products or further collaborations.
PATENTS AND PROPRIETARY RIGHTS
Embrex controls (either through direct ownership or exclusive license) 21 issued
U.S. patents, 10 pending U.S. patent applications, and over 34 issued foreign
patents and 42 pending foreign patent applications. In addition, Embrex has
executed confidentiality agreements with its employees, collaborators,
subcontractors and directors.
The INOVOJECT(R) system utilizes a process of injecting viral, bacterial or
fungal vaccines into avian eggs that was patented in the U.S. by the USDA in
1984. Embrex holds the exclusive license to this patent through its expiration
in
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2002. Embrex has supplemented the USDA patent with five additional issued U.S.
patents (and multiple foreign patents and patent applications) covering specific
design features of the INOVOJECT(R) system. See Item 3, "Legal Proceedings,"
below.
Embrex also owns or licenses method-of-use patents for the in ovo administration
of VNF(R) vaccines and other compounds to elicit various beneficial responses in
poultry. Two U.S. patents for methods of treating IBD virus infections using
VNF(R) vaccines, including by in ovo administration, were issued to Embrex in
March 1995. A U.S. patent application claiming the use of VNF(R) vaccines in all
non-primate animals was allowed in 1997. These patents and additional patent
applications encompass the use of the compounds regardless of the source of the
compound.
Embrex additionally owns or licenses composition-of-matter patents for VNF(R)
vaccines against IBD virus disease. A U.S. patent application with
composition-of-matter claims to VNF(R) vaccines for combating viral diseases in
non-primate animals was allowed in1997. These patent claims cover the vaccine
preparation, regardless of the manner in which the preparation is used.
In 1997, two additional U.S. patent applications were filed covering various
aspects of in ovo technology.
Embrex continues its efforts to patent methods of delivering compounds in ovo,
including early intervention methods and devices. In 1997, two U.S. patents with
claims to methods of delivering compounds to avian embryos in ovo were allowed
or issued.
Additionally, Embrex has federally registered the trademarks EMBREX(R),
INOVOJECT(R), and VNF(R), and has applied for federal registration of the
trademarks Bursaplex(TM) and Fortimune(TM).
COMPETITION
The primary competition for the INOVOJECT(R) system is the manual, post-hatch
administration of biological products. As 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 operate as intended under long-term commercial
conditions in order for these potential products to be marketed successfully.
The Company holds the exclusive license to the U.S. patent for injecting
vaccines into an avian embryo. Embrex has supplemented this patent with five
additional U.S. patents covering specific design features of the INOVOJECT(R)
system. In addition, Embrex relies on numerous foreign patents to protect its
intellectual properties and to afford a competitive advantage. See "Patents and
Proprietary Rights," above. There can be no assurance, however, that a
competitive delivery method, either within or outside the United States, will
not be developed and gain commercial acceptance. Embrex continues to monitor for
the presence of any competitive in ovo administration systems worldwide. See
Item 3, "Legal Proceedings," below.
Competitive success for Embrex will be based primarily on commercial acceptance
of its products, achieving and retaining scientific expertise and technological
superiority, identifying and pursuing scientifically feasible and commercially
viable opportunities, obtaining proprietary protection for its research
achievements, obtaining adequate funding and timely regulatory approvals, and
attracting corporate sponsors or partners in developing, testing, producing, and
marketing products, none of which can be assured. In addition, a primary
competitive factor affecting Embrex is its ability to conduct research and
development. Embrex's ability to compete also is dependent on its ability to
attract and retain key personnel. Maintaining financial and human resources,
therefore, are important factors for success.
PRODUCTION, MARKETING AND DISTRIBUTION
Production
Embrex currently subcontracts the production of substantially all of its
mechanical and biological products and expects to continue to do so for the
foreseeable future. The Company believes that alternative sources of manufacture
and supply generally exist.
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INOVOJECT(R) System
Embrex's in-house engineering staff designs the INOVOJECT(R) system, which
incorporates proprietary mechanical, pneumatic and electronic sub-systems and
concepts. The Company uses a single contract manufacturer to fabricate its
INOVOJECT(R) systems. While other machine fabricators exist and have constructed
limited numbers of INOVOJECT(R) systems, a change in fabricators could cause a
delay in manufacturing and a possible delay in the timing of future INOVOJECT(R)
installations and revenues from those installations.
VNF(R) (Viral Neutralizing Factor)
In 1993, Embrex signed multi-year agreements with SPAFAS, Inc., a subsidiary of
Charles River Laboratories, Inc., under which SPAFAS will supply the active
ingredient in VNF(R). In connection with this agreement, Embrex maintains
appropriate inventory levels and places orders with SPAFAS to allow Embrex to
satisfy anticipated customer demand for VNF(R). The regulatory approval granted
by the USDA for Bursaplex(TM) in January 1997 specifically covers the vaccine
produced with SPAFAS-manufactured VNF(R).
The Company has granted Select Laboratories, Inc. ("Select"), a wholly-owned
subsidiary of Rhone Merieux SA, exclusive rights to manufacture Infectious
Bursal Disease vaccines containing Embrex's VNF(R) product, known as
Bursaplex(TM), for Embrex to market in North America, Latin America and Asia.
Embrex has also granted Websters (a unit of American Home Products Corp.)
exclusive rights to manufacture IBD vaccines containing the Company's VNF(R)
product, known as Bursamune(TM), to be marketed in Europe, the Middle East and
Africa. The manufacture of the IBD vaccines being produced by Select and
Websters, and the Company's VNF(R) product, generally must be performed in
licensed facilities or under approved regulatory methods. Although there are
other manufacturers who are capable of manufacturing 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.
Marketing and Distribution
Because of the geographical and industrial concentration of the poultry industry
in the U.S., Embrex markets its products and provides ongoing service directly
to the industry. Embrex's marketing is focused principally on the broiler
chicken segment of the poultry industry, but the Company also has adapted its
products for use by and initiated trials and entered into commercial contracts
with a limited number of turkey producers.
In order to encourage proper use of the INOVOJECT(R) system technology within an
appropriate production environment, Embrex leases and licenses INOVOJECT(R)
systems to hatcheries. The agreements cover the use of the mechanical equipment
and ongoing field service, maintenance and technical support. The agreements
also include a license with royalty fees for use of Embrex's proprietary
injection process. Products which are delivered in ovo are sold separately.
The Company also is initiating arrangements for international distribution of
IBD vaccines, subject in each case to the availability of required regulatory
approvals. In 1996, the Company entered into agreements with other parties to
distribute Bursaplex(TM) in Israel, Chile, Ecuador, Peru and Pakistan. The
agreement for Israel also entitles the distributor to manufacture a VNF(R)-based
IBD vaccine. Subject to these agreements, the Company also will conduct
international marketing directly.
Other significant poultry markets exist in Asia and Latin America. Embrex has
held a number of discussions regarding marketing and distribution in each of
these markets. In 1997, the Company entered into agreements with other parties
to distribute Bursaplex(TM) in South Korea, Malaysia, Taiwan, Japan and Vietnam,
subject to regulatory approvals. Embrex also hired management for selected Asian
and Latin American markets and installed INOVOJECT(R) systems on a commercial or
trial basis in certain Asian markets.
Embrex has initiated activities necessary for the commercialization of its
technology in Japan. In 1992, Embrex entered into a distribution agreement with
Ishii Company, Ltd. ("Ishii"), a leading chick producer and the dominant
supplier of hatchery equipment in Japan. Upon veterinary medical device
regulatory approval by the Japanese Ministry of Agriculture, Fisheries and
Forestry, Ishii intends to distribute the INOVOJECT(R) egg injection system to
poultry producers throughout Japan.
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The Company's revenues attributable to international operations in 1997, 1996
and 1995 were 9%, 10% and 6% of the Company's consolidated revenues,
respectively. The company's identifiable assets attributable to international
operations in 1997, 1996 and 1995 were 16%, 13% and 5% of the Company's
consolidated assets, respectively.
RESEARCH AND DEVELOPMENT
In February 1998, Embrex opened a 12,800 square foot research and testing
facility near the Company's headquarters. This new facility is expected to
increase the Company's clinical trial capabilities and reduce reliance on
contract research. Research and development expense was $3.4 million in 1995,
$3.7 million in 1996 and $3.8 million in 1997. The increase in research and
development expense from 1995 to 1997 largely reflects increases in outside
contract research, supplies consumption, and INOVOJECT(R) design and development
activity. Research and development is principally Company sponsored and funded
primarily from internal sources.
GOVERNMENTAL REGULATION
Regulation by governmental authorities in the U.S. and other countries is a
significant factor in the production and marketing of Embrex's products and in
its on-going research and development activities. Although the use of the
INOVOJECT(R) system is not subject to regulatory approval in the U.S., animal
health products being developed by Embrex must receive approval for marketing
from either the USDA or the Food and Drug Administration (the "FDA") and from
similar agencies in foreign countries where 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 in
animals and demonstrate appropriate levels of safety and efficacy. Generally,
with respect to animal health products, the USDA has regulatory authority over
products which are biological in origin or which stimulate or affect an animal's
immune system, and the FDA has authority over all other products. The time and
cost of USDA approvals are generally less than those for FDA approvals. FDA
approval generally requires more extensive animal and toxicology testing than
USDA approvals and may take five or more years to obtain, whereas USDA approvals
generally require one to three years to obtain. Embrex's VNF(R) technology
received USDA approval in January 1995 for IBD applications post hatch, and for
in ovo use in January 1997. Of Embrex's products currently under development,
only the growth enhancing compounds and certain gene therapy products (depending
on the nature of the genetic material and the response induced) are known to
require FDA approval. Embrex believes all of its other products under
development will be subject only to USDA approval. Embrex's existing products
have received all necessary governmental approvals in the U.S. 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, 1997, Embrex employed 121 persons, 115 of whom were full-time
employees, an increase of 14 persons from the 101 full-time employees at
December 31, 1996.
SIGNIFICANT CUSTOMERS
Tyson Foods, Inc., including Hudson Foods which was acquired by Tyson in January
1998 ("Tyson"), accounted for approximately 28% of Embrex's consolidated 1997
revenues. Based on millions of pounds of ready-to-cook poultry meat produced in
1997, Tyson accounted for approximately 26% of the broilers grown in the U.S.
During 1997, Tyson extended its contract with Embrex through 2004. There are no
customers besides Tyson that represent 10 percent or greater of total revenues.
However, Perdue Farms and ConAgra Poultry accounted for approximately 8% and 7%,
respectively, of consolidated 1997 revenues.
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ITEM 2. PROPERTIES
Embrex leases its corporate headquarters and research and development
facilities, which occupy approximately 23,000 square feet and are located
adjacent to Research Triangle Park, North Carolina. Two-thirds of the space is
devoted to research and development. The lease is for a 15-year term expiring
March 31, 2002. Embrex paid an annual rent of approximately $215,000 during
1997. Annual rent increases thereafter amount to approximately 3%. In addition
to research and development activities conducted at its corporate headquarters,
Embrex opened a new 12,800 square foot research and testing facility near its
headquarters in February 1998. The lease is for a 10-year term expiring November
14, 2007, with a 5-year renewal option. The annual rent is approximately
$135,000, with annual increases of approximately 3% through the first 10 years
and approximately 4% during the 5-year renewal term.
Embrex leases approximately 3,000 square feet of warehouse space in Springdale,
Arkansas, on a year-to-year basis, which is used to support the Embrex customer
service function in the region. The Company also leases offices of 1,250 square
feet and warehouse space of 850 square feet in Great Dunmow, Essex, England.
Embrex is in the process of negotiating a new 2,500 square foot warehouse
facility near its offices in England that will replace the 850 square foot
facility. The warehouse will provide additional operating space and a close
proximity to the headquarters office. The incremental rent for the replacement
warehouse is not expected to exceed $13,000 annually. Embrex also has access to
facilities at certain universities. The use of these facilities is important to
Embrex's ongoing research and development efforts. Embrex has had agreements
with North Carolina State University ("NCSU") providing access to facilities
used for incubating eggs and growing live birds and for research and testing
purposes. Reliance on the NCSU facilities is expected to decline as a result of
Embrex's new research and testing facility. Embrex believes that suitable
alternative facilities exist if the above agreements are not renewed.
ITEM 3. LEGAL PROCEEDINGS
In September 1996, Embrex filed a patent infringement suit in the United States
District Court for the Eastern District of North Carolina against Service
Engineering Corporation, a Maryland corporation, and Edward G. Bounds, Jr., a
Maryland resident and officer of Service Engineering Corporation. The suit
alleged that each of the defendants' development of an in ovo injection device,
designed to compete with Embrex's patented INOVOJECT(R) injection method,
infringes at least one claim of the U.S. patent No. 4,458,630 exclusively
licensed to Embrex for the in ovo injection of vaccines into an avian embryo
(the "Sharma Patent"). Further, Embrex claims that the defendants have violated
the terms of a Consent Judgment and Settlement Agreement entered into with
Embrex in November 1995 in which prior litigation was concluded with Service
Engineering and Bounds agreeing not to engage in future activities violating the
Sharma Patent. Embrex sought injunctive relief to prevent infringement of the
Sharma Patent as well as monetary damages. In November 1996, Service Engineering
Corporation and Edward G. Bounds responded to Embrex's patent infringement suit
by asserting various affirmative defenses and denying the substantive
allegations in Embrex's complaint. This suit is still pending and final
disposition is expected in 1998.
In November 1996, Embrex filed a patent infringement suit in the United States
District Court for the Eastern District of North Carolina against IGI, Inc., a
Delaware corporation. The suited alleged that IGI, Inc., through its activities
with Service Engineering Corporation and Edward G. Bounds, Jr., an officer of
Service Engineering Corporation, is engaging in activities that constitute
infringement of the Sharma Patent. Embrex sought injunctive relief to prevent
infringement of the Sharma Patent as well as monetary damages. In January 1997,
IGI, Inc. responded to Embrex's patent infringement suit by asserting various
affirmative defenses and denying the substantive allegations in Embrex's
complaint. This suit was concluded by agreement between Embrex and IGI, Inc. in
January 1998.
In March 1997, Service Engineering Corporation, a Maryland corporation, and
Edward G. Bounds, Jr., a Maryland resident and an officer of Service Engineering
Corporation, filed suit against the United States Department of Agriculture in
the United States District Court for the District of Maryland with respect to
its grant to Embrex of an exclusive license for the Sharma Patent. The complaint
alleges that the USDA did not adequately comply with statutory and regulatory
requirements in making the grant to Embrex of an exclusive license to the Sharma
Patent, the revision of the exclusive license in 1991 and the revision of the
exclusive license in 1994, which extended the period of exclusivity, originally
set to terminate on December 31, 1996, through the patent expiration date.
Plaintiffs allege that in December 1996 (after Embrex had instituted the above
referenced action for patent infringement and breach of contract), the
Plaintiffs requested the USDA to grant them a license of the Sharma Patent. The
Plaintiffs allege that the USDA refused to do so because the USDA said that the
license was not available and that the Plaintiffs had no basis for relief.
Plaintiffs also
9
<PAGE>
allege that the USDA wrongfully consented to Embrex's bringing suit against the
Plaintiffs. Plaintiffs are seeking to have the court set aside the extension of
the exclusive license, the USDA's grant of permission for Embrex to sue Service
Engineering Corporation, Edwards G. Bounds, Jr. and IGI, Inc. for patent
infringement, the USDA's refusal to grant to Service Engineering Corporation a
non-exclusive license to the Sharma Patent and the USDA's refusal to act
favorably upon Service Engineering Corporation's appeal from the refusal to
grant it a non-exclusive license. In addition, Plaintiffs seek to have the court
issue an order requiring the USDA, prior to granting any exclusive license under
the Sharma Patent, including by extending the term of a pre-existing exclusive
license, to observe the procedures set forth under laws and regulations
governing the grant of licenses to patents owned by the USDA, and to remand the
matter to the USDA to take action in accordance with the order. Plaintiffs also
seek attorneys' fees and costs from the USDA. This suit was stayed in January
1998 for 60 days pending resolution of the suit between Embrex and Service
Engineering Corporation and Edward G. Bounds, Jr. See "Risk Factors" filed as
Exhibit 99 to this report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1997.
10
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock trades on the Nasdaq National Market System under the
symbol EMBX. The quarterly trading ranges of the Company's Common Stock for the
last two fiscal years were as shown in the table below:
Common Stock
Price Per Share
----------------------
Quarter Ended High Low
------------- ---- ---
March 31, 1996...................... 8 1/4 5 1/2
June 30, 1996....................... 7 7/8 6
September 30, 1996.................. 7 3/8 6
December 31, 1996................... 7 3/4 6
March 31, 1997...................... 7 13/16 6 3/8
June 30, 1997....................... 7 3/8 6 3/16
September 30, 1997.................. 7 3/8 5 15/16
December 31, 1997................... 7 5
At February 27, 1998 (the most recent practicable date), there were 504 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. SELECTED FINANCIAL DATA
Summary of Operations by Quarters (Unaudited)
<TABLE>
<CAPTION>
(Dollars In Thousands,
Except Per Share Amounts) 1997 1996
- ----------------------------- -----------------------------------------------------------------------------------------------
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues..................... $5,925 $5,922 $6,531 $6,412 $4,595 $5,068 $5,641 $ 5,328
Operating Expenses........... 2,577 $2,403 2,585 2,230 1,628 1,848 2,155 2,180
Net income (loss)............ 262 417 540 542 58 193 203 (113)
Net income (loss) per share
of Common Stock
Basic................. $ 0.03 $ 0.05 $ 0.06 $ 0.07 $ 0.01 $ 0.03 $ 0.03 $ (0.01)
Diluted............... $ 0.03 $ 0.05 $ 0.06 $ 0.07 $ 0.01 $ 0.03 $ 0.03 $ (0.01)
Number of Shares Used
in Per Share Calculation
(thousands)
Basic................ 8,058 8,203 8,236 8,238 6,820 7,017 7,213 7,821
Diluted............... 8,278 8,380 8,369 8,331 7,158 7,347 7,452 7,821
</TABLE>
11
<PAGE>
5-Year Summary of Selected Financial Data
(Dollars In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Restated)
<S> <C> <C> <C> <C> <C>
Statements of Operations Data
Revenues ........................................... $ 24,789 $ 20,632 $ 13,719 $ 6,897 $ 2,159
Research and development expenses .................. 3,793 3,673 3,416 4,271 3,763
Other operating expenses ........................... 6,002 4,138 3,836 3,561 4,248
Net income (loss) .................................. 1,760 341 (4,512) (6,710) (7,307)
Net income (loss) per share of Common
Stock (thousands)
Basic ....................................... $ 0.21 $ 0.05 $ (0.73) $ (1.19) $ (1.61)
Diluted ..................................... $ 0.21 $ 0.06 $ (0.73) $ (1.19) $ (1.61)
Number of Shares Used in Per Share
Calculation (thousands)
Basic ....................................... 8,184 7,218 6,187 5,645 4,552
Diluted ..................................... 8,339 7,520 6,187 5,645 4,552
Balance Sheet Data
Working capital .................................... $ 7,581 $ 7,552 $ 5,934 $ 1,608 $ 9,370
Total assets ....................................... 25,161 25,554 21,789 13,379 14,997
Long-term liabilities .............................. 3,278 5,814 10,966 3,093 1,377
Accumulated deficit ................................ (38,933) (40,693) (41,034) (36,522) (29,812)
Shareholders' equity ............................... 15,741 13,309 5,909 5,323 11,996
</TABLE>
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 1997 was $1.8 million compared to $341,000 in 1996
and a net loss of $4.5 million, on a restated basis, in 1995. Diluted earnings
per share increased from a net loss of $0.73 in 1995, on a restated basis, and a
profit of $0.05 in 1996, to net income of $0.21 in 1997. For the year ended
1997, shares outstanding on a diluted basis were 8.3 million, up from 7.5 and
6.2 million at year-end 1996 and 1995, respectively.
Revenues
Consolidated revenues in 1997 totaled $24.8 million, representing an increase of
20% over 1996 revenues of $20.6 million, which were 50% over 1995 revenues of
$13.7 million. INOVOJECT(R) revenues totaled $23.6 million in 1997 compared to
$19.3 million in 1996 and $12.8 million in 1995, representing increases of 22%
from 1996 to 1997, and 50% from 1995 to 1996, with the 1997 increase coming
principally from increased placement and throughput of INOVOJECT(R) systems in
North America and Europe.
The 1997 revenues include INOVOJECT(R) lease fees derived from multi-year
contracts and paid trials in the U.S. and foreign countries, and the sale of
INOVOJECT(R) systems to distributors. At December 31, 1997, Embrex had over 300
INOVOJECT(R) systems installed and operating under lease agreements worldwide,
up from over 250 systems at December 31, 1996, and 235 at December 31, 1995.
Additionally, Embrex estimates that as of December 31, 1997, it was vaccinating
in excess of 80% of the estimated 8.0 billion broiler birds grown in the U.S. in
1997, as well as
12
<PAGE>
approximately 80% in 1996, and 66% in 1995. 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 1998 from
existing INOVOJECT(R) operations in the United States and Canada, new
INOVOJECT(R) system leases in other countries, and sales of Bursaplex(TM)
product to poultry producers. However, the rate at which the marketplace will
accept the INOVOJECT(R) technology outside the United States and Canada, the
timing of regulatory approvals of third-party vaccines for in ovo use outside
the United States and Canada, start-up costs in new markets, possible
variability in U.S. hatchery bird production as a result of grain price
fluctuations, and possible variability in the demand for U.S. poultry and
poultry products outside the U.S., will impact the pace of revenue growth, if
any, and the sustaining of profitability from the installation and operational
throughputs of INOVOJECT(R) systems. In any event, any revenue and earnings
growth in 1998 is not anticipated to begin prior to the third and fourth
quarters.
Sales of Bursaplex(TM), the Company's proprietary vaccine for the treatment of
avian Infectious Bursal Disease, was the principal source of $1.1 million of
product revenues in 1997. The previously discussed delay associated with
obtaining U.K. regulatory approval for the sale of Bursamune(TM) in the U.K.
reduced the sale of the Company's proprietary VNF(R) product, which is a key
component of Bursamune(TM), to Ft. Dodge Animal Health, a division of American
Home Products Corp. See "Business -- Existing Products," above. This offset
initial sales of Bursaplex(TM) during 1997 and consequently resulted in a
$155,000 decrease in product revenue from 1996. Sales of VNF(R) for inclusion in
IBD vaccines were the principal source of previous years' product revenues,
which generated $1.2 million and $817,000 in 1996 and 1995, respectively.
Cost of Product Sales and INOVOJECT(R) Revenues
Cost of revenues as a percentage of revenues decreased from 53% and 64% of total
revenues in 1996 and 1995, respectively, to 49% of total revenues in 1997. The
improvement in 1997 is primarily attributable to INOVOJECT(R) system-related
cost reductions.
Operating Expenses
Operating expenses totaled $9.8 million in 1997 compared to $7.8 million in
1996, and $7.3 million in 1995.
General and administrative ("G&A") expenses were $5.5 million in 1997, up 49%
from $3.7 million in 1996, and up 11% from $3.3 million in 1995. The 1997 G&A
increase was 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. The 1996 increase over 1995 was
largely due to increased legal expenses associated with the implementation of a
shareholder rights plan in March 1996 and amendments to the Company's Articles
of Incorporation approved at the annual meeting of shareholders in May 1996.
Sales and marketing expenses totaled $522,000 in 1997 compared to $455,000 and
$525,000 in 1996 and 1995, respectively. Fluctuations during these periods
resulted from various levels of activity in the Company's sales and customer
service functions to support market expansion and field support of INOVOJECT(R)
systems, as well as stepped-up international activity, principally in Europe.
Certain 1997, 1996, and 1995 operating expenses were reclassified to cost of
revenues to conform to the presentation format adopted in the fourth quarter of
1996 and during 1997. These reclassifications had no effect on previously
reported net income or loss or shareholders' equity in 1995, 1996, or 1997.
Research and development ("R&D") expenses were $3.8 million in 1997 compared to
$3.7 million in 1996 and $3.4 million in 1995. The increase in R&D expense from
1995 to 1997 largely reflects an increase in outside contract research, supplies
consumption, and INOVOJECT(R) design and development activity. The Company
continues to manage its research and development effort to leverage its
know-how, patent position, market presence and expenditures.
13
<PAGE>
Other Income and Expense
Interest income totaled $488,000, $355,000, and $389,000 in years 1997, 1996,
and 1995, respectively. The 1997 increase relative to 1996 resulted principally
from higher cash balances, while the decrease in 1996 relative to 1995 was a
function of lower interest rates.
Interest expense totaled $1.1 million in 1997 compared to $1.6 million in 1996,
and $2.7 million, on a restated basis, in 1995. In 1997, the decrease in
interest expense reflected the repayment of approximately $3.3 million of
external financing, primarily in the form of equipment leases. In 1996 and 1995,
the amount of expense was principally attributable to the Company's funding of
its growing installed base of INOVOJECT(R) systems with the use of capital lease
financing and, in 1995, the issuance of convertible debentures. Additionally,
interest expense for 1995 has been restated to reflect a one-time charge
associated with recognizing $1,019,000 of interest expense attributable to the
difference between the market price of the Company's Common Stock and the
conversion price of the debentures issued in 1995. See "Liquidity and Capital
Resources" and Note 12 to the Company's financial statements. Management expects
to continue to rely on the use of internally generated funds to finance the cost
of additional INOVOJECT(R) systems in 1998, as was the case in 1997.
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.
Year 2000 Issue
Embrex's general ledger and primary financial accounting software is a DOS-based
application that operates on a client- server network. This application uses
only two digits to identify a year in the date field. The Company intends to
replace this application during 1998 with a Windows(TM)-based system.
Irrespective of the Year 2000 issue, the Company needs to upgrade its accounting
system to meet the demands of its business. The Company is in the process of
developing the implementation plan for this upgrade. The Company believes that
the additional costs associated with the Year 2000 aspects of the upgrade will
be immaterial.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company's cash and short-term investment balances
totaled $8.6 million compared to $9.9 million and $7.3 million at December 31,
1996 and 1995, respectively. The decrease reflected the ability of the Company
to fund capital expenditures with internal cash instead of equipment lease
financing. Working capital remained unchanged at $7.6 million in both 1997 and
1996, as a decrease in cash was offset by a reduction in the short-term portions
of both capital lease obligations and long-term debt.
During 1997, operating activities generated $6.1 million in cash, primarily due
to non-cash depreciation, and net income. Within investing activities,
INOVOJECT(R) systems, the Company's new research and testing facility, and
equipment purchases required $4.9 million, while the sale of short-term
investments, provided an offsetting $0.9 million. In addition, $3.1 million was
used to repay long-term debt and capital lease obligations.
During 1997, $425,000 of outstanding debentures along with $139,000 of accrued
interest were converted into 98,267 shares of Common Stock net of unamortized
debt issuance costs totaling $1,000. In addition, 419 shares of Embrex Common
Stock were issued pursuant to the non-cash exercise of warrants related to the
initial sale of the debentures in May 1995. As of December 1, 1997, all
debentures had been converted into Common Stock.
As of December 31, 1997, the Company had outstanding purchase commitments of
approximately $2.5 million related to the production of the Company's
Bursaplex(TM) product, and materials and supplies for construction and
maintenance of INOVOJECT(R) egg injection systems. This commitment included the
obligation related to a January 1996 agreement
14
<PAGE>
reached with Select Laboratories, requiring the Company to purchase all existing
inventories of raw materials, Bursaplex(TM), and related materials from Select
within 30 months following the January 1997 receipt of in ovo approval of the
Bursaplex(TM) product being manufactured for Embrex. In January 1998, the
Company fulfilled its obligation to Select under the January 1996 agreement.
The Company maintains a $2.0 million secured line of credit with a bank in the
United Kingdom, which may be used to finance the construction of additional
INOVOJECT(R) systems for Europe, the Middle East and Africa. The Company
utilized $0.3 million of this line in 1997, with the balance of $1.7 available
at year end. A remaining commitment of $2.0 million for utilization by Embrex
under a collaterized equipment financing arrangement expired in June 1997.
Based on its current operations, management believes that its available cash and
short-term investments, together with cash flow from operations, will be
sufficient to meet its foreseeable cash requirements.
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, which
statements represent the Company's judgment concerning the future and are
subject to risks and uncertainties that could cause the Company's actual
operating results and financial position to differ materially. Such forward
looking statements can be identified by the use of forward looking terminology
such as "may," "will," "expect," "anticipate," "estimate," "believe," or
"continue," or the negative thereof or other variations thereof or comparable
terminology.
The Company cautions that any such forward looking statements are further
qualified by important factors that could cause the Company's actual operating
results to differ materially from those in the forward looking statements,
including without limitation the Company's ability to penetrate new markets, the
Company's dependence on certain customers; the ability of the Company, its
manufacturing and marketing partners and others to obtain regulatory approval
for products, which is dependent on a number of factors, including the results
of trials, the discretion of regulatory officials, and any potential changes in
regulations; the Company's ability to generate future cash flow from operations;
continued demand for the INOVOJECT(R) system; the successful outcome of patent
litigation; the Risk Factors described in Exhibit 99 to this report; and other
risks detailed from time to time in the Company's Securities and Exchange
Commission filings, including the Company's Forms 10-Q, 10-K, and 8-K.
15
<PAGE>
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, 1997 and 1996, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentations.
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, 1997 and 1996, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Raleigh, North Carolina
February 20, 1998
16
<PAGE>
Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31
---------------------------
ASSETS 1997 1996
-------- --------
<S> <C> <C>
Current Assets
Cash and cash equivalents ............................................................... $ 8,580 $ 9,036
Restricted Cash (Note 2) ................................................................ 275 0
Short-term investments (Note 3) ......................................................... 0 876
Inventories:
Materials and supplies .............................................................. 898 1,061
Product ............................................................................. 603 573
Accounts receivable - trade ............................................................. 2,772 2,313
Other current assets .................................................................... 595 124
-------- --------
Total Current Assets ................................................................ 13,723 13,983
INOVOJECT(R)Systems Under Construction ....................................................... 690 530
INOVOJECT(R)Systems .......................................................................... 21,024 18,193
Less accumulated depreciation ........................................................... (12,149) (8,499)
-------- --------
8,875 9,694
Equipment, Furniture and Fixtures ............................................................ 3,601 2,607
Less accumulated depreciation ................................................................ (2,041) (1,695)
-------- --------
1,560 912
Other Assets:
Patents and exclusive licenses of patentable technology
(net of accumulated amortization of $80 in 1997 and $58 in 1996) .................... 309 125
Other noncurrent assets ................................................................. 4 310
-------- --------
Total Assets ................................................................................. $ 25,161 $ 25,554
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable ........................................................................ $ 1,312 $ 1,355
Accrued expenses ........................................................................ 2,147 1,087
Current portion of capital lease obligations ............................................ 2,391 3,080
Current portion of long-term debt (Note 5) .............................................. 292 909
-------- --------
Total Current Liabilities ...................................................... 6,142 6,431
Capital Lease Obligations, less current portion (Note 4) ..................................... 3,269 5,806
Long-Term Debt, less current portion (Note 5) ................................................ 9 8
Shareholders' Equity (Notes 6, 7 and 8)
Common Stock, $.01 par value per share
Authorized - 30,000,000 shares
Issued and outstanding- 8,239,946 and 8,043,490 shares at
December 31, 1997 and 1996, respectively ....................................... 82 80
Additional paid-in capital .............................................................. 54,788 53,742
Currency translation adjustments ........................................................ (196) 180
Accumulated deficit ..................................................................... (38,933) (40,693)
-------- --------
Total Shareholders' Equity .......................................................... 15,741 13,309
-------- --------
Total Liabilities and Shareholders' Equity ................................................... $ 25,161 $ 25,554
======== ========
</TABLE>
17
<PAGE>
Consolidated Statements of Operations
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------
1997 1996 1995
-------- -------- --------
(Restated)
<S> <C> <C> <C>
Revenues
INOVOJECT(R)revenue ............................................. $ 23,614 $ 19,263 $ 12,806
Product revenue ................................................. 1,062 1,217 817
Other revenue ................................................... 113 152 96
-------- -------- --------
Total Revenues .............................................. 24,789 20,632 13,719
Cost of Product Sales and INOVOJECT(R)Revenues ...................... 12,244 11,032 8,714
-------- -------- --------
12,545 9,600 5,005
Operating Expenses
General and administrative ...................................... 5,480 3,683 3,311
Sales and marketing ............................................. 522 455 525
Research and development ........................................ 3,793 3,673 3,416
-------- -------- --------
Total Operating Expenses .................................... 9,795 7,811 7,252
-------- -------- --------
Operating Income (Loss) ............................................. 2,750 1,789 (2,247)
Other Income (Expense)
Interest income ................................................. 488 355 389
Interest expense ................................................ (1,070) (1,608) (2,654
Other ........................................................... 14 0 0
-------- -------- --------
Total Other Expense ......................................... (568) (1,253) (2,265)
-------- -------- --------
Income (Loss) Before Taxes .................................. 2,182 536 (4,512)
Income Taxes (Note 10) .............................................. 422 195 0
-------- -------- --------
Net Income (Loss) ................................................... $ 1,760 $ 341 $ (4,512)
======== ======== ========
Net Income (loss) per share of Common Stock
Basic ....................................................... $ 0.21 $ 0.05 $ (0.73)
Diluted ..................................................... $ 0.21 $ 0.06 $ (0.73)
Number of Shares Used in Per Share Calculation
Basic ....................................................... 8,184 7,218 6,187
Diluted ..................................................... 8,339 7,520 6,187
</TABLE>
See accompanying notes.
18
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
(Dollars in thousands) Year ended December 31,
----------------------------------------
1997 1996 1995
-------- -------- --------
(Restated)
<S> <C> <C> <C>
Operating Activities
Net income (loss) ............................................................. $ 1,760 $ 341 $ (4,512)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization ............................................. 4,043 4,021 3,443
Changes in operating assets and liabilities:
Accounts receivable, inventories and other current assets ............ (797) (515) (1,610)
Accounts payable and accrued expenses ................................ 1,083 119 (64)
-------- -------- --------
Net Cash Provided By (Used In) Operating Activities ................................ 6,089 3,966 (2,743)
Investing Activities
Purchases of short-term investments ........................................... 0 0 (147)
Sales of short-term investments ............................................... 876 1,096 0
Collateralization of Lease (Note 2) ........................................... (275) 0 0
Purchases of INOVOJECT(R)systems, equipment, furniture and fixtures ........... (3,962) (4,888) (7,330)
Reductions to patents and other noncurrent assets ............................. 280 93 111
-------- -------- --------
Net Cash Provided By (Used In) Investing Activities ................................ (3,081) (3,699) (7,366)
Financing Activities
Issuance of Common Stock ...................................................... 257 3,438 927
Issuance of long-term debt .................................................... (119) 476 6,403
Proceeds from capital lease obligations ....................................... 102 2,139 7,101
Payments on capital lease obligations ......................................... (3,328) (2,818) (1,771)
-------- -------- --------
Net Cash Provided By (Used In) Financing Activities ................................ (3,088) 3,235 12,660
-------- -------- --------
Increase (Decrease) In Cash And Cash Equivalents ................................... (80) 3,502 2,551
Currency Translation Adjustments ................................................... (376) 180 --
Cash and cash equivalents at beginning of period ................................... 9,036 5,354 2,803
-------- -------- --------
Cash and Cash Equivalents at End of Period ......................................... $ 8,580 $ 9,036 $ 5,354
======== ======== ========
</TABLE>
Supplemental Disclosure of Cash Flow Information
Total interest paid was $1,070,000, $1,593,000 and $1,635,000 for the years
ended December 31, 1997, 1996, and 1995, respectively.
Total income taxes paid was $70,000, $170,000 and $0 for the years ended
December 31, 1997, 1996 and 1995, respectively.
Supplemental Schedule of Noncash Financing Activity:
In May 1995, American Cyanamid Company, a subsidiary of American Home Products
Corp., converted the promissory note issued by Embrex, Inc. to American Cyanamid
in 1991. The $1.2 million note, which would have been due on May 27, 1995, was
converted into 320,000 shares of Common Stock.
Also, during the 1995 period, $3.0 million of the debentures issued in May 1995,
along with $34,000 of accrued interest, were converted into 507,678 shares of
Common Stock net of unamortized debt issuance costs totaling $211,000.
During 1996, an additional $3.3 million of the debentures, along with $258,000
of accrued interest, were converted into 612,061 shares of Common Stock net of
unamortized debt issuance costs totaling $111,000.
19
<PAGE>
During 1997, $425,000 of outstanding debentures along with $139,000 of accrued
interest were converted into 98,267 shares of Common Stock net of unamortized
debt issuance costs totaling $1,000. In addition, 419 shares of Embrex Common
Stock were issued pursuant to the non-cash exercise of warrants related to the
initial sale of the debentures in May 1995. As of December 1, 1997, all
debentures had been converted into Common Stock.
On May 27, 1997, 34,320 shares of Common Stock were issued in exchange for
substantially all of the assets of Agrimatic Corporation.
Consolidated Statements of Shareholders' Equity
(Dollars in thousands)
<TABLE>
<CAPTION>
Additional Currency
Common Paid-in Translation Accumulated
Stock Capital Adjustments Deficit Total
-------- ---------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 ............................. $ 41,624 $ 221 $ 0 $(36,522) $ 5,323
-------- -------- -------- -------- --------
Stock issued:
Upon exercise of options ........................ 134 134
Under employee stock purchase plan .............. 80 80
Upon conversion of long-term debt
(net of issuance costs of $232) ............ 3,554 450 4,004
Upon exercise of warrants ....................... 730 730
Warrants issued on May 1, 1995 ...................... 150 150
Net loss ............................................ (4,512) (4,512)
-------- -------- -------- -------- --------
Balance at December 31, 1995 (as restated) ............... 46,122 821 0 (41,034) 5,909
Stock issued:
Upon exercise of options ........................ 286 286
Under employee stock purchase plan .............. 68 68
Upon conversion of long-term debt
(net of issuance cost of $1) ............... 2,947 494 3,441
Upon exercise of warrants ....................... 3,084 3,084
Establishment of $.01 par value
(Note 6) ................................. (52,427) 52,427
Currency translation adjustments .................... 180 180
Net income .......................................... 341 341
-------- -------- -------- -------- --------
Balance at December 31, 1996 ............................. 80 53,742 180 (40,693) 13,309
Stock issued:
Upon exercise of options ........................ 1 201 202
Under employee stock purchase plan .............. 55 55
Upon conversion of long-term debt
(net of issuance costs of $111) ............ 1 563 564
Upon issuance of shares for
Agrimatic acquisition ...................... 227 227
Currency translation adjustments .................... (376) (376)
Net income .......................................... 1,760 1,760
-------- -------- -------- -------- --------
Balance at December 31, 1997 ............................. $ 82 $ 54,788 $ (196) $ 38,933 $ 15,741
======== ======== ======== ======== ========
</TABLE>
20
<PAGE>
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 vaccination of newly hatched broiler chicks. Embrex also develops and
markets patented pharmaceutical and biological products to improve bird health,
reduce bird production costs and provide economic value to the global poultry
industry.
Acquisition
On May 27, 1997, the Company issued 34,320 shares of Common Stock in exchange
for substantially all of the assets of Agrimatic Corporation. This transaction
had an immaterial effect on the operations of Embrex.
Principles of Consolidation
The consolidated financial statements include the accounts of Embrex, Inc. and
its wholly owned subsidiaries, Embrex Europe Limited and Embrex Sales, Inc. (the
"Company"). All significant intercompany transactions and accounts have been
eliminated. Currently, foreign operations account for less than 10% of the
Company's revenues.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Inventories
Items recorded as inventory are generally purchased from others and recorded at
the lower of cost or market using the average cost method. Materials and
supplies inventories include spare parts for the INOVOJECT(R) systems as well as
laboratory and general supplies. Product inventories are comprised of biological
compounds, principally the Company's viral neutralizing factor product (VNF(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 methods over the estimated useful life of the equipment and
commences after construction is complete and the equipment is placed in service.
Equipment, Furniture and Fixtures
Equipment, furniture and fixtures are recorded at cost. Depreciation is computed
principally by using accelerated methods over the estimated useful lives of the
assets placed in service.
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.
21
<PAGE>
Foreign Currency Translation
All assets and liabilities in the balance sheets of the Company's foreign
subsidiary, Embrex Europe Limited, and its Asian operations, are translated at
year-end exchange rates except shareholders' equity which is translated at
historical rates. Revenues, costs and expenses are recorded at average rates of
exchange during the year. Translation gains and losses are accumulated as a
component of shareholders' equity. Foreign currency transaction gains and losses
are included in determining net income.
Revenue Recognition
INOVOJECT(R) system fees are recognized based on eggs processed during the
period. Product sales are recognized when the products are shipped. Contract
research revenue is recognized on a straight-line basis over the term of the
contract. Revenue received, but not yet earned, is classified as deferred
revenue.
Research and Development Costs
Research and development costs, including costs incurred to complete contract
research, are charged to operations when incurred and are included in operating
expenses.
Income Taxes
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 (Loss) Per Share
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 128, "Earnings per Share" which established new standards for
computing and presenting net income per share information. As required, the
Company adopted the provisions of Statement No. 128 in its 1997 financial
statements and has restated all prior year net income per share information.
Basic net income per share was determined by dividing net income available for
common shareholders by the weighted average number of common shares outstanding
during each year. Diluted net income per share reflects the potential dilution
that could occur assuming conversion or exercise of all convertible securities
and issued and unexercised stock options. A reconciliation of the net income
available for common shareholders and number of shares used in computing basic
and diluted net income per share is in Note 13.
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 28 percent of
consolidated 1997 revenues. Based on the millions of pounds of ready-to-eat
poultry meat produced in 1997, Tyson accounted for approximately 26 percent of
the broilers grown in the U.S. In 1997, Tyson was the only customer that
represented greater than 10 percent 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. The Company's
exposure to credit loss in the event payment is not received equals the
outstanding accounts receivable balance. As of December 31, 1997, Tyson Foods,
Inc. accounted for approximately
22
<PAGE>
23% of consolidated accounts receivable, and substantially all of the Company's
accounts receivable are due from companies in the poultry industry.
Sources of Supply
The Company has developed a strategic relationship with a single contract
manufacturer to fabricate its INOVOJECT(R) systems. While other machine
fabricators exist and have constructed limited numbers of INOVOJECT(R) systems,
a change in fabricators could cause a delay in manufacturing and a possible
delay in the timing of future INOVOJECT(R) installations and revenues from those
installations.
The Company has granted Select Laboratories, Inc. ("Select"), a subsidiary of
Rhone Merieux SA, exclusive rights to manufacture bursal disease vaccines
containing Embrex's proprietary VNF(R) product for Embrex to market in North
America, Latin America and Asia under the trade name Bursaplex(TM). In 1995,
Embrex granted Cyanamid Websters ("Websters"), a unit of Ft. Dodge Animal
Health, which is a division of American Home Products Corp., exclusive rights to
manufacture and market bursal disease vaccines containing the Company's VNF(R)
product to be marketed in Europe, the Middle East and Africa under the trade
name Bursamune(TM). Additionally, the Company has one contract supplier of its
VNF(R) product. The manufacture of the bursal disease vaccines being produced by
Select and Websters and the Company's VNF(R) product generally must be performed
in licensed facilities and/or under regulatory approved methods. Although there
are other manufacturers who are capable of manufacturing bursal disease products
and producing products such as VNF(R), a change of suppliers could adversely
effect the Company's future operating results due to the time it would take a
new supplier to obtain regulatory approval of its production process and/or
manufacturing facilities. The Company seeks to minimize this exposure through
multi-year supply agreements and the maintenance of adequate inventories.
Reclassification
Certain 1997, 1996, and 1995 amounts in the accompanying financial statements
have been reclassified to conform to the presentation adopted in the fourth
quarter of 1996 and during 1997. These reclassifications had no effect on
previously reported net income or loss or shareholders' equity in 1995, 1996 or
1997.
Impact of Recently Issued Accounting Standards
In 1997, the FASB issued Statements No. 130, "Reporting Comprehensive Income"
("SFAS 130") and No. 131, "Disclosures About Segments of an Enterprise and
Related Information" ("SFAS 131"), which are both effective for fiscal years
beginning after December 15, 1997. SFAS 130 addresses reporting amounts of other
comprehensive income and SFAS 131 addresses reporting segment information. The
Company does not believe that the adoption of these new standards will have a
material impact on its financial statements.
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 and testing
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. Short-Term Investments
Management determines the appropriate classification of its investments in debt
securities at the time of purchase and reevaluates such determination at each
balance sheet date. Debt securities for which the Company has both the intent
and ability to hold to maturity are classified as held to maturity. These
securities are carried at amortized cost. At December 31, 1997, the Company had
no investments that qualified as trading or available for sale.
23
<PAGE>
At December 31, 1996, the Company's investments in debt securities were
classified as cash and cash equivalents and short-term investments. The Company
maintains cash and cash equivalents and short-term investments principally of
United States treasury securities and commercial paper with a maturity date less
than twelve months with various financial institutions. The Company performs
periodic evaluations of the relative credit standing of those financial
institutions that are considered in the Company's investment strategy which is
designed to limit exposure to any one institution.
At December 31, 1997, the Company held no short-term investments. At year-end
1996, the Company held short-term investments totaling $876,000, of which
$251,000 was held in commercial paper, and $625,000 in repurchase agreements.
The Company's short-term investment balances are maintained in accounts at
various financial institutions. In connection with the secured line of credit,
the Company has deposited $298,000 as a compensating cash balance with the
lender.
4. Leases
At December 31, 1997 and 1996, the Company had assets totaling $14.0 million and
$13.9 million, respectively, financed by capital lease agreements which expire
through October 2000. Accumulated depreciation and amortization includes $10.1
million and $8.2 million of amortization related to these assets at December 31,
1997 and 1996, respectively. Amortization of assets financed by capital leases
is included with depreciation expense. As of December 31, 1996, the Company has
used $9.2 million ($0 in 1997 and $2.1 million in 1996) of the $11.2 million
capital lease financing closed in 1995 to fund construction of INOVOJECT(R)
systems principally under contract with North American customers in the United
States. At December 31, 1996, the Company had available $2.0 million of
aggregate unutilized capital financing capacity for use in the construction of
INOVOJECT(R) systems. This unused commitment expired in June 1997.
The Company leases its facilities under a number of operating leases extending
through November 2007. The Company has the option to cancel the operating lease
agreement with the payment of a $180,000 penalty. Total rent expense was
$312,000, $334,000, and $426,000 for the years ended December 31, 1997, 1996,
and 1995, respectively.
At December 31, 1997, the Company's minimum future commitments under capital and
operating leases were as follows:
<TABLE>
<CAPTION>
Operating Capital
Leases Leases
------ ------
<S> <C> <C>
1998................................................................... $ 407,000 $3,018,000
1999................................................................... 351,000 2,940,000
2000................................................................... 337,000 637,000
2001................................................................... 346,000 0
2002................................................................... 185,000 0
Beyond................................................................. 696,000 0
---------- ----------
Total.................................................................. $2,322,000 $6,595,000
==========
Less amounts representing interest........................................................... (935,000)
----------
Present value of future minimum lease payments............................................... $5,660,000
==========
</TABLE>
5. Long-Term Debt
During 1997, $425,000 of outstanding debentures along with $66,000 of accrued
interest were converted into 98,267 shares of Common Stock net of unamortized
debt issuance costs totaling $1,000. In addition, 419 shares of Embrex Common
Stock were issued pursuant to the non-cash exercise of warrants related to the
initial sale of such debentures.
On May 1, 1995, the Company closed on a private placement offering of
convertible debentures ("the debentures") resulting in net proceeds to the
Company of $5.4 million (as adjusted for the August 1995 rescission of the
issuance of $225,000 of the debentures). The debentures were payable on May 1,
1997. Through June 13, 1995, the holders of the debentures were entitled to
convert the debentures into Common Stock of the Company at a conversion price
equal to
24
<PAGE>
the average market price at the time of issuance. Commencing on June 14, 1995,
the holders of the debentures were entitled to convert the debentures into
Common Stock of the Company at a conversion price of the lesser of the market
price at the time of issuance ($5.00 per share) or 85 percent of the average
closing bid price of the Company's Common Stock for the five trading days ending
on the conversion date. The debentures accrued interest, payable at maturity, at
a rate of 8 percent per annum. The accrued interest was convertible into Common
Stock of the Company at the same conversion price as the debenture principal.
The Company had the right to demand conversion of the debentures and any accrued
interest after April 30, 1996. Additionally, at any time, the Company had the
right to redeem the debentures for cash equal to the closing bid of the
Company's Common Stock at the date of redemption multiplied by the underlying
shares into which the debentures would have been convertible. In conjunction
with this offering, the Company incurred issuance costs totaling $540,000 and
recorded $1.0 million of interest expense related to the 15% discount from
market upon conversion (See Note 12). The issuance costs were amortized as a
component of interest expense over the term of the debentures.
In 1995, $3.0 million of the debentures' principal and related discount was
converted into 517,910 shares of Common Stock, net of unamortized debt issuance
costs totaling $215,000. During 1996, an additional $3.3 million debentures and
related discount, along with $258,000 of accrued interest were converted into
612,061 shares of Common Stock, net of unamortized debt issuance costs totaling
$111,000.
As part of its compensation for the sale of the convertible debentures, the
Company's placement agent received a 6.5 percent commission, which is included
in the $540,000 total issuance costs, and warrants to purchase 96,000 shares of
Common Stock at a price of $6.00 per share. The estimated value of these
warrants, $150,600, has been recorded as additional paid-in capital, while their
cost was included within the $540,000 total issuance costs discussed above.
On May 29, 1991, the Company issued a four-year convertible term note (the
"note") to American Cyanamid Company, now a subsidiary of American Home Products
Corporation, in exchange for $1.2 million. During May 1995, at the election of
American Cyanamid, the note was converted into 320,000 shares of Common Stock of
the Company. Contemporaneous with the conversion, the Company paid to American
Cyanamid $160,000 of accrued interest due on the note.
6. Shareholders' Equity
On May 16, 1996, the Company's shareholders approved an increase in the number
of authorized shares of Common Stock from 15,000,000 to 30,000,000 shares and an
increase in the amount of authorized Preferred Stock from 20,000 to 15,000,000
shares. In addition, the Company changed the par value of the Common Stock and
Series A Participating Preferred Stock from no par value to par value stock,
with a par value of $.01 per share.
At December 31, 1997, the Company had reserved a total of 1,840,382 shares of
its Common Stock for future issuance as follows:
For exercise of warrants to purchase Common Stock................. 390,775
For exercise of Common Stock options.............................. 1,396,300
For possible future issuance to employees and others
under employee stock purchase plans............................... 53,307
---------
Total reserved..................................................... 1,840,382
=========
25
<PAGE>
At December 31, 1997, the Company had issued and outstanding warrants to
purchase Common Stock as follows:
Date through
Exercise Price Shares Reserved for Which Warrants
Per Share Exercise of Warrants are Exercisable
-------------- -------------------- ---------------
$8.07.................... 188,197 7/28/98
$9.02.................... 31,578 1/28/99
$9.50.................... 30,000 12/31/00
$9.50.................... 15,000 6/9/01
$6.00.................... 96,000 4/30/00
$7.28.................... 30,000 10/30/01
-------
390,775
=======
7. Stock Option Plans
The Company's stock option plans provide for option grants designated as either
nonqualified or incentive stock options. The options generally vest over a
four-year period and expire ten years from the date of grant. In general, the
exercise price of stock options is the closing price of the Company's Common
Stock on the date of grant.
Most U.S. employees and certain employees outside the U.S. are eligible to
receive a grant of stock options periodically with the number of shares
generally determined by the employee's salary grade and performance level. In
addition, certain management and professional level employees may receive a
stock option grant upon hire. Non-employee directors of the Company receive
annual grants of stock options in amounts specified in the applicable plan.
Stock option information with respect to all of the Company's stock option plans
follows:
<TABLE>
<CAPTION>
Number Option Price Range Expiration
of Shares per Share Date
--------- ------------------ ----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994, outstanding options.................. 713,402 $2.00 to $8.75 1998-2004
Granted....................................................... 314,370 $5.875 to $6.50 2005
Exercised..................................................... (59,444) $2.00 to $7.875
Canceled...................................................... (59,207) $2.00 to $8.75
---------
Balance at December 31, 1995, outstanding options.................. 909,121 $2.00 to $8.375 1998-2005
Granted....................................................... 111,980 $6.125 to $7.625 2006
Exercised..................................................... (66,873) $2.00 to $7.00
Canceled...................................................... (87,814) $6.125 to $2.00
--------
Balance at December 31, 1996, outstanding options.................. 866,414 $2.00 to $8.375 1998-2006
Granted....................................................... 279,525 $6.063 to $7.125 2007
Exercised..................................................... (53,779) $2.00 to $7.00
Canceled...................................................... (53,568) $6.125 to $7.00
---------
Balance at December 31, 1997, outstanding options.................. 1,038,592 $2.00 to $8.75 1998-2007
=========
</TABLE>
At December 31, 1997, options to purchase 1,038,592 shares of Common Stock were
exercisable at prices ranging from $2.00 to $8.375 per share.
The Company has elected to follow Accounting Principles Board Option No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation," requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
26
<PAGE>
The Company's 1996 Amendment to its 1993 Incentive Stock Option Plan increases
the authorized grant of options to company personnel from 500,000 shares of
common stock up to 1.2 million shares. All options granted have 10 year terms
and vest and become fully exercisable at the end of 4 years of continued
employment.
Pro forma information regarding net income (loss) and income (loss) per
share is required by SFAS 123, and has been determined as if the Company
accounted for its employee stock options granted subsequent to December 31, 1994
under the fair value method of SFAS 123. The fair value for these options was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted average assumptions:
1997 1996 1995
----- ----- ----
Risk free interest rate............... 6.13 6.42 6.13
Dividends........................... -- -- --
Volatility factor................... 0.358 0.421 0.358
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:
<TABLE>
<CAPTION>
For the year ended December 31
--------------------------------------------
1997 1996 1995
----- ----- ----
<S> <C> <C> <C>
Pro forma net income (loss)....................... $1,241,310 $51,513 $(4,574,000)
Pro forma income (loss) per share................. $ 0.15 $ 0.01 $ (0.72)
</TABLE>
Exercise prices for options outstanding as of December 31, 1997 ranged from
$2.00 to $8.75.
The weighted average remaining contractual life of those options is 8.42 years.
The weighted average exercisable price of outstanding options at December 31,
1996 is $6.52.
8. Employee Stock Purchase Plan
The Company has an Employee Stock Purchase Plan (the "Purchase Plan") to provide
its employees with an additional opportunity to share in the ownership of the
Company. Under terms of the Purchase Plan, all regular full-time employees of
the Company may make voluntary payroll contributions thereby enabling them to
purchase Common Stock at a price to be determined by the Compensation Committee
of the Board, but not less than 85 percent of the lower of the fair market value
as of the beginning or end of the twelve-month offering period. Contributions
are limited to 20 percent of an employee's compensation. Up to 100,000 shares of
Common Stock may be issued under the Purchase Plan.
Under the Purchase Plan, during 1997, 1996 and 1995, 9,764, 11,028, and 17,041
shares of Common Stock, respectively, were purchased.
9. 401(k) Retirement Savings Plan
The Company has a 401(k) plan which covers all employees upon employment who are
at least 18 years of age. Employer contributions are voluntary at the discretion
of the Company. There were no Company contributions for the years ended December
31, 1997, 1996, and 1995.
27
<PAGE>
10. Income Taxes
The components of income tax expense for the year ended December 31, 1997 are as
follows:
Current:
Federal.................................................... $ 59,000
State...................................................... 84,000
Foreign.................................................... 279,000
--------
$422,000
========
The Company's consolidated effective tax rate differed from the statutory rate
as set forth below for the year ended December 31, 1997:
Federal taxes at statutory rate............................... $742,000
State and local income taxes, net of Federal benefit.......... 84,000
Non-deductible expenses....................................... 24,000
Foreign losses for which no benefit has been recognized....... 346,000
Change in valuation allowance................................. 125,000
Utilization of net operating loss carryforwards............... (1,238,000)
Alternative minimum and foreign withholding taxes............. 338,000
Other......................................................... 1,000
----------
$422,000
==========
Deferred income taxes reflect the net effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. The Company has no deferred tax
liabilities. Significant components of the Company's deferred tax assets are as
follows:
<TABLE>
<CAPTION>
At December 31,
--------------------------------
1997 1996
----------- -----------
<S> <C> <C>
Deferred tax assets:
Book over tax depreciation........................................ $718,000 $790,000
Net operating loss carryforwards.................................. 11,430,000 12,800,000
Research and experimental tax credit carryforwards................ 1,915,000 1,725,000
Charitable contributions carryfoward.............................. 16,000 16,000
Other............................................................. 158,000 170,000
----------- -----------
Total deferred tax assets..................................... 14,237,000 15,501,000
Valuation allowance for deferred tax assets............................ (14,237,000) (15,501,000)
----------- -----------
Net deferred tax assets........................................... $0 $0
== ==
</TABLE>
During 1997 and 1996, the valuation allowance decreased by ($1,264,000) and
($255,000), respectively.
At December 31, 1997, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $34 million which are available to
offset future taxable income. These net operating loss carryforwards expire
during the years 2000 through 2010. As a result of the changes in ownership
percentages which occurred with the 1991 Initial Public Offering (IPO), the
future utilization of the net operating loss carryforwards incurred prior to the
1991 IPO is limited to approximately $2.1 million per year. Any loss
carryforward amounts exceeding the limitation can be carried forward to future
years within the carryforward period. The net operating loss carryforwards
incurred subsequent to the 1991 IPO are not subject to these change in ownership
limitations.
In addition, the Company has Research and Experimental Tax Credit carryforwards
totaling approximately $1.9 million which are available to offset future federal
income taxes. These credits expire during the years 2000 through 2012.
28
<PAGE>
11. Commitments
As of December 31, 1997, the Company had outstanding purchase commitments of
approximately $2.5 million related to the production of the Company's
Bursaplex(TM) product, and materials and supplies for the construction and
maintenance of INOVOJECT(R) egg injection systems.
12. Restatement
At the annual meeting of the American Institute of Certified Public Accountants
(AICPA) in January 1997 and at the March 1997 staff meeting of the Emerging
Issues Task Force of the Financial Accounting Standards Board (FASB), the
Securities and Exchange Commission staff stated that a charge to income is
appropriate in situations where a registrant has issued debt securities
convertible to Common Stock at the lower of a conversion rate fixed at issuance
or a fixed discount to the Common Stock's market price at the date of
conversion.
In accordance with the SEC's position, the Company has restated its 1995
financial statements to record additional interest expense of $1.1 million
related to the conversion feature at a 15% discount included in the 1995
debentures (see Note 4). The restatement resulted in an increase of $1.0 million
in the previously reported 1995 net loss and an increase in 1995 net loss per
share from $.57 per share to $.73 per share. In addition, at December 31, 1995,
long-term debt was increased by $569,000 and shareholders equity was decreased
by $569,000 to reflect the conversion discount related to outstanding debentures
that had not been converted.
29
<PAGE>
13. Net Income (Loss) Per Share
The following table sets forth the computation of basic and diluted net income
(loss) per share (in thousands, except per share amounts):
1997 1996 1995
------- ------- -------
Numerator:
Net Income (Loss) Available To
Common Stockholders ........................ $ 1,760 $ 341 $(4,512)
Effect of dilutive securities:
Regulation S Debentures .................. 9 122 --
------- ------- -------
Numerator for diluted earnings
per share-income available to
common stockholders after
assumed Conversions .................... $ 1,769 $ 463 $(4,512)
======= ======= =======
Denominator:
Denominator for basic net income per
share--weighted-average shares ............. 8,184 7,218 6,187
Effect of Dilutive Securities:
Employee Stock Options ................. 143 188 --
Warrants ............................... 8 12 --
Convertible Debentures ................. 4 102 --
------- ------- -------
Dilutive Potential Shares ............ 155 302 --
Denominator for diluted net income
per share--adjusted weighted-
average shares and assumed
conversions ............................ 8,339 7,520 6,187
======= ======= =======
Basic net income per share ...................... $ 0.21 $ 0.05 $ (0.73)
======= ======= =======
Diluted net income per share .................... $ 0.21 $ 0.06 $ (0.73)
======= ======= =======
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
30
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information on the executive officers and directors is incorporated by reference
from the Company's Proxy Statement (under the headings "Management" and
"Proposal I: Election of Directors," respectively), with respect to the Annual
Meeting of Shareholders to be held on May 21, 1998, to be filed with the
Securities and Exchange Commission.
ITEM 11. EXECUTIVE COMPENSATION
This information is incorporated by reference from the Company's Proxy Statement
(under the heading "Executive Compensation"), with respect to the Annual Meeting
of Shareholders to be held on May 21, 1998, to be filed with the Securities and
Exchange Commission.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information is incorporated by reference from the Company's Proxy Statement
(under the heading "Share Ownership of Management and Certain Beneficial
Owners"), with respect to the Annual Meeting of Shareholders to be held on May
21, 1998, to be filed with the Securities and Exchange Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
31
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1). The financial statements listed below are included in Item 8 of
this report. All financial statement schedules normally required under
Regulation S-X are omitted as the required information is inapplicable.
Report of Independent Auditors
Financial Statements
Consolidated Balance Sheets at
December 31, 1996 and 1997
Consolidated Statements of Operations
for each of the three fiscal years ended
December 31, 1995, 1996 and 1997
Consolidated Statements of Cash Flows
for each of the three fiscal years ended
December 31, 1995, 1996 and 1997
Consolidated Statements of Shareholders'
Equity for each of the three fiscal
years ended December 31, 1995, 1996 and 1997
Notes to Consolidated Financial Statements
(a)(2). The financial statements of the Company's Employee Stock Purchase
Plan listed below are filed herewith, pursuant to Form 10-K, General
Instruction F.
Report of Independent Auditors
Financial Statements
Statements of Net Assets Available for Plan
Benefits at December 31, 1996 and 1997
Statements of Changes in Net Assets Available
for Plan Benefits for the three years ended
December 31, 1997
Notes to Financial Statements
32
<PAGE>
(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 10.32.
Exhibits Description
- -------- -----------
3.1(1) Restated Articles of Incorporation
3.2(2) Articles of Amendment to Restated Articles of
Incorporation, effective March 21, 1996
3.3(3) Articles of Amendment to Restated Articles of
Incorporation, effective May 28, 1996
3.4 Amended and Restated Bylaws, effective March 27,
1998
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4
4.2(4) Specimen of Common Stock Certificate
4.3(5) Notices to holders of outstanding warrants regarding
adjustments in warrant terms resulting from
Regulation S private placement
4.4(6) Form of Registration Rights Agreement
4.5(5) Form of Regulation S Securities Subscription
Agreement
4.6(5) Form of Embrex 8% Convertible Debenture due May 1,
1997
4.7(5) Warrant to Purchase Common Stock of Embrex issued to
Schwartz Investments, Inc.
4.8(7) Rights Agreement dated as of March 21, 1996 between
Embrex and Branch Banking and Trust Company, as
Rights Agent
10.1(8) Exchange Agreement dated May 28, 1991, between
Embrex and American Cyanamid Company, Advent First
Limited Partnership A, Biotechnology Venture Fund
S.A., Biotechnology Investments Limited, Domain
Partners, L.P., Elf Technologies, Inc., Prince
Venture Partners III, L.P., 3I Securities
Corporation, and Charles E. Austin
10.2(8) Form of Stock Purchase Warrant exercisable for the
purchase of 180,003 shares of Common Stock
10.3(8) License Agreement dated December 11, 1991, between
Embrex and the National Technical Information
Service, a primary operating unit of the United
States Department of Commerce
10.4(8) Collaborative Research Agreement dated January 17,
1989 between Embrex and the University of Arkansas
10.5(8) License Agreement dated October 1, 1988, between
Embrex and the National Technical Information
Service, a primary operating unit of the United
States Department of Commerce
10.6(8) 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
33
<PAGE>
Exhibits Description
- -------- -----------
10.7(4) Fourth Amendment of Lease dated October 1, 1994
between the Company and Glaxo Inc. (as successor in
interest to Imperial Center Partnership and Petula
Associates, Ltd.)
10.8(4) Fifth Amendment of Lease dated December 13, 1996
between the Company and Glaxo Wellcome Inc. (as
successor in interest to Glaxo Inc.)
10.9 Lease for Royal Center II dated October 13, 1997
between the Company and Petula Associates, Ltd.
10.10(8) Facility Agreement dated March 1, 1991, between
Embrex and Mississippi Agriculture and Forestry
Experiment Station, Mississippi State University
10.11(8) 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(8) 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(8) 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(8) 1988 Incentive Stock Option Plan and form of
Incentive Stock Option Agreement
10.15(8) 1989 Nonstatutory Stock Option Plan and form of
Nonstatutory Stock Option Agreement
10.16(8) 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(4) Amended and Restated Employee Stock Purchase Plan
10.20(8) Employment Agreement dated November 15, 1989,
between Embrex and Randall L. Marcuson
10.21(4) Amendment to Employment Agreement dated May 21, 1996
between Embrex and Randall L. Marcuson
10.22(4) Change In Control Severance Agreement dated May 21,
1996 between Embrex and Randall L. Marcuson
10.23(8) Employment Agreement dated October 16, 1989, between
Embrex and Catherine A. Ricks
10.24(4) Change In Control Severance Agreement dated May 21,
1996 between Embrex and Catherine A. Ricks
10.25(2) General Provisions to Employment Agreement between
Embrex and Brian V. Cosgriff dated August 18, 1995
34
<PAGE>
Exhibits Description
- -------- -----------
10.26(4) Charge In Control Severance Agreement dated May 21,
1996 between Embrex and Brian V. Cosgriff
10.27(2) Terms and Conditions of Employment between Embrex
Europe Limited and David M. Baines dated May 12,
1994
10.28(4) Change In Control Severance Agreement dated June 9,
1996 between Embrex and David M. Baines
10.29(4) Letter Agreement and General Provisions to
Employment Agreement dated August 20, 1996 between
Embrex and Don T. Seaquist and Amendment to
Employment Agreement dated September 9, 1996 between
Embrex and Don T. Seaquist
10.30(4) Change In Control Severance Agreement dated
September 9, 1996 between Embrex and Don T. Seaquist
10.31(4) Letter Agreement and General Provisions to
Employment Agreement dated August 26, 1996 between
Embrex and Rick L. Ryan and Amendment to Employment
Agreement dated August 26, 1996 between Embrex and
Rick L. Ryan
10.32(4) Change In Control Severance Agreement dated August
26, 1996 between Embrex and Rick L. Ryan
10.33(8) Shareholders' Agreement dated August 14, 1991 by and
among Embrex, Advent Euroventures Limited
Partnership, and Plant Resource Venture Fund II
Limited Partnership
10.34 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)
10.35 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)
10.36(10) Master Lease Agreement dated December 3, 1993
between Embrex and Capital Associates International,
Inc. with a form of equipment schedule and
collateral assignment of lease attached
10.37(10) Master Lease Agreement dated January 28, 1994
between Embrex and Aberlyn Capital Management
Limited Partnership with a form of lease schedule
and collateral assignment of lease attached
10.38(10) Agreement to Issue Warrant dated January 28, 1994
between Embrex and Aberlyn Capital Management
Limited Partnership
10.39(10) Common Stock Purchase Warrant issued to Aberlyn
Capital Management Limited Partnership
10.40(10) Agreement to Issue Warrant dated January 28, 1994
between Embrex and Aberlyn Holding Company, Inc.
35
<PAGE>
Exhibits Description
- -------- -----------
10.41(10) Common Stock Purchase Warrant issued to Aberlyn
Holding Company, Inc.
10.42(11) Master Equipment Lease Agreement dated as of
December 7, 1994 between Financing for Science
International, Inc. and Embrex with a Consent to
Assignment of Equipment Lease Agreement, Security
Agreement and Rental Schedule attached
10.43(11) License Agreement dated as of December 7, 1994
between Financing for Science International, Inc.
and Embrex with Sublicense Agreement attached
10.44(11) Common Stock Purchase Warrant dated January 17, 1995
issued to Financing for Science International, Inc.
10.45(11) Agreement for Sale of Equipment and Rights Under
User Agreement dated as of December 7, 1994 between
Financing for Science International, Inc. and Embrex
10.46(5) Letter of Agreement for $6.0 million Convertible
Regulation S Private Placement by and between the
Company and Swartz Investments, Inc., as placement
agent
10.47(2) Limited License and Supply Agreement dated as of
July 20, 1995 between Embrex and Webster
10.48(4) Amendments dated August 1, 1996 and November 11,
1996 to Limited License and Supply Agreement dated
as of July 20, 1995 between Embrex and Webster
10.49(2) Agreement dated as of January 22, 1996 between
Embrex and Select
10.50(2) Letter Agreement dated as of January 22, 1996
between Select and Embrex
10.51(2) License dated as of January 22, 1996 granted by
Select to Embrex
10.52(2) Commitment letter accepted June 14, 1995 between
Embrex and Financing for Science International, Inc.
for $2.0 million capital lease financing facility
10.53(2) Stock Purchase Warrant dated June 9, 1995 issued to
Financing for Science International, Inc.
10.54(2) Financing Agreement (Number 10783) dated as of
October 30, 1995 between Lease Management Services,
Inc. and Embrex, and Addendum thereto dated October
30, 1995 attached
10.55(2) License Agreement dated October 30, 1995 between
Embrex and Lease Management Services, Inc.
10.56(2) Sublicense Agreement dated as of October 30, 1995
between Embrex and Lease Management Services, Inc.
10.57(2) Movable Hypothec on Equipment and Contracts dated as
of October 30, 1995 between Embrex and Lease
Management Services, Inc.
10.58(2) Warrant to Purchase 30,000 Shares of Common Stock
dated October 30, 1995 issued to Lease Management
Services, Inc.
10.59(2) Intercreditor Agreement dated as of October 31, 1995
among Financing for Science International, Inc.,
Lease Management Services, Inc., and Embrex.
36
<PAGE>
Exhibits Description
- -------- -----------
10.60(4) Embrex Europe Limited Loan Agreement dated April 3,
1996
21 Subsidiaries
23 Consent of Ernst & Young LLP to the inclusion of
their report dated February 20, 1998 with respect to
the consolidated financial statements of the Company
in this Form 10-K and the incorporation by reference
of such report into the Registration Statement on
Form S-3 (No. 333-18231), as filed with the
Securities and Exchange Commission on December 19,
1996, and into the Registration Statements under the
Securities Act of 1933 on Form S-8 (Registration
Nos. 33-51582, 33-63318 and 333-04109), as filed
with the Securities and Exchange Commission on
September 1, 1992, May 25, 1993, and May 20, 1996,
respectively, and to the incorporation by reference
in the Registration Statement on Form S-8
(Registration No. 33-63318) pertaining to the
Employee Stock Purchase Plan of their report dated
March 19, 1998 with respect to the financial
statements of the Embrex, Inc. Employee Stock
Purchase Plan included in this Form 10-K.
24 Powers of Attorney
27.1 Financial Data Schedule to the Company's Form 10-K
for the year ended December 31, 1997.
27.2 Amended Financial Data Schedule to the Company's
Form 10-Q for the quarter ended March 31, 1997 as
filed with the Securities and Exchange Commission
on May 7, 1997.
27.3 Amended and Restated Financial Data Schedule to the
Company's Form 10-K for the year ended December 31,
1996 as filed with the Securities and Exchange
Commission on March 31, 1997.
27.4 Amended and Restated Financial Data Schedule to the
Company's Form 10-Q for the quarter ended September
30, 1996 as filed with the Securities and Exchange
Commission on November 30, 1996.
27.5 Amended and Restated Financial Data Schedule to the
Company's Form 10-Q for the quarter ended June 30,
1996 as filed with the Securities and Exchange
Commission on August 12, 1996.
27.6 Amended and Restated Financial Data Schedule to the
Company's Form 10-Q for the quarter ended March 31,
1996 as filed with the Securities and Exchange
Commission on May 13, 1996.
99 Risk Factors relating to the Company
- ----------
(1) Exhibit to the Company's Form 10-K as filed with the Securities and
Exchange Commission for fiscal year ending December 31, 1991 and
incorporated herein by reference
(2) Exhibit to the Company's Form 10-K as filed with the Securities and
Exchange Commission for the fiscal year ending December 31, 1995 and
incorporated herein by reference
(3) Exhibit to the Company's Form 10-Q as filed with the Securities and
Exchange Commission for the three months ended June 30, 1996 and
incorporated herein by reference
(4) Exhibit to the Company's Form 10-K as filed with the Securities and
Exchange Commission for fiscal year ending December 31, 1996 and
incorporated herein by reference
(5) Exhibit to the Company's Form 10-Q as filed with the Securities and
Exchange Commission for the three months ended June 30, 1995 and
incorporated herein by reference
(6) Exhibit to the Company's Form 10-Q as filed with the Securities and
Exchange Commission for the three months ended March 31, 1995 and
incorporated herein by reference
(7) 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
37
<PAGE>
(8) 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
(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 Form 10-KSB, as amended, as filed with the
Securities and Exchange Commission for the fiscal year ending December
31, 1993 and incorporated herein by reference
(11) Exhibit to the Company's Form 10-K as filed with the Securities and
Exchange Commission for the fiscal year ending December 31, 1994 and
incorporated herein by reference
(b). No reports on Form 8-K were filed during the last quarter of the fiscal
year ended December 31, 1997.
38
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized.
EMBREX, INC.
By: /s/ Randall L. Marcuson
---------------------------
Date: March 30, 1998 Randall L. Marcuson
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Randall L. Marcuson President, Chief Executive Officer, March 30, 1998
- -------------------------------- and Director
Randall L. Marcuson
/s/ Don T. Seaquist
- -------------------------------- Vice President, Finance March 30, 1998
Don T. Seaquist and Administration (Principal
Financial and Accounting Officer)
* Chairman of the March 30, 1998
- -------------------------------- Board of Directors
Charles E. Austin
* Director March 30, 1998
- --------------------------------
C. Daniel Blackshear
* Director March 30, 1998
- --------------------------------
Lester M. Crawford, D.V.M. Ph.D.
* Director March 30, 1998
- --------------------------------
Kenneth N. May, Ph.D.
* Director March 30, 1998
- --------------------------------
Arthur M. Pappas
</TABLE>
* By: /s/ Randall L. Marcuson
---------------------------------------
Randall L. Marcuson, as Attorney-in-Fact
39
<PAGE>
Report of Independent Auditors
The Board of Directors
Embrex, Inc.
We have audited the accompanying statements of net assets available for plan
benefits of Embrex, Inc. Employee Stock Purchase Plan as of December 31, 1997
and 1996, and the related statement of changes in net assets available for plan
benefits for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the net assets available for plan benefits of Embrex,
Inc. Employee Stock Purchase Plan at December 31, 1997 and 1996, and the changes
in net assets available for plan benefits for each of the three years in the
period ended December 31, 1997 in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Raleigh, North Carolina
March 19, 1998
40
<PAGE>
STATEMENTS OF NET ASSETS AVAILABLE FOR PLAN BENEFITS
EMBREX, INC. EMPLOYEE STOCK PURCHASE PLAN
At December 31,
1997 1996
---- ----
Receivable from Company........................... $ 38,666 $ 26,077
-------- --------
Net assets available for Plan benefits............ $ 38,666 $ 26,077
======== ========
See accompanying notes.
41
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS
EMBREX, INC. EMPLOYEE STOCK PURCHASE PLAN
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Employee contributions................................... $ 87,189 $79,487 $90,880
Deductions:
Purchases of Common Stock................. 46,365 59,116 79,737
Withdrawals............................... 28,245 31,394 15,862
------- ------- -------
74,600 90,510 95,601
------- ------- -------
New (decrease) increase.................................. 12,589 (11,023) (4,721)
Net assets available for Plan benefits at
beginning of period....................... 26,077 37,100 41,821
------- ------- -------
Net assets available for Plan benefits at
end of period............................. $ 38,666 $26,077 $37,100
======= ======= =======
Shares of Common Stock purchased
during year............................... 8,209 11,028 17,041
======= ======= =======
</TABLE>
42
<PAGE>
EMBREX, INC. EMPLOYEE STOCK PURCHASE PLAN
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
NOTE 1 - BASIS OF PRESENTATION
The accompanying financial statements of the Embrex, Inc. Employee Stock
Purchase Plan ("the Plan") have been prepared on the accrual basis.
NOTE 2 - PLAN DESCRIPTION AND SUMMARY OF SIGNIFICANT PLAN PROVISIONS
The Board of Directors of Embrex, Inc. ("the Company") adopted the Plan on
January 28, 1993, and the Plan was approved by shareholders of the Company at
the Annual Meeting of Shareholders on May 20, 1993. The Plan became effective as
of June 1, 1993.
The purpose of this Plan is to provide the Company's employees with an
additional opportunity to share in the ownership of the Company. Under terms of
the Plan, all regular full-time employees of the Company may make voluntary
payroll contributions thereby enabling them to purchase Common Stock at a price
to be determined by the Compensation Committee of the Board, but not less than
85 percent of the lower of the fair market values as of the beginning or end of
the twelve month offering period.
Contributions are limited to 20 percent of an employee's compensation, and the
aggregate number of shares of Common Stock which may be purchased in total by
all Plan participants may not exceed 100,000 shares.
Contributions to the Plan are maintained in a non-interest bearing account until
such time as the participant exercises the option to purchase shares of Common
Stock from his or her available contributions, or withdraws from the account.
All amounts representing net Plan assets are considered general assets of the
Company and may be subject to the claims of creditors.
In addition to contributions, plan activity consists of voluntary purchases of
shares of Common Stock and withdrawals from participation in the Plan.
Participants may purchase whole shares of Common Stock during a Purchase Period
(generally a twelve month period ending each June 30th). A participant may
withdraw from the Plan and cease making contributions at any time.
The Plan is not subject to the provisions of the Employee Retirement Income
Security Act of 1974 ("ERISA") and is not qualified under Section 401(a) of the
Internal Revenue Code of 1986, as amended which relates to qualification of
certain pension, profit-sharing and stock bonus plans.
All costs to administer the Plan are paid by the Company.
43
<PAGE>
Exhibits Description
- -------- -----------
3.1(1) Restated Articles of Incorporation
3.2(2) Articles of Amendment to Restated Articles of
Incorporation, effective March 21, 1996
3.3(3) Articles of Amendment to Restated Articles of
Incorporation, effective May 28, 1996
3.4 Amended and Restated Bylaws, effective March 27,
1998
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4
4.2(4) Specimen of Common Stock Certificate
4.3(5) Notices to holders of outstanding warrants regarding
adjustments in warrant terms resulting from
Regulation S private placement
4.4(6) Form of Registration Rights Agreement
4.5(5) Form of Regulation S Securities Subscription
Agreement
4.6(5) Form of Embrex 8% Convertible Debenture due May 1,
1997
4.7(5) Warrant to Purchase Common Stock of Embrex issued to
Schwartz Investments, Inc.
4.8(7) Rights Agreement dated as of March 21, 1996 between
Embrex and Branch Banking and Trust Company, as
Rights Agent
10.1(8) Exchange Agreement dated May 28, 1991, between
Embrex and American Cyanamid Company, Advent First
Limited Partnership A, Biotechnology Venture Fund
S.A., Biotechnology Investments Limited, Domain
Partners, L.P., Elf Technologies, Inc., Prince
Venture Partners III, L.P., 3I Securities
Corporation, and Charles E. Austin
10.2(8) Form of Stock Purchase Warrant exercisable for the
purchase of 180,003 shares of Common Stock
10.3(8) License Agreement dated December 11, 1991, between
Embrex and the National Technical Information
Service, a primary operating unit of the United
States Department of Commerce
10.4(8) Collaborative Research Agreement dated January 17,
1989 between Embrex and the University of Arkansas
10.5(8) License Agreement dated October 1, 1988, between
Embrex and the National Technical Information
Service, a primary operating unit of the United
States Department of Commerce
10.6(8) Lease Agreement dated December 9, 1986 between
Embrex, as tenant, and Imperial Center Partnership
and Petula Associates, Ltd., as landlord, as amended
by First Amendment dated June 11, 1987, Second
Amendment dated December 1, 1988, and Third
Amendment dated May 2, 1989
10.7(4) Fourth Amendment of Lease dated October 1, 1994
between the Company and Glaxo Inc. (as successor in
interest to Imperial Center Partnership and Petula
Associates, Ltd.)
10.8(4) Fifth Amendment of Lease dated December 13, 1996
between the Company and Glaxo Wellcome Inc. (as
successor in interest to Glaxo Inc.)
44
<PAGE>
Exhibits Description
- -------- -----------
10.9 Lease for Royal Center II dated October 13, 1997
between the Company and Petula Associates, Ltd.
10.10(8) Facility Agreement dated March 1, 1991, between
Embrex and Mississippi Agriculture and Forestry
Experiment Station, Mississippi State University
10.11(8) 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(8) 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(8) 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(8) 1988 Incentive Stock Option Plan and form of
Incentive Stock Option Agreement
10.15(8) 1989 Nonstatutory Stock Option Plan and form of
Nonstatutory Stock Option Agreement
10.16(8) 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(4) Amended and Restated Employee Stock Purchase Plan
10.20(8) Employment Agreement dated November 15, 1989,
between Embrex and Randall L. Marcuson
10.21(4) Amendment to Employment Agreement dated May 21, 1996
between Embrex and Randall L. Marcuson
10.22(4) Change In Control Severance Agreement dated May 21,
1996 between Embrex and Randall L. Marcuson
10.23(8) Employment Agreement dated October 16, 1989, between
Embrex and Catherine A. Ricks
10.24(4) Change In Control Severance Agreement dated May 21,
1996 between Embrex and Catherine A. Ricks
10.25(2) General Provisions to Employment Agreement between
Embrex and Brian V. Cosgriff dated August 18, 1995
10.26(4) Charge In Control Severance Agreement dated May 21,
1996 between Embrex and Brian V. Cosgriff
10.27(2) Terms and Conditions of Employment between Embrex
Europe Limited and David M. Baines dated May 12,
1994
45
<PAGE>
Exhibits Description
- -------- -----------
10.28(4) Change In Control Severance Agreement dated June 9,
1996 between Embrex and David M. Baines
10.29(4) Letter Agreement and General Provisions to
Employment Agreement dated August 20, 1996 between
Embrex and Don T. Seaquist and Amendment to
Employment Agreement dated September 9, 1996 between
Embrex and Don T. Seaquist
10.30(4) Change In Control Severance Agreement dated
September 9, 1996 between Embrex and Don T. Seaquist
10.31(4) Letter Agreement and General Provisions to
Employment Agreement dated August 26, 1996 between
Embrex and Rick L. Ryan and Amendment to Employment
Agreement dated August 26, 1996 between Embrex and
Rick L. Ryan
10.32(4) Change In Control Severance Agreement dated August
26, 1996 between Embrex and Rick L. Ryan
10.33(8) Shareholders' Agreement dated August 14, 1991 by and
among Embrex, Advent Euroventures Limited
Partnership, and Plant Resource Venture Fund II
Limited Partnership
10.34 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)
10.35 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)
10.36(10) Master Lease Agreement dated December 3, 1993
between Embrex and Capital Associates International,
Inc. with a form of equipment schedule and
collateral assignment of lease attached
10.37(10) Master Lease Agreement dated January 28, 1994
between Embrex and Aberlyn Capital Management
Limited Partnership with a form of lease schedule
and collateral assignment of lease attached
10.38(10) Agreement to Issue Warrant dated January 28, 1994
between Embrex and Aberlyn Capital Management
Limited Partnership
10.39(10) Common Stock Purchase Warrant issued to Aberlyn
Capital Management Limited Partnership
10.40(10) Agreement to Issue Warrant dated January 28, 1994
between Embrex and Aberlyn Holding Company, Inc.
10.41(10) Common Stock Purchase Warrant issued to Aberlyn
Holding Company, Inc.
10.42(11) Master Equipment Lease Agreement dated as of
December 7, 1994 between Financing for Science
International, Inc. and Embrex with a Consent to
Assignment of Equipment Lease Agreement, Security
Agreement and Rental Schedule attached
46
<PAGE>
Exhibits Description
- -------- -----------
10.43(11) License Agreement dated as of December 7, 1994
between Financing for Science International, Inc.
and Embrex with Sublicense Agreement attached
10.44(11) Common Stock Purchase Warrant dated January 17, 1995
issued to Financing for Science International, Inc.
10.45(11) Agreement for Sale of Equipment and Rights Under
User Agreement dated as of December 7, 1994 between
Financing for Science International, Inc. and Embrex
10.46(5) Letter of Agreement for $6.0 million Convertible
Regulation S Private Placement by and between the
Company and Swartz Investments, Inc., as placement
agent
10.47(2) Limited License and Supply Agreement dated as of
July 20, 1995 between Embrex and Webster
10.48(4) Amendments dated August 1, 1996 and November 11,
1996 to Limited License and Supply Agreement dated
as of July 20, 1995 between Embrex and Webster
10.49(2) Agreement dated as of January 22, 1996 between
Embrex and Select
10.50(2) Letter Agreement dated as of January 22, 1996
between Select and Embrex
10.51(2) License dated as of January 22, 1996 granted by
Select to Embrex
10.52(2) Commitment letter accepted June 14, 1995 between
Embrex and Financing for Science International, Inc.
for $2.0 million capital lease financing facility
10.53(2) Stock Purchase Warrant dated June 9, 1995 issued to
Financing for Science International, Inc.
10.54(2) Financing Agreement (Number 10783) dated as of
October 30, 1995 between Lease Management Services,
Inc. and Embrex, and Addendum thereto dated October
30, 1995 attached
10.55(2) License Agreement dated October 30, 1995 between
Embrex and Lease Management Services, Inc.
10.56(2) Sublicense Agreement dated as of October 30, 1995
between Embrex and Lease Management Services, Inc.
10.57(2) Movable Hypothec on Equipment and Contracts dated as
of October 30, 1995 between Embrex and Lease
Management Services, Inc.
10.58(2) Warrant to Purchase 30,000 Shares of Common Stock
dated October 30, 1995 issued to Lease Management
Services, Inc.
10.59(2) Intercreditor Agreement dated as of October 31, 1995
among Financing for Science International, Inc.,
Lease Management Services, Inc., and Embrex.
10.60(4) Embrex Europe Limited Loan Agreement dated April 3,
1996
21 Subsidiaries
47
<PAGE>
Exhibits Description
- -------- -----------
23 Consent of Ernst & Young LLP to the inclusion of
their report dated February 20, 1998 with respect to
the consolidated financial statements of the Company
in this Form 10-K and the incorporation by reference
of such report into the Registration Statement on
Form S-3 (No. 333-18231), as filed with the
Securities and Exchange Commission on December 19,
1996, and into the Registration Statements under the
Securities Act of 1933 on Form S-8 (Registration
Nos. 33-51582, 33-63318 and 333-04109), as filed
with the Securities and Exchange Commission on
September 1, 1992, May 25, 1993, and May 20, 1996,
respectively, and to the incorporation by reference
in the Registration Statement on Form S-8
(Registration No. 33-63318) pertaining to the
Employee Stock Purchase Plan of their report dated
March 19, 1998 with respect to the financial
statements of the Embrex, Inc. Employee Stock
Purchase Plan included in this Form 10-K.
24 Powers of Attorney
27.1 Financial Data Schedule to the Company's Form 10-K
for the year ended December 31, 1997.
27.2 Restated Financial Data Schedule to the Company's
Form 10-Q for the quarter ended September 30, 1997
as filed with the Securities and Exchange
Commission on November 10, 1997 due to the change in
the earnings per share calculation as a result of
the adoption of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" on December
31, 1997.
27.3 Restated Financial Data Schedule to the Company's
Form 10-Q for the quarter ended June 30, 1997 as
filed with the Securities and Exchange Commission
on August 12, 1997, due to the change in the
earnings per share calculation as a result of the
adoption of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" on
December 31, 1997.
27.4 Restated Financial Data Schedule to the Company's
Form 10-Q for the quarter ended March 31, 1997 as
filed with the Securities and Exchange Commission
on May 7, 1997, due to the change in the
earnings per share calculation as a result of the
adoption of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" on
December 31, 1997, and to reflect a restatement of
the Company's _____________ for such quarter.
27.5 Restated Financial Data Schedule to the Company's
Form 10-K for the year ended December 31, 1996 as
filed with the Securities and Exchange Commission
on March 31, 1997, due to the change in the
earnings per share calculation as a result of the
adoption of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" on
December 31, 1997.
27.6 Restated Financial Data Schedule to the Company's
Form 10-Q for the quarter ended September 30, 1996
as filed with the Securities and Exchange Commission
on November 30, 1996, due to the change in the
earnings per share calculation as a result of the
adoption of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" on December
31, 1997.
27.7 Restated Financial Data Schedule to the Company's
Form 10-Q for the quarter ended June 30, 1996
as filed with the Securities and Exchange Commission
on August 12, 1996, due to the change in the
earnings per share calculation as a result of the
adoption of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" on December
31, 1997.
27.8 Restated Financial Data Schedule to the Company's
Form 10-Q for the quarter ended March 31, 1996
as filed with the Securities and Exchange Commission
on May 13, 1996, due to the change in the
earnings per share calculation as a result of the
adoption of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" on December
31, 1997.
99 Risk Factors relating to the Company
- ----------
(1) Exhibit to the Company's Form 10-K as filed with the Securities and
Exchange Commission for fiscal year ending December 31, 1991 and
incorporated herein by reference
(2) Exhibit to the Company's Form 10-K as filed with the Securities and
Exchange Commission for the fiscal year ending December 31, 1995 and
incorporated herein by reference
(3) Exhibit to the Company's Form 10-Q as filed with the Securities and
Exchange Commission for the three months ended June 30, 1996 and
incorporated herein by reference
(4) Exhibit to the Company's Form 10-K as filed with the Securities and
Exchange Commission for fiscal year ending December 31, 1996 and
incorporated herein by reference
(5) Exhibit to the Company's Form 10-Q as filed with the Securities and
Exchange Commission for the three months ended June 30, 1995 and
incorporated herein by reference
(6) Exhibit to the Company's Form 10-Q as filed with the Securities and
Exchange Commission for the three months ended March 31, 1995 and
incorporated herein by reference
(7) 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
(8) 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
(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
48
<PAGE>
(10) Exhibit to the Company's Form 10-KSB, as amended, as filed with the
Securities and Exchange Commission for the fiscal year ending December
31, 1993 and incorporated herein by reference
(11) Exhibit to the Company's Form 10-K as filed with the Securities and
Exchange Commission for the fiscal year ending December 31, 1994 and
incorporated herein by reference
49
AMENDED AND RESTATED EFFECTIVE MARCH 27, 1998
AMENDED AND RESTATED BYLAWS
OF
EMBREX, INC.
ARTICLE I
---------
DEFINITIONS
-----------
In these bylaws, unless otherwise provided, the following terms shall
have the following meanings:
(1) "Act" shall mean the North Carolina Business Corporation
Act as codified in Chapter 55 of the North Carolina General Statutes effective
July 1, 1990, and as amended from time to time;
(2) "Articles of Incorporation" shall mean the Corporation's
articles of incorporation, including amended and restated articles of
incorporation and articles of merger;
(3) "Corporation" shall mean Embrex, Inc.;
(4) "Distribution" shall mean a direct or indirect transfer of
money or other property (except the Corporation's own shares) or incurrence of
indebtedness by the Corporation to or for the benefit of its shareholders in
respect of any of its shares. A distribution may be in the form of a declaration
or payment of a dividend, a purchase, redemption, or other acquisition of
shares, a distribution of indebtedness, or otherwise;
(5) "Emergency" shall mean a catastrophic event which prevents
a quorum of the board of directors from being readily assembled;
(6) "Shares" shall mean the units into which the proprietary
interests in the Corporation are divided; and
(7) "Voting group" shall mean all shares of one or more
classes or series that under the articles of incorporation or the Act are
entitled to vote and be counted together collectively on a matter at a meeting
of shareholders. All shares entitled by the articles of incorporation or the Act
to vote generally on a matter are for that purpose a single voting group.
ARTICLE II
OFFICES
SECTION 1. PRINCIPAL OFFICE: The principal office of the Corporation
shall be located at 1035 Swabia Court, Durham, Durham County, North Carolina
27703, or at such other place as may be determined from time to time by the
directors.
SECTION 2. REGISTERED OFFICE: The registered office of the Corporation
shall be located at 1035 Swabia Court, Durham, Durham County, North Carolina
27703.
SECTION 3. OTHER OFFICES: The Corporation may have offices at such
other places, either within or without the State of North Carolina, as the board
of directors may from time to time determine, or as the affairs of the
Corporation may require.
ARTICLE III
-----------
MEETINGS OF SHAREHOLDERS
------------------------
SECTION 1. PLACE OF MEETINGS: All meetings of shareholders shall be
held at the principal office of the Corporation, or at such other place, either
within or without the State of North Carolina, as shall be designated in the
notice of the meeting or as may be agreed upon by a majority of the shareholders
entitled to vote at the meeting.
SECTION 2. ANNUAL MEETING: The annual meeting of shareholders for the
election of directors and the transaction of other business shall be held
annually in any month on any day (except Saturday, Sunday or a legal holiday) as
fixed by the board of directors.
SECTION 3. SUBSTITUTE ANNUAL MEETING: If the annual meeting shall not
be held on the day designated by these bylaws, a substitute annual meeting may
be called by the board of directors, the chairman of the board, the chief
executive officer or the president. A meeting so called shall be designated and
treated for all purposes as the annual meeting.
SECTION 4. SPECIAL MEETINGS: Special meetings of the shareholders may
be called at any time by the board of directors, the chairman of the board, the
chief executive officer or the president. Only business within the purpose or
purposes described in the meeting notice specified in Section 6 of this Article
may be conducted at a special meeting of shareholders.
SECTION 5. CONDUCT OF BUSINESS: The chairman of the meeting of
shareholders shall determine the order of business and the procedure at the
meeting, including such regulation of the manner of voting and the conduct of
discussion as seem to him in order.
SECTION 6. NOTICE OF MEETING: Written or printed notice stating the
time and place of the meeting shall be delivered not less than ten (10) nor more
than sixty (60) days before the date of any shareholders' meeting, either
personally, by mail, by telegraph, by teletype, or by facsimile transmission, by
or at the direction of the chairman of the board, the chief executive officer,
the president, the secretary, or other person calling the meeting to each
shareholder of record entitled to vote at such meeting. If mailed, such notice
shall be deemed to be delivered when deposited in the United States mail,
addressed to the shareholder at his address as it appears on the record of the
shareholders of the Corporation, with postage thereon prepaid.
In the case of a special meeting, the notice of meeting shall
specifically state the purpose or purposes for which the meeting is called. In
the case of an annual or substitute annual meeting, the notice of meeting need
not specifically state the business to be transacted unless such a statement is
required by the Act.
When an annual or special meeting is adjourned to a different date,
time, and place, it is not necessary to give any notice of the adjourned meeting
other than by announcement at the meeting at which the adjournment is taken;
provided, however, that if a new record date for the adjourned meeting is or
must be set, notice of the adjourned meeting must be given to persons who are
shareholders as of the new record date.
2
<PAGE>
The record date for determining the shareholders entitled to notice of
and to vote at an annual or special meeting shall be fixed as provided in
Section 3 of Article VIII.
SECTION 7. WAIVER OF NOTICE: A shareholder may waive notice of any
meeting either before or after such meeting. Such waiver shall be in writing,
signed by the shareholder, and filed with the minutes or corporate records. A
shareholder's attendance at a meeting: (i) waives objection to lack of notice or
defective notice of the meeting, unless the shareholder at the beginning of the
meeting objects to holding the meeting or transacting business at the meeting;
and (ii) waives objection to consideration of a particular matter at the meeting
that is not within the purpose or purposes described in the meeting notice,
unless the shareholder objects to considering the matter before it is voted
upon.
SECTION 8. SHAREHOLDER LIST: Commencing two (2) business days after
notice of a meeting of shareholders is given and continuing through such
meeting, the secretary of the Corporation shall maintain at the principal office
of the Corporation an alphabetical list of the shareholders entitled to vote at
such meeting, arranged by voting group, with the address of and number of shares
held by each. This list shall be subject to inspection by any shareholder or his
agent or attorney at any time during usual business hours and may be copied at
the shareholder's expense.
SECTION 9. QUORUM: A majority of the votes entitled to be cast on a
matter by any voting group, represented in person or by proxy, shall constitute
a quorum of that voting group for action on that matter. The shareholders
present at a duly organized meeting may continue to transact business until
adjournment, notwithstanding the withdrawal of enough shareholders to leave less
than a quorum.
In the absence of a quorum at the opening of any meeting of
shareholders, such meeting may be adjourned from time to time by a majority of
the votes voting on the motion to adjourn; and at any adjourned meeting at which
a quorum is present, any business may be transacted which might have been
transacted at the original meeting.
SECTION 10. PROXIES: Shares may be voted either in person or by one or
more agents authorized by a written proxy executed by the shareholder or by his
duly authorized attorney in fact. A proxy may take the form of a telegram,
telex, facsimile or other form of wire or wireless communication which appears
to have been transmitted by a shareholder. A proxy is effective when received by
the secretary or other officer or agent authorized to tabulate votes. A proxy is
not valid after the expiration of eleven (11) months from the date of its
execution, unless the person executing it specifies therein the length of time
for which it is to continue in force or limits its use to a particular meeting.
SECTION 11. VOTING OF SHARES: Unless otherwise provided in these
bylaws, the articles of incorporation, or the Act, each outstanding share,
regardless of class, shall be entitled to one vote on each matter submitted to a
vote at a meeting of shareholders.
Except for the election of directors, which is governed by the
provisions of Section 4 of Article IV, if a quorum is present, action on a
matter by a voting group is approved if the votes cast within the voting group
favoring the action exceed the votes cast against the action, unless the vote of
a greater number is required by the Act, the articles of incorporation, or these
bylaws.
Shares of the Corporation are not entitled to vote if: (i) they are
owned, directly or indirectly, by the Corporation, unless they are held by it in
a fiduciary capacity; (ii) they are owned, directly or
3
<PAGE>
indirectly, by a second corporation in which the Corporation owns a majority of
the shares entitled to vote for directors of the second corporation; or (iii)
they are redeemable shares and (x) notice of redemption has been given and (y) a
sum sufficient to redeem the shares has been deposited with a bank, trust
company, or other financial institution under an irrevocable obligation to pay
the holders the redemption price upon surrender of the shares.
Either the board of directors or the chairman of the meeting may
appoint one or more voting inspectors, each of whom shall take an oath to
execute his duties impartially and to the best of his ability. The voting
inspector may be an officer, employee or agent of the Corporation. The voting
inspectors shall, by majority vote, resolve all questions regarding voting of
shares, including the number of shares outstanding, the voting power of each,
the shares represented at the meeting, the qualification of voters, the validity
of proxies, the existence of a quorum as to any voting group, and the
acceptance, rejection and tabulation of votes.
SECTION 12. INFORMAL ACTION BY SHAREHOLDERS: Any action which may be
taken at a meeting of the shareholders may be taken without a meeting if a
consent in writing, setting forth the action so taken, is signed by all of the
persons who would be entitled to vote upon such action at a meeting and is
delivered to the Corporation to be included in the minutes or to be kept as part
of the corporate records.
SECTION 13. SHAREHOLDER PROPOSALS: Any shareholder wishing to bring any
business before a meeting of shareholders must provide notice to the Corporation
not more than ninety (90) and not less than fifty (50) days before the meeting
in writing by registered mail, return receipt requested, of the business to be
presented by such shareholder at the meeting. Any such notice shall set forth
the following as to each matter the shareholder proposes to bring before the
meeting: (i) a brief description of the business desired to be brought before
the meeting and the reasons for conducting such business at the meeting and, if
such business includes a proposal to amend the bylaws of the Corporation, the
language of the proposed amendment; (ii) the name and address, as they appear on
the Corporation's books, of the shareholder proposing such business; (iii) the
class and number of shares of the Corporation which are beneficially owned by
such shareholder; (iv) a representation that the shareholder is a holder of
record of stock of the Corporation entitled to vote at such meeting and intends
to appear in person or by proxy at the meeting to propose such business; and (v)
any material interest of the shareholder in such business. Notwithstanding the
foregoing provisions of this Section, a shareholder shall also comply with all
applicable requirements of the Securities Exchange Act of 1934, as amended, and
the rules and regulations thereunder with respect to the matters set forth in
this Section. In the absence of such notice to the Corporation meeting the above
requirements, a shareholder shall not be entitled to present any business at any
meeting of the shareholders.
SECTION 14. CORPORATION'S ACCEPTANCE OF VOTES: If the name signed on a
vote, consent, waiver, or proxy appointment corresponds to the name of a
shareholder, the Corporation is entitled to accept the vote, consent, waiver, or
proxy appointment and to give it effect as the act of the shareholder.
If the name signed on a vote, consent, waiver, or proxy appointment
does not correspond to the name of its shareholder, the Corporation is
nevertheless entitled to accept the vote, consent, waiver, or proxy appointment
and to give it effect as the act of the shareholder if: (i) the shareholder is
an entity and the name signed purports to be that of an officer or agent of the
entity; (ii) the name signed purports to be that of an administrator, executor,
guardian, or conservator representing the shareholder and, if the Corporation
requests, evidence of fiduciary status acceptable to the Corporation has been
presented with respect to the vote, consent, waiver, or proxy appointment; (iii)
the name signed purports to be that of a receiver or trustee in bankruptcy of
the shareholder and, if
4
<PAGE>
the Corporation requests, evidence of its status acceptable to the Corporation
has been presented with respect to the vote, consent, waiver, or proxy
appointment; (iv) the name signed purports to be that of a beneficial owner or
attorney-in-fact of the shareholder and, if the Corporation requests, evidence
acceptable to the Corporation of the signatory's authority to sign for the
shareholder has been presented with respect to the vote, consent, waiver, or
proxy appointment; or (v) two or more persons are the shareholder as co-tenants
or fiduciaries and the name signed purports to be the name of at least one of
the co-owners and the person signing appears to be acting on behalf of all the
co-owners.
The Corporation is entitled to reject a vote, consent, waiver, or proxy
appointment if the secretary or other officer or agent authorized to tabulate
votes has a reasonable basis for doubt about the validity of the signature on it
or about the signatory's authority to sign for the shareholder.
SECTION 15. NUMBER OF SHAREHOLDERS: The following persons or entities
identified as a shareholder in the Corporation's current record of shareholders
constitute one shareholder for purposes of these bylaws: (i) all co-owners of
the same shares; (ii) a corporation, partnership, trust, estate, or other
entity; (iii) the trustees, guardians, custodians, or other fiduciaries of a
single trust, estate, or account. Shareholdings registered in substantially
similar names constitute one shareholder if it is reasonable to believe that the
names represent the same person.
ARTICLE IV
----------
BOARD OF DIRECTORS
------------------
SECTION 1. GENERAL POWERS: All corporate powers shall be exercised by
or under the authority of, and the business and affairs of the Corporation shall
be managed under the direction of, its board of directors.
SECTION 2. NUMBER, TERM AND QUALIFICATIONS: The number constituting the
board of directors shall be not less than one (1) nor more than seven (7). The
number of directors within this variable range may be fixed or changed from time
to time by the shareholders or the board of directors. Each director shall hold
office until his death, resignation, retirement, removal, disqualification, or
until his successor is elected and qualified. Directors need not be residents of
the State of North Carolina or shareholders of the Corporation.
SECTION 3. NOMINATION OF DIRECTORS: Nominations for the election of
directors may only be made by the board of directors, by the nominating
committee of the board of directors (or, if none, any other committee serving a
similar function) or by any shareholder entitled to vote generally in elections
of directors where the shareholder complies with the requirements of this
Section. The Chief Executive Officer of the Corporation shall be a nominee for
election to the board of directors. Any shareholder of record entitled to vote
generally in elections of directors may nominate one or more persons for
election as directors at a meeting of shareholders only if written notice of
such shareholder's intent to make such nomination or nominations has been given,
either by personal delivery or by registered mail, return receipt requested, to
the Secretary of the Corporation (i) with respect to an election to be held at
an annual meeting of shareholders, not more than ninety (90) days nor less than
fifty (50) days in advance of such meeting; and (ii) with respect to an election
to be held at a special meeting of shareholders called for the purpose of the
election of directors, not later than the close of business on the tenth
business day following the date on which notice of such meeting is first given
to shareholders. Each such notice of a shareholder's intent to nominate a
director or directors at an annual or special meeting shall set forth the
following: (A) the name and address, as they appear on the Corporation's books,
of the shareholder who intends to make the
5
<PAGE>
nomination and the name and residence address of the person or persons to be
nominated; (B) the class and number of shares of the Corporation which are
beneficially owned by the shareholder; (C) a representation that the shareholder
is a holder of record of stock of the Corporation entitled to vote at such
meeting and intends to appear in person or by proxy at the meeting to nominate
the person or persons specified in the notice; (D) a description of all
arrangements or understandings between the shareholder and each nominee and any
other person or persons (naming such person or persons) pursuant to which the
nomination or nominations are to be made by the shareholders; (E) such other
information regarding each nominee proposed by such shareholder as would be
required to be disclosed in solicitations of proxies for election of directors,
or as would otherwise be required, in each case pursuant to Regulation 14A under
the Securities and Exchange Act of 1934, as amended, including any information
that would be required to be included in a proxy statement filed pursuant to
Regulation 14A had the nominee been nominated by the board of directors; and (F)
the written consent of each nominee to be named in a proxy statement and to
serve as director of the Corporation if so elected. No person nominated by a
shareholder shall be eligible to serve as a director of the Corporation unless
nominated in accordance with the procedures set forth in this Section. If the
chairman of the shareholders meeting shall determine that a nomination was not
made in accordance with the procedures described by the bylaws of the
Corporation, he shall so declare to the meeting, and the defective nomination
shall be disregarded. Notwithstanding the foregoing provisions of this Section,
a shareholder shall also comply with all applicable requirements of the
Securities Exchange Act of 1934, as amended, and the rules and regulations
thereunder with respect to the matters set forth in this Section.
SECTION 4. ELECTION OF DIRECTORS: Except as provided in Section 6 of
this Article, the directors shall be elected at the annual meeting of
shareholders by plurality vote; and accordingly those persons who receive the
highest number of votes shall be deemed to have been elected. If any shareholder
so demands, the election of directors shall be by ballot.
SECTION 5. REMOVAL: Any director, or the entire board of directors, may
be removed from office at any time, with or without cause, but only if the
number of votes cast to remove him exceeds the number of votes cast not to
remove him. If a director is elected by a voting group of shareholders, only
members of that voting group may participate in the vote to remove him. A
director may not be removed by the shareholders at a meeting unless the notice
of the meeting specifies such removal as one of its purposes. If any directors
are removed, new directors may be elected at the same meeting.
SECTION 6. VACANCIES: Any vacancy occurring in the board of directors,
including, without limitation, a vacancy resulting from an increase in the
number of directors or from the failure by the shareholders to elect the full
authorized number of directors, shall be filled by the shareholders or the board
of directors. If such vacancy is to be filled by the board of directors, and if
the directors remaining in office constitute fewer than a quorum of the board,
such vacancy may be filled by the affirmative vote of a majority of the
remaining directors or by the sole remaining director. If the vacant office was
held by a director elected by a voting group of shareholders, only the remaining
director or directors elected by that voting group or the holders of shares of
that voting group are entitled to fill the vacancy. The term of a director
elected to fill a vacancy shall expire at the next shareholders' meeting at
which directors are elected.
SECTION 7. CHAIRMAN OF THE BOARD: The board of directors from time to
time may appoint from their number a chairman of the board. The chairman of the
board, if one is appointed, shall preside at all meetings of the board of
directors and the shareholders and shall perform such other duties as may be
prescribed from time to time by the board of directors.
6
<PAGE>
SECTION 8. COMPENSATION: The board of directors may compensate
directors for their services as such and may provide for the payment of all
expenses incurred by directors in attending regular and special meetings of the
board.
SECTION 9. COMMITTEES: The board of directors may create one or more
committees of the board, each of which shall have at least two (2) members, all
of whom shall be directors. The creation of a committee and the appointment of
members to it must be approved by a majority of all the directors in office when
the action is taken. Each committee may, as specified by the board of directors,
exercise some or all of the authority of the board except that a committee may
not: (i) authorize distributions; (ii) approve or propose to shareholders action
that the Act requires be approved by shareholders; (iii) fill vacancies on the
board of directors or on any of its committees; (iv) amend the articles of
incorporation pursuant to N.C. Gen. Stat. Section 55-10-02 or its successor; (v)
adopt, amend, or repeal bylaws; (vi) approve a plan of merger not requiring
shareholder approval; (vii) authorize or approve a reacquisition of shares,
except according to a formula or method prescribed by the board of directors; or
(viii) authorize or approve the issuance or sale or contract for sale of shares,
or determine the designation and relative rights, preferences, and limitations
of a class or series of shares, except that the board of directors may authorize
a committee to do so within limits specifically prescribed by the board of
directors to the full extent permitted by applicable law. The provisions of
Article V, which govern meetings of the board of directors, shall likewise apply
to meetings of any committee of the board.
SECTION 10. EXECUTIVE COMMITTEE: In accordance with Section 9 of this
Article, the board of directors may designate an executive committee. Subject to
the provisions of Section 9 of this Article, any executive committee so
designated may exercise all of the power of the board of directors during
intervals between meetings thereof, including but not limited to the power to
authorize the execution of contracts, deeds, leases, and other agreements
respecting real or personal property. The board of directors shall approve,
disapprove, or modify action taken by any such executive committee and shall
record such action in the minutes of the board meeting.
ARTICLE V
MEETINGS OF DIRECTORS
SECTION 1. REGULAR MEETINGS: Regular meetings of the board of directors
shall be held at such place or places, on such date or dates, and at such time
or times as shall have been established by the board of directors and publicized
among all directors.
SECTION 2. SPECIAL MEETINGS: Special meetings of the board of directors
may be called by one-third of the directors then in office or by the chief
executive officer and shall be held at such place, either within or without the
State of North Carolina, on such date, and at such time as they or he shall fix.
SECTION 3. NOTICE OF MEETINGS: Regular meetings of the board of
directors may be held without notice. The person or persons calling a special
meeting of the board of directors shall, at least three (3) days before the
meeting, give notice of the meeting by any usual means of communication,
including by telephone, telegraph, teletype, mail, private carrier, facsimile
transmission, or other form of wire or wireless communication. Such notice may
be oral and need not specify the purpose for which the meeting is called.
SECTION 4. WAIVER OF NOTICE: Any director may waive notice of any
meeting either before or after such meeting. Such waiver shall be in writing,
signed by the director, and filed with the
7
<PAGE>
minutes or corporate records; provided, however, that a director's attendance at
or participation in a meeting waives any required notice to him unless the
director at the beginning of the meeting (or promptly upon his arrival) objects
to holding the meeting or transacting business at the meeting and does not
thereafter vote for or assent to action taken at the meeting.
SECTION 5. QUORUM: A majority of the directors fixed by or pursuant to
these bylaws shall constitute a quorum for the transaction of business at any
meeting of the board of directors.
SECTION 6. MANNER OF ACTING: The act of a majority of the directors
present at a meeting at which a quorum is present shall be the act of the board
of directors, unless a greater number is required by the articles of
incorporation or these bylaws.
SECTION 7. PRESUMPTION OF ASSENT: A director of the Corporation who is
present at a meeting of the board of directors or a committee of the board of
directors when corporate action is taken is deemed to have assented to the
action taken unless: (i) he objects at the beginning of the meeting (or promptly
upon his arrival) to holding it or transacting business at the meeting; (ii) his
dissent or abstention from the action taken is entered in the minutes of the
meeting; or (iii) he files written notice of his dissent or abstention with the
presiding officer of the meeting before its adjournment or with the Corporation
immediately after adjournment of the meeting. This right of dissent or
abstention is not available to a director who votes in favor of the action
taken.
SECTION 8. PARTICIPATION IN MEETINGS: Any or all of the directors may
participate in a regular or special meeting by, or conduct the meeting through
the use of, any means of communication by which all directors participating may
simultaneously hear each other during the meeting.
SECTION 9. ACTION WITHOUT MEETING: Action which may be taken at a board
of directors meeting may be taken without a meeting if the action is taken by
all members of the board and is evidenced by one or more written consents signed
by each director before or after such action, which describes the action taken
and is included in the minutes or filed with the corporate records. Such action
is effective when the last director signs the consent, unless the consent
specifies a different effective date.
ARTICLE VI
OFFICERS
SECTION 1. OFFICERS OF THE CORPORATION: The officers of the Corporation
shall consist of a chief executive officer, president, secretary, treasurer, and
such vice presidents, assistant secretaries, assistant treasurers, and other
officers as the board of directors may from time to time appoint. Any two or
more offices may be held by the same person, but no officer may act in more than
one capacity where action of two or more officers is required.
SECTION 2. APPOINTMENT AND TERM: The officers of the Corporation shall
be appointed by the board of directors. A duly appointed officer may appoint one
or more officers or assistant officers if authorized by the board of directors.
Each officer shall hold office until his death, resignation, retirement,
removal, disqualification or until his successor is appointed and qualifies. The
appointment of an officer does not itself create contract rights for either the
officer or the Corporation.
8
<PAGE>
SECTION 3. COMPENSATION OF OFFICERS: The compensation of officers of
the Corporation shall be fixed by the board of directors. No officer shall
receive compensation for serving the Corporation in any other capacity unless
such additional compensation be authorized by the board of directors.
SECTION 4. RESIGNATION AND REMOVAL: An officer may resign at any time
by communicating his resignation to the Corporation. A resignation is effective
when it is communicated unless it specifies in writing a later date. If a
resignation is made effective as of a later date and the Corporation accepts the
future effective date, the board of directors may fill the pending vacancy
before the effective date if the board provides that the successor does not take
office until the effective date. An officer's resignation does not affect the
Corporation's contract rights, if any, with the officer. Any officer or agent
appointed by the board of directors may be removed by the board at any time,
with or without cause, but such removal shall be without prejudice to the
contract rights, if any, of the person so removed.
SECTION 5. BONDS: The board of directors may by resolution require any
officer, agent, or employee of the Corporation to give bond to the Corporation,
with sufficient sureties, conditioned on the faithful performance of the duties
of his respective office or position, and to comply with such other conditions
as may from time to time be required by the board of directors.
SECTION 6. CHIEF EXECUTIVE OFFICER: The chief executive officer shall
have general authority and supervision over the officers and employees of the
Corporation, and shall perform such other duties as may be prescribed from time
to time by the board of directors. All officers shall report to him except to
the extent specifically required by the board of directors. He shall consult
with the president as to matters within the scope of the authority of the
president. He shall have the authority to sign certificates for shares, as well
as any deeds, mortgages, contracts, or other instruments which the board of
directors has authorized to be executed, except in cases where the signing and
execution of such contracts or instruments shall be expressly delegated by the
board of directors or by these bylaws to some other officer or agent of the
Corporation, or shall be required by the Act to be otherwise signed or executed.
SECTION 7. PRESIDENT: The president shall be the chief operating
officer of the Corporation and shall have general charge of the operation of the
business of the Corporation. The president shall perform such duties and have
such powers as the board of directors from time to time may assign. He shall
have the authority to sign certificates for shares, as well as any deeds,
mortgages, contracts, or other instruments which the board of directors has
authorized to be executed, except in cases where the signing and execution of
such contracts or instruments shall be expressly delegated by the board of
directors or by these bylaws to some other officer or agent of the Corporation,
or shall be required by the Act to be otherwise signed or executed.
SECTION 8. VICE PRESIDENTS: In the absence of the president, the vice
presidents in the order of their length of service as vice presidents, unless
otherwise determined by the board of directors, shall perform the duties of the
president, and when so acting shall have all the powers of and be subject to all
the restrictions upon that office. Any vice president may sign certificates for
shares, as well as any deeds, mortgages, contracts, or other instruments which
the board of directors has authorized to be executed, except in cases where the
signing and execution of such documents or instruments shall be expressly
delegated by the board of directors or these bylaws to some other officer or
agent of the Corporation or shall be required by the Act to be otherwise signed
or executed. A vice president shall perform such other duties as from time to
time may be assigned to him by the chief executive officer, the president, or
the board of directors.
9
<PAGE>
SECTION 9. SECRETARY: The secretary shall: (i) keep the minutes of the
meetings of shareholders, of the board of directors, and of all committees of
the board in one or more books provided for that purpose; (ii) see that all
notices are duly given in accordance with the provisions of these bylaws or as
required by law; (iii) be custodian of the seal of the Corporation and see that
the seal of the Corporation is affixed to all documents the execution of which
on behalf of the Corporation under its seal is duly authorized; (iv) keep a
register of the mailing address of each shareholder which shall be furnished to
the secretary by such shareholder; (v) sign, with the chief executive officer,
the president, or a vice president, certificates for shares, the issuance of
which shall have been authorized by resolution of the board of directors; (vi)
have general charge of the stock transfer books of the Corporation; (vii) keep
or cause to be kept in the State of North Carolina at the Corporation's
principal office a record of the Corporation's shareholders, giving the names
and addresses of all shareholders and the number and class of shares held by
each, and prepare or cause to be prepared a shareholder list prior to each
meeting of shareholders as required by the Act; (viii) maintain and authenticate
the books and records of the Corporation; (ix) with the assistance of the
treasurer and other officers, prepare and deliver to the Corporation's
shareholders such financial statements, notices, and reports as may be required
by N.C. Gen. Stat. Sections 55-16-20 and 55-16-21 (or their successors); (x)
prepare and file with the North Carolina Secretary of Revenue the annual report
required by N.C. Gen. Stat. Section 55-16-22 (or its successor); and (xi) in
general perform all duties incident to the office of secretary and such other
duties as from time to time may be assigned to him by the chief executive
officer, the president or the board of directors.
SECTION 10. ASSISTANT SECRETARIES: In the absence of the secretary, the
assistant secretaries in the order of their length of service as assistant
secretary, unless otherwise determined by the board of directors, shall perform
the duties of the secretary, and when so acting shall have all the powers of and
be subject to all the restrictions upon the secretary. They shall perform such
other duties as may be assigned to them by the secretary, the chief executive
officer, the president, or the board of directors. Any assistant secretary may
sign, with the chief executive officer, the president or a vice president,
certificates for shares.
SECTION 11. TREASURER: The treasurer shall be the chief financial
officer of the Corporation and shall: (i) have charge and custody of and be
responsible for all funds and securities of the Corporation; (ii) receive and
give receipts for monies due and payable to the Corporation from any source
whatsoever, and deposit all such monies in accordance with the provisions of
Section 4 of Article VII; (iii) prepare, or cause to be prepared, an annual
financial statement in accordance with Section 3 of Article IX; and (iv) in
general, perform all of the duties incident to the office of treasurer and such
other duties as from time to time may be assigned to him by the chief executive
officer, the president or the board of directors. The treasurer may sign, with
the chief executive officer, the president or a vice president, certificates for
shares.
SECTION 12. ASSISTANT TREASURERS: In the absence of the treasurer, the
assistant treasurers, in the order of their length of service as assistant
treasurer, unless otherwise determined by the board of directors, shall perform
the duties of the treasurer, and when so acting shall have all the powers of and
be subject to all the restrictions upon the treasurer. They shall perform such
other duties as may be assigned to them by the treasurer, the chief executive
officer, the president, or the board of directors. Any assistant treasurer may
sign, with the chief executive officer, the president or a vice president,
certificates for shares.
SECTION 13. ACTION RE: SECURITIES OF OTHER CORPORATIONS: Unless
otherwise directed by the board of directors, the President shall have power to
vote and otherwise act on behalf of the Corporation, in person or by proxy, at
any meeting of shareholders of or with respect to any action of shareholders of
any other corporation in which this Corporation may hold securities and
otherwise to
10
<PAGE>
exercise any and all rights and powers which this Corporation may
possess by reason of its ownership of securities in such other corporation.
ARTICLE VII
CONTRACTS, LOANS, CHECKS AND DEPOSITS
SECTION 1. CONTRACTS: The board of directors may authorize any officer
or agent to enter into any contract or to execute and deliver any instrument on
behalf of the Corporation, and such authority may be general or confined to
specific instances.
SECTION 2. LOANS: No loans shall be contracted on behalf of the
Corporation and no evidences of indebtedness shall be issued in its name unless
authorized by a resolution of the board of directors. Such authority may be
general or confined to specific instances.
SECTION 3. CHECKS AND DRAFTS: All checks, drafts or other orders for
payment of money issued in the name of the Corporation shall be signed by such
officers or agents of the Corporation and in such manner as shall from time to
time be determined by resolution of the board of directors.
SECTION 4. DEPOSITS: All funds of the Corporation not otherwise
employed shall be deposited from time to time to the credit of the Corporation
in such depositories as the board of directors shall direct.
ARTICLE VIII
CERTIFICATES FOR SHARES AND THEIR TRANSFER
SECTION 1. CERTIFICATES FOR SHARES: Shares may, but need not, be
represented by certificates. If certificates are issued, they shall be in such
form as the board of directors shall determine; provided that, at a minimum,
each certificate shall state on its face: (i) the name of the Corporation and
that it is organized under the laws of North Carolina; (ii) the name of the
person to whom issued; and (iii) the number and class of shares and the
designation of the series, if any, the certificate represents. If the
Corporation issues certificates for shares of preferred stock, the designations,
relative rights, preferences, and limitations applicable to that class, and the
variations in rights, preferences, and limitations for each series within that
class (and the authority of the board of directors to determine variations for
future series) must be summarized on the front or back of each certificate;
alternatively, each certificate may state conspicuously on its front or back
that the Corporation will furnish the shareholder this information in writing
and without charge. These certificates shall be signed, either manually or in
facsimile, by the chief executive officer, the president, or any vice president,
and the secretary or any assistant secretary, the treasurer or any assistant
treasurer. They shall be consecutively numbered or otherwise identified and the
name and address of the persons to whom they are issued, with the number of
shares and date of issue, shall be entered on the stock transfer books of the
Corporation.
SECTION 2. TRANSFER OF SHARES: Transfer of shares of the Corporation
shall be made only on the stock transfer books of the Corporation by the holder
of record, by his legal representative (who shall furnish proper evidence of
authority to transfer) or by his attorney (whose authority shall be evidenced by
a power of attorney duly executed and filed with the secretary), and only upon
surrender for cancellation of the certificates for such shares.
11
<PAGE>
SECTION 3. FIXING RECORD DATE: For the purpose of determining
shareholders entitled to receive notice of a meeting of shareholders, to demand
a special meeting, to vote, to take any other action, or to receive payment, or
for any other purpose, the board of directors may fix in advance a date as the
record date for any such determination of shareholders, such record date in any
case to be not more than seventy (70) days, and, in case of a meeting of
shareholders, not less than ten (10) days, before the date on which the
particular action requiring such determination of shareholders is to be taken.
If no record date is fixed for the determination of shareholders entitled to
notice of or to vote at a meeting of shareholders, or of shareholders entitled
to receive a distribution, the day before the first notice of the meeting is
mailed or the day on which the board of directors authorize the distribution, as
the case may be, shall be the record date for such determination of
shareholders.
When a determination of shareholders entitled to notice of or to vote
at any meeting of shareholders has been made as provided in this Section, such
determination shall apply to any adjournment of such meeting unless the board of
directors fixes a new record date, which it must do if the meeting is adjourned
to a date more than 120 days after the date fixed for the original meeting.
SECTION 4. LOST CERTIFICATES: The board of directors may authorize the
issuance of a new share certificate in place of a certificate claimed to have
been lost or destroyed, upon receipt of an affidavit of such fact from the
person claiming the loss or destruction. When authorizing the issuance of a new
certificate, the board of directors may require the claimant to give the
Corporation a bond in such sum as it may direct to indemnify the Corporation
against loss from any claim with respect to the certificate claimed to have been
lost or destroyed; or the board of directors may, by resolution reciting that
the circumstances justify such action, authorize the issuance of the new
certificate without requiring such a bond.
SECTION 5. REACQUIRED SHARES: The Corporation may acquire its own
shares and shares so acquired constitute authorized but unissued shares.
ARTICLE IX
GENERAL PROVISIONS
SECTION 1. DISTRIBUTIONS: The board of directors may from time to time
declare, and the Corporation may make, distributions on its outstanding shares
in the manner and subject to the terms and conditions provided by the Act and by
the articles of incorporation.
SECTION 2. SEAL: The corporate seal of the Corporation shall consist of
two concentric circles between which is the name of the Corporation and in the
center of which is inscribed "CORPORATE SEAL" or "SEAL," and which shall have
such other characteristics as the board of directors may determine.
SECTION 3. RECORDS AND REPORTS: All of the Corporation's records shall
be maintained in written form or in another form capable of conversion into
written form within a reasonable time. The Corporation shall keep as permanent
records minutes of all meetings of its incorporators, shareholders, and board of
directors, a record of all actions taken by the shareholders or board of
directors without a meeting, and a record of all actions taken by a committee of
the board of directors in place of the board of directors.
The Corporation shall keep a copy of the following records at its
principal office: (i) the articles of incorporation and all amendments to them
currently in effect; (ii) these bylaws and all amendments to them currently in
effect; (iii) resolutions adopted by its board of directors creating
12
<PAGE>
one or more classes or series of shares and fixing their relative rights,
preferences, and limitations (if shares issued pursuant to those resolutions are
outstanding); (iv) the minutes of all meetings of shareholders and records of
all actions taken by shareholders without a meeting during the past three years;
(v) all written communications to shareholders generally within the past three
years; (vi) the annual financial statements described below, prepared during the
past three years; (vii) a list of the names and business addresses of its
current directors and officers; and (viii) its most recent annual report
delivered to the North Carolina Secretary of Revenue (or Secretary of State, if
applicable).
The Corporation shall prepare and make available to its shareholders
annual financial statements for the Corporation and its subsidiaries that: (i)
include a balance sheet as of the end of the fiscal year, an income statement
for that year, and a statement of cash flows for the year; and (ii) are
accompanied by either (x) a report of a public accountant on the annual
financial statements, or (y) a statement by the treasurer stating his reasonable
belief whether the annual financial statements were prepared on the basis of
generally accepted accounting principles (and, if not, describing the basis of
preparation) and describing any respects in which the statements were not
prepared on a basis of accounting consistent with the statements prepared for
the preceding year. These annual financial statements, or a written notice of
their availability, shall be mailed to each shareholder within 120 days after
the close of each fiscal year of the Corporation. On written request from a
shareholder who was not mailed the annual financial statements, the Corporation
shall mail to him the latest such statements.
The Corporation shall also prepare and file with the North Carolina
Secretary of Revenue an annual report in such form as required by N.C. Gen.
Stat. Section 55-16-22, or its successor.
SECTION 4. INDEMNIFICATION: Any person who at any time serves or has
served as a director or officer of the Corporation, or at the request of the
Corporation is or was serving as an officer, director, agent, partner, trustee,
administrator, or employee for any other foreign or domestic corporation,
partnership, joint venture, trust, employee benefit plan, or other enterprise,
shall be indemnified by the Corporation to the fullest extent from time to time
permitted by law in the event he is made, or is threatened to be made, a party
to any threatened, pending or completed civil, criminal, administrative,
investigative or arbitrative action, suit or proceeding and any appeal therein
(and any inquiry or investigation that could lead to such action, suit or
proceeding), whether or not brought by or on behalf of the Corporation, seeking
to hold him liable by reason of the fact that he is or was acting in such
capacity. In addition, the board may provide such indemnification for the
employees and agents of the Corporation as it deems appropriate.
The rights of those receiving indemnification hereunder shall, to the
fullest extent from time to time permitted by law, cover (i) reasonable
expenses, including without limitation all attorneys' fees actually and
necessarily incurred by him in connection with any such action, suit or
proceeding, (ii) all reasonable payments made by him in satisfaction of any
judgment, money decree, fine (including an excise tax assessed with respect to
an employee benefit plan), penalty, or settlement for which he may have become
liable in such action, suit or proceeding; and (iii) all reasonable expenses
incurred in enforcing the indemnification rights provided herein.
Expenses incurred by anyone entitled to receive indemnification under
this Section in defending a proceeding may be paid by the Corporation in advance
of the final disposition of such proceeding as authorized by the board of
directors in the specific case or as authorized or required under any provisions
in the bylaws or by any applicable resolution or contract upon receipt of an
undertaking by or on behalf of the director to repay such amount unless it shall
ultimately be determined that he is entitled to be indemnified by the
Corporation against such expenses.
13
<PAGE>
The board of directors of the Corporation shall take all such action as
may be necessary and appropriate to authorize the Corporation to pay the
indemnification required by this bylaw, including without limitation, to the
extent needed, making a good faith evaluation of the manner in which the
claimant for indemnity acted and of the reasonable amount of indemnity due him.
Any person who at any time serves or has served in any of the aforesaid
capacities for or on behalf of the Corporation shall be deemed to be doing or to
have done so in reliance upon, and as consideration for, the right of
indemnification provided herein. Any repeal or modification of these
indemnification provisions shall not affect any rights or obligations existing
at the time of such repeal or modification. The rights provided for herein shall
inure to the benefit of the legal representatives of any such person and shall
not be exclusive of any other rights to which such person may be entitled apart
from the provisions of this bylaw.
The rights granted herein shall not be limited by the provisions
contained in N.C. Gen. Stat. Section 55-8-51 (or its successor), provided,
however, that the Corporation shall not indemnify or agree to indemnify a
potential indemnitee against liability or expenses he may incur on account of
his activities which were at the time taken known or believed by the potential
indemnitee to be clearly in conflict with the best interests of the Corporation.
The Corporation may purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee or agent of the Corporation,
or is or was serving at the request of the Corporation as a director, officer,
employee or agent for any other foreign or domestic corporation, partnership,
joint venture, trust, employee benefit plan, or other enterprise, against any
liability asserted against him and incurred by him in any such capacity, or
arising out of his status as such, whether or not the Corporation would have the
power to indemnify him against such liability under the provisions of the Act or
these bylaws.
SECTION 5. FISCAL YEAR: The fiscal year of the Corporation shall be
fixed by the board of directors.
SECTION 6. AMENDMENTS: (a) The board of directors may amend or repeal
these bylaws, except to the extent otherwise provided in the articles of
incorporation, a bylaw adopted by the shareholders, or the Act, and except that
a bylaw adopted, amended or repealed by the shareholders may not be readopted,
amended or repealed by the board of directors if neither of the articles of
incorporation nor a bylaw adopted by the shareholders authorizes the board of
directors to adopt, amend, or repeal that particular bylaw or the bylaws
generally.
(b) The Corporation's shareholders may adopt, amend, alter,
change, or repeal any of these bylaws consistent with the provisions of Section
11 of Article III.
(c) A bylaw that fixes a greater quorum or voting requirement
for the board of directors may be amended or repealed: (i) if originally adopted
by the shareholders, only by the shareholders, unless the bylaw permits
amendment or repeal by the board of directors; or (ii) if originally adopted by
the board of directors, either by the shareholders or by the board of directors.
(d) A bylaw referred to in Subsection (c) above: (i) may not
be adopted by the board of directors by a vote of less than a majority of the
directors then in office; and (ii) may not itself be amended by a quorum or vote
of the directors less than the quorum or vote therein prescribed or prescribed
by a bylaw adopted or amended by the shareholders.
14
<PAGE>
(e) A bylaw adopted or amended by the shareholders that fixes
a greater voting or quorum requirement for the board of directors may provide
that it may be amended or repealed only by a specified vote of either the
shareholders or the board of directors.
SECTION 7. TIME PERIODS: In applying any provision of these bylaws
which requires an act to be done or not done a specified number of days prior to
an event or that an act be done during a period of a specified number of days
prior to an event, calendar days shall be used, the day of the doing of the act
shall be excluded and the day of the event shall be included.
SECTION 8. OPT-OUT OF NORTH CAROLINA SHAREHOLDER PROTECTION ACT: The
provisions of the North Carolina Shareholder Protection Act, N.C. Gen. Stat.
ss.ss. 55-9-01 - 05, as presently enacted or hereafter amended, shall not be
applicable to the Corporation.
SECTION 9. OPT-OUT OF NORTH CAROLINA CONTROL SHARE ACQUISITION ACT: The
provisions of the North Carolina Control Share Acquisition Act, N.C. Gen. Stat.
ss.ss. 55-9A-01 - 09, as presently enacted or hereafter amended, shall not be
applicable to the Corporation.
SECTION 10. EMERGENCIES: In anticipation of or during an emergency, the
board of directors may: (i) modify lines of succession to accommodate the
incapacity of any director, officer, employee, or agent; and (ii) relocate the
principal office or designate alternative principal or regional offices, or
authorize the officers to do so.
During an emergency: (i) notice of a meeting of the board of directors
need be given only to those directors whom it is practicable to reach and may be
given in any practicable manner, including by publication and radio; and (ii)
one or more officers present at a meeting of the board of directors may be
deemed to be directors for the meeting, in order of rank and within the same
rank in order of seniority, as necessary to achieve a quorum.
SECTION 11. SEVERABILITY: Should any provision of these bylaws become
ineffective or be declared to be invalid for any reason, such provision shall be
severable from the remainder of these bylaws and all other provisions of these
bylaws shall continue to be in full force and effect.
ATTESTED:
/s/ Don T. Seaquist Dated: March 27, 1998
- ------------------------------------
Don T. Seaquist
Secretary
LEASE
FOR
ROYAL CENTER II
LANDLORD: Petula Associates, Ltd.,
an Iowa corporation
TENANT: Embrex, Inc.
a North Carolina corporation
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
1. PREMISES 1
2. TERM 1
3. RENT 2
4. ADDITIONAL RENT 3
5. LANDLORD'S LIEN 4
6. USE 4
7. PARKING AND COMMON AREAS 4
8. UTILITIES 5
9. TENANT REPAIRS 5
10. LANDLORD REPAIRS 6
11. SIGNS AND ADVERTISING; USE OF NAME 6
12. IMPROVEMENTS 7
13. FIXTURES AND INTERIOR ALTERATIONS 9
14. LIENS 9
15. INDEMNIFICATION 10
16. TENANT'S COMPLIANCE; INSURANCE REQUIREMENTS; WAIVER OF SUBROGATION 11
17. CASUALTY DAMAGE 12
18. PASS THROUGH-PRORATED INSURANCE COSTS 13
19. PASS THROUGH-PRORATED TAXES 13
20. PASS THROUGH-OPERATING EXPENSE CHARGES 14
<PAGE>
21. ACCOUNTING FOR PASS THROUGH CHARGES 15
22. LANDLORD LIABILITY 16
23. CARE OF PREMISES 17
24. QUIET ENJOYMENT 18
25. SURRENDER; HOLDING OVER 18
26. ASSIGNMENT AND SUBLEASING 18
27. SUBORDINATION; ATTORNMENT 19
28. DEFAULT 20
29. ATTORNEY'S FEES 21
30. INSPECTION 21
31. CONDEMNATION 21
32. RIGHT TO RELOCATE 21
33. SECURITY DEPOSIT 22
34. NOTICES 22
35. HAZARDOUS MATERIALS; ENVIRONMENTAL COMPLIANCE 23
36. BROKER'S COMMISSIONS 25
37. MISCELLANEOUS 25
38. SPECIAL CONDITIONS, EXHIBITS AND ADDENDA 26
</TABLE>
<PAGE>
STATE OF NORTH CAROLINA
LEASE
COUNTY OF DURHAM
THIS LEASE, made as of this 13 day of October, 1997, by and between
Petula Associates Ltd., hereinafter "Landlord", and Embrex, Inc., hereinafter
(whether one or more) "Tenant".
WITNESSETH:
Upon the terms and conditions hereinafter set forth, Landlord leases to
Tenant and Tenant leases from Landlord property hereinafter defined and referred
to as the Premises, all as follows:
1. PREMISES. The property hereby leased to Tenant is:
That area shown on Exhibit A-1 (Floor Plan) consisting of
approximately 12,764 rentable square feet and located in Royal
Center II (the "Building") with an address at 4222 Emperor
Boulevard, Durham, North Carolina, the above-described leased
property being herein referred to as the Premises which
together with the common areas for the Building is also shown
on Exhibit A-3 (Site Plan). If Landlord or Tenant so requests,
at any time during the first six (6) months of the Term (as
hereinafter defined), the actual "as built" total square
footage of the Premises shall be measured by an architect
mutually acceptable to Landlord and Tenant in accordance with
BOMA (as hereinafter defined). If the amount of measured
rentable square feet is different from that stated above by
more than two percent (2%) of the above-stated amount, the
remeasured amount of rentable square feet, together with
resulting modifications of rent to be paid hereunder, shall be
set forth in a memorandum to be executed by Landlord and
Tenant. Landlord and Tenant agree to execute and deliver such
memorandum within ten (10) business days after the
measurement. In the event the measured rentable square feet
does not differ from the above-stated amount by more than two
percent (2%) of such amount, there shall be no modification to
the definition of the Premises or rent payable hereunder. The
cost of the remeasurement of the Premises shall be borne by
the party requesting same.
2. TERM. The term of this Lease shall be for a period of ten (10)
years commencing on the earlier to occur of: (i) Tenant's
occupancy of the Premises for the purpose of commencing its
business operations or (ii) November 14, 1997 (the
"Commencement Date"),
<PAGE>
and ending at midnight on the day before the tenth anniversary of the
Commencement Date (the "Term"). Tenant shall have the option to extend the Term
in accordance with Exhibit G attached hereto and incorporated herein by
reference. For purposes herein, a "Lease Year" shall be defined as a 365-day
period beginning on the Commencement Date or any anniversary thereof and a
"business day" shall be defined as any day other than Saturday, Sunday and any
day that is a legal or banking holding in North Carolina. Notwithstanding
anything contained herein to the contrary, in the event the Commencement Date is
a day other than the first day of a calendar month, the Term shall be extended
and shall expire on that date which is ten (10) full years from the first day of
the first full calendar month immediately following the Commencement Date (the
"Term Commencement Date"); provided, further, in the event the Commencement Date
is a day other than the first day of a calendar month, the first Lease Year
shall begin on the Commencement Date and shall expire on the first anniversary
of the Term Commencement Date and thereafter, each Lease Year shall commence and
expire on the anniversary of the Term Commencement Date.
Promptly after the date of Landlord's receipt of this Lease as executed
by Tenant, Landlord shall proceed with due diligence to construct the Building
and shall use reasonable best efforts to deliver possession of the Premises in
its base building condition with Landlord's Work (as described in Exhibit B-1)
substantially completed to Tenant within five (5) days after this Lease has been
fully executed (the "Delivery Date"). Upon delivery of the Premises to Tenant,
the exterior of the Building and base building finishes shall be substantially
completed (i.e. the remaining work to be done to the exterior and interior of
the Building shall be of such a nature as will not materially interfere with
Tenant's undertaking of the Tenant Improvements (as hereinafter defined)) so
that Tenant and its approved contractor may enter into the Premises and commence
the construction of the Tenant Improvements. If for any reason whatsoever,
Landlord cannot deliver possession of the Premises to Tenant as of the Delivery
Date, this Lease shall not be void or voidable; no obligation of Tenant shall be
affected thereby; and neither Landlord nor Landlord's agent shall be liable to
Tenant for any loss or damage resulting therefrom; provided, however, that in
such event, the commencement and expiration dates of this Lease and all other
dates affected thereby may be revised by written notice from Landlord to Tenant
within thirty (30) days of the Delivery Date specified above to conform all
affected dates under this Lease to the date of Landlord's delivery of possession
to Tenant. Notwithstanding the foregoing, if Landlord is unable to deliver
possession of the Premises in its base building condition with Landlord's Work
substantially completed to Tenant on or before October 1, 1997 due to delays
within Landlord's reasonable control (and expressly excluding force majeure
delays and delays attributable to Tenant), Landlord agrees that Tenant shall be
entitled to one (1) day of free Minimum Rent for every two (2) days of delay in
delivering the Premises to Tenant beyond October 1, 1997.
3. RENT. All rent payable by Tenant shall be without previous demand
therefor by Landlord, and without setoff or deduction. The minimum rent
("Minimum Rent") for the Term shall be the sum of One Million Three Hundred
Sixteen Thousand Nine Hundred Eighty-Nine and 52/100 Dollars ($1,316,989.52),
which rent shall be payable in advance in equal monthly installments as follows:
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Rate Per Monthly Annual
Lease Year Rentable SF Rent Rent
---------- ----------- ---- ----
1 $ 9.00 $ 9,573.00 $114,876.00
2 $ 9.27 $ 9,860.19 $118,322.28
3 $ 9.55 $10,158.02 $121,896.20
4 $ 9.84 $10,466.48 $125,597.76
5 $10.13 $10,774.94 $129,299.32
6 $10.43 $11,094.04 $133,128.52
7 $10.75 $11,434.42 $137,213.00
8 $11.07 $11,774.79 $141,297.48
9 $11.40 $12,125.80 $145,509.60
10 $11.74 $12,487.45 $149,849.36
Total Minimum Rent $1,316,989.52
Each monthly installment of rent shall be payable on or before the first day of
each calendar month during the Term, unless the Term commences other than on the
first day of the month, in which event rent at the above rate pro-rated until
the end of that month shall be due and payable on the commencement date. In
addition to such remedies as may be provided under the default provisions of
this Lease, Landlord shall be entitled to a late charge of five percent (5%) of
the amount of the monthly rent if not received when due, and a charge of Twenty
Dollars ($20.00) or the maximum amount allowed by law, whichever is less, for
any check given by Tenant not paid when first presented by Landlord.
Notwithstanding the foregoing sentence, Tenant shall be entitled to one (1)
five-day grace period per Lease Year for the first late payment of monthly rent
without imposition of the foregoing late charge.
4. ADDITIONAL RENT. In addition to rent, Tenant shall pay to Landlord,
at the same time as monthly installment payments to rent are made, a sum which
represents Tenant's proportionate share of insurance costs, taxes and operating
expense charges owed by Tenant pursuant to the terms of Sections 18, 19 and 20
of this Lease, respectively. The actual amount of additional rent due from
Tenant shall be adjusted on an annual basis as and when the actual amount of
tenant's proportionate share of insurance costs, taxes and operating expense
charges are determined, and if Tenant has underpaid, it shall, within thirty
(30) days after receipt of written demand therefor, together with such
supporting documentation as Tenant may reasonably request, pay the shortfall as
a lump sum payment, and if Tenant has overpaid, Landlord shall,
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on a lump sum basis, reduce future monthly payments of additional rent for the
coming year so as to credit to Tenant the amount of overpayment.
5. LANDLORD'S LIEN. [INTENTIONALLY DELETED]
6. USE. The Premises may be used for laboratory, office, warehouse,
storage, and light assembly uses as is necessary for Tenant's business of
conducting live animal research on poultry for the purpose of developing
products which enhance poultry health and growth performance and for no other
purpose without Landlord's written consent first had and obtained.
Notwithstanding the foregoing, Tenant is expressly prohibited from producing or
selling poultry or any other animals for consumption. Tenant shall not use or
occupy nor permit the Premises to be used or occupied, nor do or permit anything
to be done in or on the Premises, in a manner which may (a) make void or
voidable any insurance in force with respect thereto; (b) result in any increase
in the premiums charged for warehouse insurance or cause Landlord to be unable
to obtain at regular rates fire or other insurance required to be maintained;
(c) cause structural damage to the Building, the Premises or any part thereof;
or (d) constitute a public or private nuisance; or (e) otherwise violate any
present or future law, ordinance, rule or requirement of any public authority
having jurisdiction, including, without limitation, any law, ordinance, rule or
requirement concerning or relating to Tenant's use, occupancy or alteration of
the Premises. If as a result of any act or neglect of Tenant, its employees,
agents, representatives, clients or visitors, or change in the manner in which
Tenant's business or operations are conducted at the Premises, any insurance
rate shall be increased over the existing rate and assessed against Landlord,
then and in that event, Tenant shall pay to Landlord within thirty (30) days
after receipt of written demand therefor, the amount of such increase as
additional rent.
7. PARKING AND COMMON AREAS. For as long as Tenant affirmatively
complies with the terms of this Lease, Landlord grants to Tenant, its employees,
agents, representatives, customers, contractors and invitees, a nonexclusive
right to use during the Term, but subject to such reasonable and
non-discriminatory rules and regulations as Landlord may enact in accordance
with the terms hereof, the common areas shown on Exhibit A-3 (Site Plan) and
which areas are or shall be designated by Landlord and are acknowledged to be
for use of such persons along with others similarly entitled, for parking, and
for ingress and egress between the Premises and other portions of the common
areas as shown on Exhibit A-3, which may include adjoining streets, sidewalks,
and highways. Tenant's employees shall park only in areas designated from time
to time by Landlord within the Royal Center II parking areas as described on
Exhibit A-3 attached hereto, and not in any other parking area. Landlord shall
make available to Tenant three (3) parking spaces per 1,000 rentable square feet
of the Premises. Common areas include, without limitation, parking areas and
entrances and exits thereto, driveways and truck serviceways, sidewalks,
landscaped areas, business park entrance areas and other areas and facilities
provided for the common or joint use and benefit of occupants of the Building
and others, their respective employees, agents, representatives, customers,
contractors and invitees. Landlord reserves the right, from time to time, to
reasonably alter the common areas, to exercise control and management of the
common areas and to establish, modify, change and enforce such reasonable and
nondiscriminatory rules and regulations as Landlord in its
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discretion may deem desirable for the management of the Building, the business
park, the common areas or any part thereof as long as Tenant's use and enjoyment
of the common areas is not materially diminished and the operating expenses with
respect to any common areas are not materially increased. In using any part of
the common areas, Tenant shall not permit anything which may impede the free
flow of traffic through such common areas, endanger persons or property or
encroach on the loading or unloading, service and parking areas of any other
tenant. Rules and Regulations which apply in part to Tenant's use of the common
areas are set forth in Exhibit C.
8. UTILITIES. Tenant shall procure for its own account and shall pay
all charges for water, telephone, electricity, gas, sewage, and other utilities
used by Tenant at or in the Premises, and Landlord agrees at all times to
provide Tenant with access to such utilities for the purpose of Tenant
maintenance, repair or replacement of such facilities or systems. Tenant shall
be responsible for separate meters for all utilities used at or in the Premises.
To the extent that any service or utility used by Tenant at or in the Premises
is not separately metered, Tenant agrees to pay as additional rent and as a
monthly charge its "pro rata share" of the charges due for such service or
utility, unless otherwise agreed in writing by Landlord, Tenant and any other
affected tenant. Tenant's "pro-rata share" shall be determined in accordance
with the terms of Section 18 for calculating the same, except that the
denominator for the computation shall be the square footage of all premises
affected or served by the particular meter.
9. TENANT REPAIRS. Other than those items specified for repair,
replacement and maintenance by Landlord in Section 10 hereof, Tenant shall be
responsible for the repair, replacement and maintenance in good order and
condition of all parts and components of the Premises, together with all
systems, fixtures or equipment therein or appurtenant thereto, including,
without limitation, interior surfaces, flooring, wiring, plumbing, heating and
air conditioning equipment, trade fixtures, loading area components (including,
without limitation, overhead doors, bumpers, seals and levelers) and other
facilities, systems or equipment, whether or not originally installed by
Landlord or Tenant in good condition and repair, ordinary wear and tear
excepted; provided, however, Tenant shall be solely responsible for any unusual
or extraordinary wear and tear resulting from Tenant's use of the Premises.
Tenant shall be responsible for maintenance and replacement of all broken plate
glass and windows (unless breakage or damage results from settling of the
building or faulty initial construction undertaken by Landlord) and of all
lights and ballasts. Tenant shall maintain all lighting serving the interior of
the Premises in good working order at all times during the Term. In connection
with the day-to-day maintenance and repair of the heating and air conditioning
systems and equipment at the Premises, Tenant agrees to enter into and maintain
(for the Term) a maintenance contract with a reputable company offering
maintenance and repair services reasonably acceptable to Landlord, this contract
to be subject to the specifications set forth in Exhibit D. Tenant shall provide
Landlord with satisfactory evidence that it has entered into and maintained the
aforesaid maintenance contract upon Landlord's request therefor. If, after
written notice from Landlord, Tenant fails to repair or maintain any component,
system, fixture or facility at the Premises which Tenant is obligated to repair
or maintain, then Landlord may, at Landlord's option,
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repair or maintain the same, and Tenant shall, upon demand by Landlord,
reimburse Landlord forthwith for the total costs of such repairs.
10. LANDLORD REPAIRS. Landlord shall be responsible for maintenance of
Landlord's Work and the maintenance and cleaning of the common areas of the
Building and adjacent to the Building; provided, however, if any element of
Landlord's Work is either materially altered by Tenant during its upfitting of
the Premises for non-office use without Landlord's prior written consent to be
granted or withheld in Landlord's sole discretion, or damaged as a result of
Tenant's non-office use, Tenant shall be solely responsible for the maintenance
and repair of such item. Except as otherwise set forth in Exhibit B-1,
Landlord's Work shall not include interior doors, windows or other components of
the Premises which are not load bearing. There shall be no allowance to Tenant
for a diminution of rentals value and no liability on the part of Landlord for
inconvenience, annoyance or injury to business arising from Landlord or others
making any construction or repair to the Premises, the Building, the common
areas or an adjoining premises, and no liability on the part of Landlord for
failure of Landlord or others, to make any repairs, alterations, additions or
improvements in or to any portion of the Premises, the Building or common areas;
provided, however, if such construction or failure denies Tenant the use of the
Premises for the normal conduct of Tenant's business for a period of three (3)
consecutive business days, Tenant's obligation to pay Minimum Rent shall abate
until such time as the Premises is available to Tenant for the normal conduct of
its business, as reasonably determined by Landlord. Landlord shall not be liable
to Tenant for any damage caused to Tenant and its property due to the Premises
or the Building, or any part or appurtenance thereof, being improperly
constructed or being or becoming out of repair, or arising from the leaking of a
pipe, facility or system for gas, water, sewage, steam, electricity or other
utility; provided, Landlord shall, subject to the Section 22 hereof, be liable
for any actual and direct damage to Tenant or the Premises caused by Landlord's
failure to repair any item of Landlord's Work within a reasonable time after
receipt of written notice from Tenant describing with specificity such repair
and Tenant specifically waives any right to pursue consequential damages arising
from Landlord's failure to repair such item. Tenant shall immediately report to
Landlord any defective condition in or about the Premises known to Tenant, and
if such defect is not so reported and such failure results in other damage,
Tenant shall be liable for such other damage. Regardless of any obligation
otherwise imposed upon Landlord, Tenant shall pay the cost of any repairs or
damage resulting from the negligence or the unlawful or willful acts of its
employees, representatives or visitors.
11. SIGNS AND ADVERTISING; USE OF NAME. Without first obtaining the
prior approval of Landlord (and after submitting such design specifications,
prepared at Tenant's sole cost and expense, as Landlord may require), Tenant
shall not permit the installation, painting and display of any sign, plaque,
lettering or advertising material of any kind on or near the exterior of the
Premises, or in the interior thereof that will be visible from the exterior. Any
such installation of a sign or other advertising by Tenant shall be installed in
accordance with Exhibit F attached hereto, in compliance with applicable law and
installed and maintained by Tenant at its sole cost and expense and shall be
removed by Tenant at the expiration or sooner termination of this Lease,
whereupon Tenant shall repair any damage caused to the Premises or
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Building by such removal. Tenant shall keep all approved signage and other
material in good working order clearly illuminated during business hours. Tenant
shall not have any property right or interest in any name or distinctive
designation which may become associated with the Building or the common areas of
which the Building may be a part. Landlord shall retain all property rights in,
and the exclusive right of use of, such name or designation.
12. IMPROVEMENTS. Tenant's preliminary plans and specifications
relating to the Tenant improvements to be constructed in the initially
configured Premises (the "Preliminary Plans") are currently under review by
Landlord. Once the Preliminary Plans are approved by Landlord, Tenant shall
prepare the final plans and specifications relating to the Tenant improvements
(the "Final Plans") and shall thereafter deliver the Final Plans to Landlord for
its review and approval. Landlord shall not unreasonably withhold or delay its
approval of the Final Plans and agrees to provide Tenant with notice of any
objections to such plans within fifteen (15) days after Landlord's receipt of
same; provided , however, so long as the Final Plans are consistent with and
substantially similar to the Preliminary Plans previously approved by Landlord,
the Final Plans will be deemed approved by Landlord. Upon approval by Landlord
of the Final Plans, they shall be attached as Exhibit B to this Lease and made a
part hereof. The improvements shown on such approved plans as they may be
modified with Landlord's consent (not to be unreasonably withheld or delayed)
and not otherwise included in Landlord's Work are referred to in this Lease as
the "Tenant Improvements."
With respect to the design and construction of the Tenant Improvements,
Tenant agrees to undertake the work in accordance with the following:
(i) Tenant agrees to cooperate fully with Landlord for the purpose of
coordinating the construction of the Tenant Improvements with the construction
of the Building;
(ii) All contractors selected by Tenant to construct the Tenant
Improvements shall require the express approval of Landlord (such approval not
to be unreasonably withheld or delayed) prior to the commencement of any such
work;
(iii) Tenant shall contract directly with the approved contractor to
construct the Tenant Improvements;
(iv) Tenant agrees to commence the construction of the Tenant
Improvements within fifteen (15) days after Tenant's receipt of all necessary
building permits and the construction of the Tenant Improvements shall be fully
coordinated with the construction of the Building and otherwise scheduled
appropriately; and
(v) Tenant agrees to complete the Tenant Improvements within one
hundred twenty (120) days after delivery of the Premises from Landlord to
Tenant. Landlord and Tenant each agree to use reasonable best efforts to ensure
that their respective contractors will coordinate the job site conditions with
the other's contractor with respect to job site security, staging of equipment
and materials so as not to impede work in progress and protection of work in
place.
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It is the intent of the parties hereto that the construction of the
Tenant Improvements in the Premises shall be fully coordinated with the
construction of the Building and Landlord's Work and accordingly, undertaken
concurrently with the completion of the Building's shell in accordance with the
reasonable requirements of Landlord or its representatives.
Provided Tenant is not in default hereunder beyond any applicable grace
or cure period, Landlord agrees to provide to Tenant an allowance of up to
Twenty-Five Dollars ($25.00) per rentable square foot of the Premises (the
"Tenant Allowance") to be applied to the cost of the Tenant Improvements.
Provided the amount requested by Tenant is not in dispute, the Tenant Allowance
shall be paid by Landlord to Tenant monthly on a date fixed by Landlord. Such
disbursement shall be contingent on Tenant furnishing to Landlord ten (10) days
prior to said disbursement date such invoices and other documents as may be
reasonably requested by Landlord relative to the design and construction of the
Tenant Improvements which evidence Tenant's payment of an amount equal to at
least $25.00 per rentable square foot of the Premises toward such costs, at
which time Landlord agrees to disburse the full Tenant Allowance to Tenant.
Tenant shall be responsible for any cost of the Tenant Improvements in excess of
the Tenant Allowance. Notwithstanding anything contained herein to the contrary,
the Tenant Allowance shall be reduced by an amount equal to one-half (1/2) of
the reasonable cost of the demising wall to be constructed by Landlord within
the Building.
Landlord will charge Tenant fees not to exceed two percent (2%) of the
costs of the design and construction of the Tenant Improvement in the aggregate
for reviewing the Tenant Improvement plans and specifications, inspecting the
construction of the Tenant Improvements, and for otherwise coordinating the
Tenant Improvements with the construction of the Building. These fees chargeable
to Tenant may be deducted from the Tenant Allowance and in any event are payable
within thirty (30) days after substantial completion of any major phase of the
Tenant Improvements.
In the event the projected cost of the Tenant Improvements exceeds the
Tenant Allowance, Tenant, upon written request from Landlord, shall provide to
Landlord such information regarding Tenant's financial condition as shall
satisfy Landlord, in its reasonable discretion, that Tenant has the financial
capability to pay such excess cost.
Landlord or Landlord's agents have made no representations or promises
with respect to the Premises or the Building except as expressly set forth
herein. The taking of possession of the Premises by Tenant shall be conclusive
evidence as against Tenant, that Tenant accepts the same "as is" and "where is"
and that the Premises and Building were in good condition at the time when
possession was taken by Tenant. Landlord may at any time construct additional
buildings or improvements in any part of the common areas and may remodel or
remove the Building or any existing building in any part of the common areas.
Any sidewall of the Premises may be used by Landlord as a "party wall" for other
buildings or improvements. However, in connection with Landlord's construction
of any additional buildings or improvements, Landlord shall not unreasonably
interfere with Tenant's use and occupancy of the Premises or impair Tenant's
rights under this Lease. Notwithstanding anything contained
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herein to the contrary, upon the expiration or earlier termination of the Term
of this Lease or Tenant's vacating the Premises, Tenant shall, at its sole cost
and expense, restore the Premises to its "base building condition"; provided,
however, in the event Tenant elects to extend the term of this Lease pursuant to
Exhibit G hereof, Tenant shall have no obligation to restore the Premises to its
base building condition and instead, may return the Premises to Landlord in its
"as-is" condition. For purposes hereof, "base building condition" shall mean the
condition of the Premises with Landlord's Work completed together with such
other Tenant Improvements as Landlord directs be left at the Premises; provided,
however, Tenant's restoration obligations with respect to the slab floor in the
Premises shall be limited to restoring the floor to a level slab of commercially
reasonable tolerances (i.e. one-eighth of an inch per ten feet). Within ten (10)
business days after Tenant's request for same (such request to be made no
earlier than sixty (60) days prior to the expiration or earlier termination of
the Term), Landlord shall provide Tenant with a list of those Tenant
Improvements which Landlord directs be left at the Premises upon the expiration
of the Term.
13. FIXTURES AND INTERIOR ALTERATIONS. Tenant, with Landlord's prior
written consent (not to be unreasonably withheld or delayed) but at Tenant's own
expense, may from time to time during the Term make interior alterations in and
to the Premises which it may deem necessary or desirable provided that in no
case may it affect the structural integrity of the Premises or the Building. Any
such work shall be done in a good workmanlike manner and in accordance with
applicable law and shall not result in any claim or lien against Landlord or its
property. All permanent improvements or alterations shall belong to Landlord and
become a part of the Premises upon the expiration or sooner termination of this
Lease, unless Landlord, when its consent is given, requests Tenant to remove
such improvements or alterations at Tenant's sole expense, whereupon Tenant
shall also cause to be repaired any damage to the Premises resulting from the
removal. Tenant shall be entitled to claim the depreciation attributable to all
leasehold improvements within the Premises constructed and paid for by Tenant.
Tenant may construct or install in the Premises, all racks, counters, shelves,
mirrors, chairs, and other trade fixtures and equipment in accordance with
applicable law as may be necessary or convenient for Tenant's business, which
racks, counters, shelves, mirrors, chairs, and other trade fixtures and
equipment shall at all times be and remain the property of Tenant, and Tenant
shall have the right to remove all or any part of the same from the Premises at
any time prior to the expiration or sooner termination of this Lease, provided
nevertheless that Tenant shall repair any damage to the Premises resulting from
installation or removal.
14. LIENS. Tenant shall keep the Premises and the Building free from
any liens arising out of any work performed, materials furnished or obligations
incurred by or on behalf of Tenant, and Tenant hereby agrees to indemnify and
hold Landlord, its agents, employees, contractors, officers, directors, partners
and shareholders harmless from any and all liability, cost or expense for such
liens. Tenant shall cause any such lien imposed to be released of record by
payment or bonding within twenty (20) days after the earlier of the imposition
of the lien or a written request by Landlord therefor. If Tenant fails to remove
any lien within the prescribed twenty (20) day period, then Landlord may do so
at Tenant's expense, including costs
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and reasonable attorneys' fees actually incurred at standard rates, which
expense shall be due as additional rent hereunder.
15. INDEMNIFICATION. Except to the extent caused by the negligence or
willful misconduct of Landlord or its employees, agents or representatives and
to the extent Landlord does not receive proceeds pursuant to its insurance
policies, Tenant shall indemnify and hold harmless Landlord, its agents,
representatives, successors or assigns, from and against any and all losses,
damages, liabilities, claims, penalties, costs or expenses (including reasonable
attorney's fees actually incurred at standard rates), whether caused by Tenant
or by its agents, servants, employees, independent contractors or licensees,
occasioned by, arising or resulting from or growing out of (a) Tenant's use or
occupancy of the Premises, or from the conduct of Tenant's business, or from any
activity, work or things done, permitted or suffered by Tenant in or about the
Premises; (b) the breach or default in the performance of any obligation on
Tenant's part to be performed under the terms of this Lease or arising from any
act or omission of Tenant; or (c) any alleged or actual violation of any
Environmental Law (as defined below), any unsafe or improper use or storage of
any Hazardous Substance (as defined below) or any condition created by or
arising therefrom including any actual or threatened pollution or contamination
at or about the Premises or the Building, whether or not due to negligence, an
omission or a willful act.
Except to the extent caused by the negligence or willful misconduct of
Tenant or its employees, agents or representatives and to the extent Tenant does
not receive proceeds pursuant to its insurance policies, Landlord shall
indemnify and hold harmless Tenant, its agents, representatives, successors or
assigns, from and against any and all losses, damages, liabilities, claims,
penalties, costs or expenses (including reasonable attorney's fees actually
incurred at standard rates), whether caused by Landlord or by its agents,
servants, employees or licensees occasioned by, or arising or resulting from or
growing out of (a) Landlord's use of or entry upon the Premises or the Building,
or from the conduct of Landlord's business, or from any activity, work or thing
done by Landlord in or about the Premises or the Building; (b) the breach or
default in the performance of any obligation on Landlord's part to be performed
under the terms of this Lease or arising from any act or omission of Landlord or
its agents, representatives or employees; or (c) any actual violation of any
Environmental Law, any unsafe or improper use or storage of any Hazardous
Substance by Landlord or any condition created by or arising therefrom,
including any actual pollution or contamination at or about the Building by
Landlord whether or not due to negligence, an omission or a willful act.
The indemnification provisions contained herein shall not be deemed to
be limited by the limits of any insurance policies required under this Lease and
shall survive the expiration or sooner termination of this Lease. The
indemnifying party shall defend any suit, action or proceeding commenced or
brought against the other party in connection with any indemnity or obligation
of the indemnifying party contained in this Section regardless of any alleged
fault or cause and the indemnifying party shall employ legal counsel reasonably
satisfactory to the other party to defend such suits, actions or proceedings.
The indemnifying party shall deliver to the other party copies of the documents
served in any such suit, action or proceeding and, whenever
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requested by such other party, shall advise as to the status of such suit,
action or proceeding. If the indemnifying party fails to defend diligently any
such suit, action or proceeding, or if such other party elects to defend by
written notice to the indemnifying party at any time, such other party shall
have the right (but not the obligation) to defend the same at the indemnifying
party's expense. The indemnifying party shall not settle any such suit, action
or proceeding without the other party's prior written consent. The indemnifying
party shall give timely notice of such suit, action or proceeding and the claims
thereof to the other party and each insurer issuing an insurance policy required
under this Lease.
16. TENANT'S COMPLIANCE; INSURANCE REQUIREMENTS; WAIVER OF SUBROGATION.
Tenant shall comply with all applicable laws, ordinances and regulations
affecting the Premises, including the Rules and Regulations set forth in Exhibit
C and any other nondiscriminatory rules for tenants as may be developed from
time to time by Landlord and delivered to Tenant or posted on the Premises.
Tenant shall maintain and care for its personal property and trade fixtures
located in the Premises, insure such personal property and fixtures in all
respects, and shall neither have nor make any claim against Landlord for any
loss or damage to the same, regardless of the cause therefor except to the
extent of the negligence or willful misconduct of Landlord or its agents or
employees. Throughout the Term, Tenant, at its sole cost and expense, shall keep
or cause to be kept for the mutual benefit of Landlord and Tenant the following
insurance: (a) commercial general liability insurance naming Landlord, and
Landlord's agent, Tri Properties, Inc., as an additional insured against any and
all claims for bodily injury and property damage occurring in or about the
Premises arising out of Tenant's use and occupancy of the Premises, such
insurance to have a combined single limit coverage of not less than $1,000,000
per occurrence with a $2,000,000 aggregate limit and excess umbrella liability
insurance in the amount of $2,000,000 (If Tenant has other locations that it
owns or leases, the policy shall include an aggregate limit per location
endorsement) and such insurance to be primary and non-contributing to any
insurance available to Landlord and Landlord's insurance shall be in excess
thereto, and in no event shall the limits of such insurance be considered as
limiting the liability of Tenant under this Lease; (b) personal property
insurance insuring all equipment, trade fixtures, inventory, fixtures and
personal property located on or in the Premises for perils covered by the causes
of loss--special form (all risk), together with coverage for flood, earthquake
and boiler and machinery (if applicable), such insurance to be written on a
replacement cost basis in an amount equal to one hundred percent (100%) of the
full replacement value of the aggregate of the foregoing property; (c) workers'
compensation insurance in accordance with statutory law and employers' liability
insurance with a limit of not less than $100,000 per employee and $500,000 per
occurrence; and (d) such other insurance as Landlord reasonably deems necessary
and consistent with the requirements of other similar tenants in the Business
Park or required by Landlord's beneficiaries or mortgagees of any deed of trust
or mortgage encumbering the Premises. The policies required to be maintained by
Tenant shall be with companies rated AX or better in the most current issue of
Best's Insurance Reports. Insurers shall be licensed to do business in the State
of North Carolina and domiciled in the United States of America. Any deductible
amounts under any insurance policies required hereunder shall not exceed
$20,000, except for Tenant's flood and earth movement insurance which may
contain deductible amounts up to $50,000. Certificates of insurance (or
certified
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copies of the policies if required by Landlord) shall be delivered to Landlord
prior to the commencement date and thereafter at least thirty (30) days prior to
the expiration date of the old policy. Landlord and Tenant agree that all
contractors working at or within the Premises at the direction of either
Landlord or Tenant shall be adequately insured in a commercially reasonable
manner. Tenant shall have the right to provide insurance coverage which it is
obligated to carry pursuant to the terms hereof in a blanket policy, provided
such blanket policy expressly affords coverage to the Premises and to Landlord
directly as required by this Lease. Each policy of insurance shall provide
notification to Landlord at least thirty (30) days prior to any cancellation or
modification resulting in a reduction of insurance coverage. Landlord and Tenant
hereby release the other from any and all liability or responsibility to the
other or anyone claiming through or under them, by way of subrogation or
otherwise, from any loss or damage to property caused by fire or any other
perils insured under policies of insurance covering such property (but only to
the extent of the insurance proceeds payable under such policies), even if such
loss or damage is attributable to the fault or negligence of the other party, or
anyone for whom such party may be responsible, including any other tenants,
owners or occupants of the Building. The foregoing notwithstanding, this mutual
release shall be applicable and in force and effect only to the extent lawful at
the time any claim is made, and in any event only with respect to loss or damage
occurring during such times as the releasor's policies shall contain a clause or
endorsement providing that any such release shall not adversely affect or impair
said policies or prejudice the right of the releasor to recover thereunder, and
then only to the extent of insurance proceeds payable under such policies.
Landlord and Tenant shall request its insurance carriers to include in its
policies such a clause or endorsement. If additional cost shall be charged
therefor, the party responsible for procuring such insurance shall pay such
additional costs.
17. CASUALTY DAMAGE. If the Premises, or any part thereof, shall be
damaged by fire or other casualty, Tenant shall give prompt written notice
thereof to Landlord. In case the Premises shall be so damaged by fire or other
casualty that substantial alteration or reconstruction of the Premises shall, in
Landlord's sole opinion, be required, Landlord may, at its option, terminate
this Lease and the term and estate hereby granted, by notifying Tenant in
writing of such termination within sixty (60) days after the date of damage, in
which event the rent shall be abated as of the date of damage. If Landlord does
not elect to terminate this Lease, Landlord shall within ninety (90) days after
the date of such damage commence to repair and restore the Premises and shall
proceed to restore the Premises (except that Landlord shall not be responsible
for delays beyond its control) to substantially the same condition in which it
was immediately prior to the happening of the casualty, except that Landlord
shall not be required to rebuild, repair, or replace any part of Tenant's
furniture, furnishings, fixtures or equipment removable by Tenant, and such work
shall not in any event exceed the scope of the work done by Landlord in
originally constructing the Premises nor shall Landlord in any event be required
to spend for such work an amount in excess of the insurance proceeds actually
received by Landlord as a result of the fire or other casualty. For the period
of restoration, rent shall abate as of the date of damage, unless Tenant is able
to continue its occupancy of the Premises during restoration whereupon rent
shall be adjusted and prorated in the proportion which the area of unusable
lease space bears to the total Premises. In any event, except to the extent of
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Landlord's gross negligence or willful misconduct, Landlord shall not be liable
for any inconvenience or annoyance to Tenant, injury to the business of Tenant,
loss of use of any part of the Premises by Tenant or loss of Tenant's personal
property resulting in any way from such damage or the repair thereof. If the
Premises or any other portion of the Building are damaged by fire or other
casualty resulting from the omission, fault or negligence of Tenant or any of
Tenant's agents, employees, or invitees, rent due hereunder shall not be abated
or diminished during the repair of such damage and Tenant shall be liable to
Landlord for the cost and expense of the repair and restoration of the Premises
and Building caused thereby to the extent such cost and expense is not covered
by insurance proceeds.
18. PASS THROUGH--PRORATED INSURANCE COSTS. For the Term, Landlord
shall keep the Building containing the Premises insured against loss or damage
by fire with extended coverage endorsement in an amount sufficient to prevent
Landlord from becoming a co-insurer under the terms of applicable policies, but,
in any event, in an amount not less than ninety (90%) percent of the full
insurable value of the Building as determined from time to time. Tenant agrees
to pay Landlord in advance monthly as additional rent its "pro rata share" (as
defined below) of the estimated premiums and costs of such Landlord insurance
throughout the Term, and any renewals or extensions hereof. Tenant's "pro rata
share" of such insurance costs shall mean that percentage found by dividing the
agreed to rentable square footage of the Premises by the agreed to rentable
square footage of the Building(s) (in which the Premises is located) subject of
the insurance. In this instance, the "pro rata share" computation is as follows:
12,764 rentable square feet of the Premises divided by 32,713 rentable square
feet of the Building equals 39.0%. This computed monthly charge estimated by
Landlord shall be paid by Tenant until such time when the charge shall be
adjusted to reflect actual insurance costs for the year. If the reconciliation
of the charges shows a deficiency, such deficiency shall be paid by Tenant to
Landlord within thirty (30) days after receipt of written demand therefor by
Landlord; if it shows a credit, the credit will be applied in a lump sum against
Tenant's next rent payment. For the first calendar year beginning with January
1, 1998, Tenant's estimated proportionate share of the premiums and costs of
such Landlord insurance shall be Three cents ($.03) per square foot for each
rentable square foot of the Premises per annum, payable in advance in equal
monthly installments.
19. PASS THROUGH--PRORATED TAXES. Tenant shall pay Landlord in advance
monthly as additional rent its "pro rata share" (as determined in accordance
with the terms of Section 18 hereof) of any sale, use and/or occupancy tax
imposed on rents collected by Landlord (other than City, State or Federal Income
and Franchise Taxes) or any tax on rents in lieu of ad valorem taxes,
notwithstanding that any such tax may be levied or assessed against Landlord.
Tenant further agrees to pay Landlord its "pro rata share" (as determined in
accordance with the terms of Section 18) of ad valorem or any other property tax
imposed upon the Building(s) (of which the Premises is a part) subject to the
tax, regardless of the taxing authority or authorities levying the same.
Furthermore, Tenant shall make timely payments of all ad valorem taxes and
assessments made against Tenant's stock of merchandise, furniture, furnishings,
trade fixtures, equipment, supplies and other property located on or used in
connection with the Premises and of all privilege and business licenses, taxes
and similar charges
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for which Tenant may be responsible. If the assessed value of the Building in
which the Premises are located is increased by a taxing authority because of
alterations or modifications to the Building made at Tenant's request or made by
Tenant, then the additional taxes attributable to such increase in valuation
shall be the sole responsibility of Tenant, and shall be included monthly as
additional rent to be paid by Tenant. For the first calendar year beginning with
January 1, 1998, the amount of Tenant's estimated share of ad valorem taxes
shall be Eighty cents ($.80) per square foot for each rentable square foot of
the Premises per annum, payable in advance in equal monthly installments.
20. PASS THROUGH--OPERATING EXPENSE CHARGES. Landlord will operate and
maintain the common areas of the Building, and related areas and facilities
referred to in Section 7 above, all as shown in Exhibit A-3 (Site Plan). For the
Term or any extension hereof, Tenant shall pay Landlord as additional rent a
minimum sum as a common areas operating expense charge equal to Sixty-Six cents
($0.66) per square foot for each rentable square foot of the Premises, per
annum, namely the sum of Eight Thousand Four Hundred Twenty-Four and 24/100
Dollars ($8,424.24) which shall be due and payable in monthly installments of
Seven Hundred Two and 02/100 Dollars ($702.02) each, in advance as rent is due.
In addition, Tenant shall pay Landlord as additional rent Tenant's proportionate
share of the Business Park fee payable by Landlord equal to Four and one-half
cents ($.045) per square foot for each rentable square foot of the Premises per
annum, payable in advance in equal monthly installments. In the event that the
actual operating expenses for the common areas as prorated shall exceed the
minimum sum shown above, Tenant shall pay its "pro rata share" (as determined in
accordance with the terms of Section 18 or if with respect to an operating
expense concerning the business park common areas, then a "business park
amenities pro rata share" determined from a percentage found by dividing the
agreed to rentable square footage of the Premises by the rentable square footage
of all benefiting buildings within the business park) of any such increase, as a
monthly charge in advance as rent is due. As used herein, the term "operating
expense" shall mean and include all actual operating costs concerning the
operation or maintenance of the common areas as determined by standard
accounting practices and shall include by way of illustration, but not limited
to: property management fees, ad valorem real and personal property taxes, legal
fees and other costs incurred in connection with protesting tax assessment in
good faith, hazard and liability insurance premiums, common area utilities,
common area maintenance services, common area facilities, business park
amenities, landscaping, snow removal, asphalt and pavement repair, labor,
materials, supplies, equipment and tools, permits, licenses and inspection fees.
The term "operating expense" shall not include depreciation on the Building in
which the Premises are located or equipment therein (except for the reasonable
amortization of the costs for capital investment items which are purchased and
installed for the purpose of reducing "operating expenses" but only to the
extent of actual reductions in the operating expenses), interest, executive
salaries or real estate broker commissions. The term "operating expenses" shall
also not include the following items: (a) repairs or other work occasioned by
fire, windstorm or other casualty, the costs of which are reimbursed to Landlord
by insurers or by others, and repairs or other work occasioned by condemnation
proceedings, the costs of which are reimbursed by governmental authorities or by
others; (b) costs incurred in renovating or otherwise improving the Building for
tenants or other
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occupants of the Building; (c) costs of correcting defects in the construction
of the Building (including latent defects in the Building) or in equipment,
except that for the purposes of this subsection (c) costs which are not
occasioned by construction defects but rather result from general maintenance
and repair or ordinary wear and tear and use shall not be deemed defects; (d)
Landlord's cost of electricity and other utilities and services furnished by
Landlord for which Landlord is entitled to be reimbursed by tenants (whether or
not actually collected by Landlord) as a separate additional charge or rental;
(e) costs (i) incurred due solely to a material violation by Landlord of the
terms and conditions of any lease pertaining to the Building or of any valid,
applicable legal requirement, building code, regulation, or law, or (ii)
incurred due solely to the Building being in material violation of any such
legal requirement, building code, regulation or law which exists as of the date
construction of the Premises commences or (iii) incurred due to an increase in
the rate of insurance on the Building or its contents which is caused solely by
the act of any tenant other than Tenant; (f) overhead and profit increment paid
to subsidiaries or affiliates of Landlord or its partners for services on or to
the Building, to the extent that such costs of such services exceed competitive
costs for such services rendered by other persons or entities of similar skill,
competence and experience; (g) costs of Landlord's general overhead and general
administrative expenses which would not be chargeable to operating expenses of
the Building under generally accepted accounting principles; (h) all items and
services for which Tenant reimburses Landlord (other than Tenant's pro rata
share of operating expenses) or for which Tenant pays third persons on behalf of
Landlord; (i) any other expenses which, under generally accepted accounting
principles, would not be classified as customary maintenance or operating
expenses of the Building; and (j) any fines, penalties, legal judgments or
settlements of causes of action by or against Landlord. The annual statement of
said operating expenses shall be made available to Tenant upon Tenant's request.
21. ACCOUNTING FOR PASS THROUGH CHARGES. Landlord shall send to Tenant,
in writing, a statement of the amount of any additional rent determined due
pursuant to Sections 18, 19 and 20 after the end of the year with respect to
which such additional rent is due. The amount of such additional rent required
to be paid pursuant to the provisions of this Lease, as well as any other sums
of money or charges required to be paid by Tenant under this Lease, whether or
not the same shall be designated "additional rent," shall nevertheless, if not
paid when due, be collectible as additional rent with the next installment of
rent thereafter falling due. Nothing herein contained shall be deemed to suspend
or delay the payment of any amount of money or charge at the time the same
becomes due and payable hereunder or otherwise limit any remedy of Landlord to
collect the same. Tenant shall pay to Landlord monthly in advance, one-twelfth
(1/12) of the estimated annualized amounts shown as Tenant's "pro rata share" of
any additional rent to be paid in anticipation of such rent due to provide for
increases in operating expenses and other expenses as specified in Sections 18,
19 or 20 hereof for the then current calendar year, and all such additional
monthly payments shall be credited in a lump sum to Tenant's rent next due to
the extent that the amount paid by Tenant exceeds the amount actually due. Any
deficiency owed by Tenant pursuant to such an accounting shall be paid by Tenant
within thirty (30) days after receipt of written demand therefor by Landlord.
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Not more than once during each Lease Year, Tenant may, at Tenant's sole
cost and expense, audit Landlord's records and all information pertaining to
operating expense charges in order to verify the accuracy of Landlord's
determination of Tenant's share of operating expenses provided that:
(i) Tenant must give notice to Landlord of its election to undertake
said audit within one hundred twenty (120) days after receipt of the
statement of the actual amount of Tenant's share of operating expenses
for the preceding calendar year from Landlord;
(ii) Such audit will be conducted only during regular business hours of
the office where Landlord maintains records of operating expenses and
only after Tenant gives Landlord fourteen (14) days advance written
notice;
(iii) Tenant shall deliver to Landlord a copy of the results of such
audit within fifteen (15) days of its receipt by Tenant;
(iv) No audit shall be conducted at any time that Tenant is in default
of any of the terms of this Lease;
(v) No subtenant shall have any right to conduct an audit and no
assignee shall conduct an audit for any period during which such
assignee was not in possession of the Premises; and
(vi) Such audit reviewed by Tenant shall not postpone or alter the
liability and obligation of Tenant to pay any amounts due under the
terms of this Lease.
Within thirty (30) days after Tenant's receipt of such audit, Tenant
must give notice to Landlord of any disputed amounts and identify all items
being contested in Landlord's statement of Tenant's share of operating expenses.
If Landlord and Tenant cannot agree upon any such item as to which Tenant shall
have given such notice, the dispute shall be resolved by an audit by a major
accounting firm mutually acceptable to Landlord and Tenant and notwithstanding
anything contained herein to the contrary, the cost of said audit shall be paid
by the non-prevailing party; provided, however, Tenant will not be considered
the "prevailing party" for purposes of this paragraph unless the accounting
firm's audit reveals an overcharge by Landlord in excess of five percent (5%) of
Tenant's share of operating expenses for the particular calendar year in
question.
22. LANDLORD LIABILITY. Tenant agrees that Landlord shall not be liable
for injury to Tenant's business or any loss of income therefrom or for any
damage to any goods, wares, merchandise, or other property of Tenant, or
Tenant's contractors, agents, employees, invitees, customers or any other person
in or about the Premises, unless such damage or loss is solely caused by
Landlord, its agents, employees or representatives, nor shall Landlord be liable
for injury to the person of Tenant or to Tenant's contractors, agents,
employees, invitees or customers whether such damage or injury is caused by or
results from fire, steam, electricity,
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gas, water or rain, or from the breakage, leakage, obstruction or other defects
of pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting
fixtures or from any other cause, whether said damage or injury results from
conditions arising upon the Premises or upon other portions of the Building of
which the Premises are a part, or from other sources or places, regardless of
whether the cause of such damage or injury or means of repairing the same is
inaccessible to Tenant except to the extent of the negligence or willful
misconduct of Landlord, its agents or employees. Landlord shall not be liable
for any loss or damages arising from any act or neglect of any other tenant. The
term "Landlord" as used in this Lease so far as covenants or obligations on the
part of Landlord are concerned shall be limited to mean and include only the
owner or owners of the Premises and Building at the time in question, and in the
event of any transfers or conveyances, the then grantor shall be automatically
freed and released from and after the date of such transfer or conveyance of all
liability as respects the performance of any covenant or obligation on the part
of Landlord contained in this Lease on the part of Landlord shall be binding on
Landlord, its successors and assigns only during and in respect to their
respective successive periods of ownership. Notwithstanding any other provision
contained herein to the contrary, in the event of a breach hereof by Landlord or
the failure of Landlord to perform any of its obligations hereunder, Landlord
shall have no personal liability therefor, but Tenant shall look solely to
Landlord's interest in the Premises for satisfaction of any claim or loss.
23. CARE OF PREMISES. Tenant shall at all times keep the Premises and
adjoining areas and appurtenances (subject to its reasonable control) in a clean
and neat condition. Tenant covenants and agrees that Tenant, for itself, its
employees, representatives and visitors, shall:
(a) Prohibit anything within Tenant's control which shall endanger or
cause injury to any person or property.
(b) Prohibit any excessive loads within the Premises or any part of the
common areas, including parking areas.
(c) Prohibit any disturbing or offensive odors, fumes, gases, smoke,
dust, steam vapors, noise or vibrations.
(d) Keep the entryways, sidewalk and delivery and service areas clean
and free from Tenant's rubbish.
(e) Keep the interior free of vermin. Landlord acknowledges that
poultry kept on the Premises in conjunction with Tenant's permitted use shall
not be deemed vermin.
(f) Prohibit the use of sinks, toilets or urinals for any purpose
except that for which they are designated and installed.
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(g) Store all trash and garbage inside the Premises and provide for its
prompt and regular removal for disposal outside the Building and common areas.
(h) Comply otherwise with all rules and regulations of Landlord,
including those Rules and Regulations set forth in Exhibit C.
24. QUIET ENJOYMENT. Upon Tenant's paying the rent and other sums
herein reserved and its performing the covenants and agreements hereof, Tenant
shall peaceably and quietly have, hold and enjoy the Premises, and all rights,
privileges, easements and appurtenances in any way appertaining thereto, during
the Term.
25. SURRENDER; HOLDING OVER. Tenant will vacate and deliver up the
Premises and all improvements, additions and alterations thereto, except and
only to the extent Landlord requests removal of such improvements, additions and
alterations pursuant to Section 13 (except Tenant signs, equipment and trade
fixtures installed by Tenant at its expense which may be removed by Tenant), at
the expiration or termination of this Lease, in a good, clean and tenantable
condition as the same were at the beginning of Tenant's occupancy, excepting
reasonable wear and tear (but not any extraordinary or unusual wear and tear due
to Tenant's use of the Premises), damage by fire and other casualty or
appropriation by eminent domain. Tenant expressly agrees to perform and complete
any and all of its repair or maintenance obligations specified under Section 9
prior to its vacating the Premises. Tenant may remove its trade fixtures and
equipment within five (5) days after the expiration or sooner termination of
this Lease, provided (a) Tenant is not in default hereunder; (b) removal of
Tenant item can be accomplished without major damage to the Premises; and (c)
Tenant immediately repairs (or reimburses Landlord for the cost of repairing any
resulting damage or defacement). Otherwise, all such items shall become
Landlord's property. Upon its surrender of the Premises, Tenant agrees to
provide that all entrance and exit doors are repaired and in good order, all
lighting and ballast are repaired and in good working order and all lights are
replaced, as necessary and burning, in addition to any other Tenant obligation
in connection with the condition of the Premises upon surrender.
Tenant shall not acquire any right or interest in the Premises by
remaining in possession after the expiration or sooner termination of this Lease
without Landlord's consent. During any such period of holding over without
Landlord's consent, Tenant shall be a tenant-at-sufferance only, occupying the
Premises without the consent of Landlord, but nevertheless subject to and bound
by all terms and conditions of this Lease except those as to term hereof and
except that during such holdover tenancy, Tenant shall pay to Landlord (a) rent
at the rate equal to One Hundred Fifty Percent (150%) of the rate of rent then
existing at the end of this Lease, and (b) Tenant's pro rata share of any and
all operating expenses and all other additional rent payable hereunder.
26. ASSIGNMENT AND SUBLEASING. Tenant may not assign, transfer,
mortgage or encumber this Lease, or sublease the Premises, in whole or in part,
without first obtaining the prior written consent of Landlord, which, provided
there is no change in the use
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of the Premises, shall not be unreasonably withheld. Any assignment or sublease
to which Landlord may consent (one consent not being any basis to contend that
Landlord should consent to a further change) shall not relieve Tenant of any of
its obligations hereunder. The withdrawal or change, whether voluntary,
involuntary or by operation of law, of persons or entities owning a controlling
interest in Tenant, or the sale of Tenant's business, shall be deemed a
voluntary assignment of this Lease and subject to the provisions of this Section
26. Acceptance of rent by Landlord after any non-permitted transfer or
assignment shall not constitute approval thereof by Landlord.
Notwithstanding anything in this Section to the contrary, Tenant may,
without Landlord's consent, assign, transfer, or sublet its leasehold interest
to a corporation, partnership, limited liability company, or other entity more
than fifty percent (50%) of the ownership of which is owned by Tenant, or to a
corporation, partnership, limited liability company, or other entity, which owns
more than fifty percent (50%) of the ownership interest in Tenant or to an
entity purchasing all or substantially all of the assets of Tenant. In the event
of any assignment, sublease or other transfer of this Lease or all or any
portion of the Premises, Tenant shall remain fully responsible and directly
liable for the payment of all rent payable pursuant to this Lease and for
compliance with all of Tenant's other obligations hereunder.
Landlord may at any time during the Term assign its interest in this
Lease without the consent of Tenant. Landlord shall promptly notify Tenant in
writing of the identity and address of the assignee and Landlord shall cause the
assignee to notify Tenant in writing of the address for payment of rent.
Except as otherwise expressly permitted in this Lease, in no event
shall this Lease be assignable by operation of any law, and Tenant's rights
hereunder may not become, and shall not be listed by Tenant as an asset under
any bankruptcy, insolvency or reorganization proceedings. Tenant is not, may not
become, and shall never represent itself to be an agent of Landlord, and Tenant
expressly recognizes that Landlord's title is paramount, and that it can do
nothing to affect or impair Landlord's title. If this Lease shall be assigned or
the Premises or any portion thereof sublet by Tenant at a rental that exceeds
the rental to be paid to Landlord hereunder attributable to the Premises or that
portion thereof so assigned or sublet, as the case may be, then and in such an
event, any such excess rent shall be paid over to Landlord by Tenant as
additional rent hereunder. Tenant agrees to reimburse Landlord all reasonable
out of pocket costs associated with Tenant's efforts to sublease or assign all
or part of the Premises including, but not limited to, legal fees, management
charges, construction management, engineering, architectural fees etc.
27. SUBORDINATION; ATTORNMENT. Tenant agrees that this Lease will
either be subordinate or superior to any mortgage or other security instrument
heretofore or hereafter executed by Landlord covering the Premises, depending on
the requirements of such mortgagee. On request, Tenant will execute such
agreements making this Lease superior or subordinate as Landlord's mortgagee may
request, and will agree to attorn to said mortgagee providing the mortgagee
agrees not to disturb Tenant's possession hereunder so long as Tenant is in
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compliance with this Lease. Landlord consents to Tenant's execution of
Landlord's mortgagee's subordination, attornment and non-disturbance agreement
(the "SNDA"), and to be bound by the provisions thereof. Further Tenant agrees
to execute within ten (10) days of request therefor, and as often as requested,
estoppel certificates setting forth the facts with respect to date of occupancy,
termination date of this Lease, the amount of rent due and date to which rent is
paid, whether or not it has any defenses or offsets to the enforcement of the
Lease or knowledge of any default or breach by Landlord, and that this Lease is
in full force and effect except as to any modifications or amendments, copies of
which Tenant shall attach to such estoppel certificate. Tenant agrees to attorn
to any successor of Landlord. Notwithstanding the foregoing, the subordination
of Tenant's interest in this Lease and the Premises shall be subject to the
execution by Landlord's mortgagee of an SNDA in a commercially reasonable form.
28. DEFAULT. If Tenant: (a) fails to pay all rent as provided in this
Lease when due; (b) breaches any other agreement or obligation herein set forth;
(c) files (or has filed against it) any petition or action for relief under any
creditor's law (including bankruptcy, reorganizations, or similar actions),
either in state or federal court and in the case of an involuntary bankruptcy
filing, the petition is not dismissed within ninety (90) days after the filing
of same; or (d) becomes insolvent, makes any transfer in fraud of creditors, has
a receiver appointed for its assets, or makes an assignment for benefit of
creditors, then in addition to any other lawful right or remedy which it may
have, Landlord, subject to its duty to mitigate damages, may do the following:
(A) declare the rent for the balance of the Term immediately due and payable,
and collect the same less all sums received from any reletting of the Premises
or in the event the Premises is not relet, the present value of the then fair
rental value of the Premises for the remainder of the term based upon a discount
rate of ten percent (10%) per annum, by distress or otherwise; (B) terminate
this Lease; or (C) repossess the Premises, and with or without terminating,
relet the same at such amount as Landlord deems reasonable, and if the amount is
less than Tenant's rent, Tenant shall immediately pay the difference on demand
to Landlord, but if in excess of Tenant's rent, the entire amount shall belong
to Landlord free of any claim of Tenant thereto. All expenses of Landlord in
repairing, restoring or altering the Premises or reletting, together with
leasing fees, all other expenses in seeking and obtaining a new tenant, the
unamortized portion of Landlord's upfit costs incurred in connection with this
Lease and other damages and costs, shall be charged to and be a liability of
Tenant. Landlord's reasonable attorneys fees actually incurred at standard rates
in pursuing any of the foregoing remedies, or in collecting any rents due by
Tenant hereunder, shall be paid by Tenant, which fees as to rents collected
shall be the actual amount of such fees and expenses as may be allowed by law.
All rights and remedies of Landlord are cumulative, and the exercise of any one
shall not be an election excluding Landlord at any other time from exercising a
different or inconsistent remedy. No waiver by Landlord or any covenant or
condition shall be deemed to imply or constitute a further waiver of the same at
a later time, and acceptance of rent by Landlord even with knowledge of a
default by Tenant shall not constitute a waiver of such default. Notwithstanding
anything contained herein to the contrary, Tenant shall not be in default
hereunder with respect to the payment of any rental or other sum of money
payable hereunder until Landlord shall have given Tenant written notice of such
failure and such failure shall have continued for three (3) business days after
Tenant's receipt of such notice; provided,
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however, Tenant shall not be entitled to more than two (2) such notices per
calendar year. In the case of Tenant's breach of any other non-monetary
agreement or obligation in this Lease, Tenant shall not be in default hereunder
with respect to same until Landlord shall have given Tenant written notice of
such breach and Tenant's failure shall have continued for a period of thirty
(30) days after receipt of such notice; provided, however, if such breach is not
capable of being cured within said thirty (30) day period, it shall only be
deemed a default if Tenant shall have failed to commence such cure within said
thirty (30) day period or once such cure has commenced, Tenant shall have failed
to prosecute such cure to completion within a reasonable period of time
thereafter.
29. ATTORNEY'S FEES. If either party places in the hands of an attorney
the enforcement of this Lease or any part thereof, for the collection of any
rent due or to become due hereunder, or recovery of the possession of the
Premises, or files suit upon the same, the non-prevailing (or defaulting) party
shall pay the other party's reasonable attorneys' fees and court costs.
30. INSPECTION. Tenant agrees that Landlord, its agents and other
representatives, shall have the right to enter into, and upon, the Premises, or
any part thereof, at all reasonable times during business hours upon prior
reasonable notice (except to the extent circumstances render such notice
impractical) for the purposes of inspecting or showing the same. Tenant further
agrees that Landlord may enter the Premises at all reasonable times during
business hours to post "For Rent" signs during the last six (6) months of the
Term, which signs may not be removed by Tenant. In conjunction with such
inspection, Landlord agrees to use reasonable efforts to not materially
interfere with Tenant's use and occupancy of the Premises and shall observe such
reasonable requirements as Tenant may impose (e.g. wearing sterile clothing and
booties for entry into "clean rooms") to protect Tenant's work in process and
proprietary information.
31. CONDEMNATION. If the Premises are totally taken by condemnation,
this Lease shall terminate on the date of taking. If only a portion of the
Premises is taken by condemnation and Tenant can continue use of the remainder
of the Premises for the normal conduct of its business, then the Lease will not
terminate, but rent shall abate in a just and proportionate amount to the loss
of use occasioned by the taking. Tenant shall have no right or claim to any part
of any award made to or received by Landlord for any taking and no right or
claim for any alleged value of the unexpired portion of this Lease; provided,
however, that Tenant shall not be prevented from making a claim against the
condemning party (but not against Landlord) for any moving expenses, loss of
profits, or taking of Tenant's personal property (other than its leasehold
interest) to which Tenant may be entitled.
32. RIGHT TO RELOCATE. At any time prior to Tenant's delivery of a
building permit relative to the construction of the Tenant Improvements to
Landlord, Landlord may, at its option, substitute for the Premises other space
(hereafter called "Substitute Premises") within the Building or within another
building located in the business park as may be generally shown on Exhibit A-2
before the commencement date or at any time during the Term or any extension
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of this Lease. Insofar as reasonably possible and to the extent available, the
Substitute Premises shall have square footage comparable to that of the
Premises. Landlord shall give Tenant at least thirty (30) days written notice of
its intention to relocate Tenant to the Substitute Premises. This notice will be
accompanied by a floor plan of the Substitute Premises. After such notice,
Tenant shall have ten (10) days within which to agree with Landlord on the
proposed new space and unless such agreement is reached within such period of
time, this Lease shall terminate at the end of the thirty (30) day period
following the aforesaid notice. Landlord agrees to construct or alter, at its
own expense, the Substitute Premises as expeditiously as possible so that they
are in substantially the same condition that the Premises were in immediately
prior to the relocation. Landlord shall have the right to reuse the fixtures,
improvements, and alterations used in the Premises. Tenant agrees to occupy the
Substitute Premises as soon as Landlord's work is substantially completed.
Landlord shall credit Tenant with one month's rent then due as a moving
allowance. Except as provided herein, Tenant agrees that all of the obligations
of this Lease, including the payment of rent, will continue despite Tenant's
relocation of the Substitute Premises. Upon substantial completion of the
Substitute Premises, this Lease will apply to the Substitute Premises as if the
Substitute Premises had been the space originally described in this Lease.
Landlord shall use all reasonable efforts to minimize any period when the
Premises shall be closed to the public as a result of relocation. Tenant's rent
shall abate from the date the Premises are closed until the date the Substitute
Premises are open for business. Tenant agrees to use all reasonable efforts to
open for business in the Substitute Premises as quickly as is reasonably
possible under the circumstances. Except as provided above, Landlord shall not
be liable or responsible in any way for damages or injuries suffered by Tenant
pursuant to the relocation in accordance with this provision including, but not
limited to, loss of goodwill, business, or profits. Within ten (10) days of
Tenant's occupancy of the Substitute Premises, Tenant agrees to execute an
endorsement to this Lease confirming essential terms concerning the Substitute
Premises, including, without limitation, rental; a Premises description;
Tenant's proportionate share, etc.
33. SECURITY DEPOSIT. Subject to the terms of the Lease Addendum, on or
before that date which is thirty (30) days prior to the date of expiry of the
Letter of Credit (as defined in the Lease Addendum), Tenant shall deposit an
amount equal to the then-current amount of one (1) month's Minimum Rent with
Landlord which sum Landlord shall retain as security for the performance by
Tenant of each of its obligations hereunder. If Tenant fails at any time to
perform its obligations, Landlord may at its option apply said deposit, or so
much thereof as is required, to cure Tenant's default. If prior to the
expiration or termination of this Lease Landlord depletes said deposit in whole
or in part, Tenant shall immediately restore the amount so used by Landlord.
This deposit shall not bear interest, and unless Landlord uses the same to cure
a default of Tenant, or to restore the Premises to the condition that Tenant is
required to leave them at the conclusion of the Term, Landlord shall within
thirty (30) days of the termination or expiration of the Lease refund to Tenant
so much of the deposit as remains.
34. NOTICES. Any notices which Landlord or Tenant is required or
desires to give the other shall be deemed sufficiently given or rendered if, in
writing, is delivered personally or sent by regular mail, or if an event of
default is claimed, then either delivered personally or
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sent by certified or registered mail, postage prepaid, return receipt requested
to the address listed below. Any notice given herein shall be deemed delivered
when the return receipt therefore is signed, or refusal to accept the mailing by
the addressee is noted thereon by the postal authorities.
LANDLORD: Petula Associates, Ltd.
Commercial Real Estate Equities
711 High Street
Des Moines, IA 50392
Attention: Bruce K. Bruene
With a copy to: TriProperties
Yorkshire Property Manager
1009 Slater Road, Suite 110
Durham, NC 27703
Attention: David M. Adams
TENANT: Embrex, Inc.
1035 Swabia Court
Durham, NC 27703
Attention: Chief Financial Officer
35. HAZARDOUS MATERIALS; ENVIRONMENTAL COMPLIANCE.
A. Tenant's Responsibility. Tenant shall not (either with or without
negligence) cause or permit the escape, disposal or release of any amount of
biologically active or other hazardous substances, or materials in excess of any
applicable legal standards (collectively hereinafter referred to as "Hazardous
Substances"). Tenant shall not allow the storage or use of said Hazardous
Substances in any manner prohibited by law or otherwise inconsistent with
commercially reasonable standards for the storage and use of such Hazardous
Substances comparable to other first class flex-space buildings used for or
containing laboratories using Hazardous Substances, nor allow to be brought into
the Building or the business park as generally shown in Exhibit A-3 any such
Hazardous Substances except to use in the ordinary course of Tenant's business.
Prior to its occupancy of the Premises, Tenant shall provide Landlord with a
list of any Hazardous Substances which it plans to introduce to the Premises and
thereafter, on each anniversary of the Commencement Date, Tenant shall update
said list and identify which Hazardous Substances have been used within the
Premises and which Hazardous Substances may be used within the Premises in the
future. In addition, prior to Tenant's occupancy of the Premises, Tenant agrees
to submit a plan detailing the method of disposal, storage and treatment of such
Hazardous Substances to Landlord for Landlord's approval. Tenant covenants and
agrees that the Premises will, at all times during its use or occupancy thereof,
be kept and maintained so as to comply with all now existing or hereafter
enacted or issued statutes, laws, rules, ordinances, orders, permits, and
regulations of all state, federal,
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local, and other governmental and regulatory authorities, agencies, and bodies
applicable to the Premises, pertaining to environmental matters, or regulating,
prohibiting or otherwise having to do with asbestos and all other toxic,
radioactive, or hazardous wastes or materials including, but not limited to, the
Federal Clean Air Act, the Federal Water Pollution Control Act, and the
Comprehensive Environmental Response, Compensation, and Liability Act of 1980,
as from time to time amended (all hereinbefore and hereinafter collectively
called the "Environmental Laws" or "Laws"). Landlord warrants and represents to
Tenant that the construction of the shell of the Building by Landlord and its
contractor shall comply in all material respects with applicable laws.
Notwithstanding the foregoing, any noncompliance with such applicable laws shall
not have a materially adverse impact on Tenant's use or occupancy of the
Premises or the health or safety of Tenant, its employees or invitees.
B. Tenant's Liability. In addition to the indemnifications contained in
Section 15 hereof, Tenant shall hold Landlord, its agents, representatives,
successors or assigns, free, harmless, and indemnified from any penalty, fine,
claim, demand, liability, cost, or charge whatsoever which Landlord or others as
aforesaid shall incur, or would otherwise incur, by reason of Tenant's failure
to comply with this Section 35; including, but not limited to: (i) the cost of
bringing the Premises into compliance with all Laws; (ii) the reasonable cost of
all appropriate tests and examinations of the Premises to confirm that the
Premises have been brought into compliance with all Laws; and (iii) the
reasonable fees and expenses of Landlord's attorneys, engineers, and consultants
incurred by Landlord in enforcing and confirming compliance with Section 35.
C. Property. For the purposes of this Section 35, the Premises shall
include the Premises identified in Section 1 above, together with the real
estate covered within the Site Plan, Exhibit A-3, and all structures and
improvements thereon; all personal property used by Tenant in connection with
the Premises (including that owned by Tenant); and the soil, ground water, and
surface water of the Premises, as this term is defined in this Subsection 35(C).
D. Inspections by Landlord. Landlord and its engineers, technicians,
and consultants (collectively the "Auditors") may, from time to time as Landlord
deems appropriate during Tenant's business hours and upon prior reasonable
notice (except to the extent emergency circumstances render such notice
impractical), conduct periodic tests and examinations ("Audits") of the Premises
to confirm and monitor Tenant's compliance with this Section 35 and shall
observe such reasonable requirements as Tenant may impose (e.g. wearing sterile
clothing and booties for entry into "clean rooms") to protect Tenant's work in
process and proprietary information. Such Audits shall be conducted in such
manner as to minimize the interference with Tenant's permitted activities on the
Premises; however, in all cases, the Audits shall be of such nature and scope as
shall be reasonably required by then existing technology to confirm Tenant's
compliance with this Section 35. Tenant shall fully cooperate with Landlord and
its Auditors in the conduct of such Audits. The cost of such Audits shall be
paid by Landlord unless an Audit shall disclose a material failure of Tenant to
comply with this Section 35, in which case the cost of such Audit, and the cost
of all subsequent Audits made during the Term and within thirty (30) days
thereafter (not to exceed two (2) such Audits per calendar year) shall
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be paid for by Tenant within thirty (30) days after receipt of written demand
therefor, together with such supporting documentation as Tenant may reasonably
request.
E. Landlord's Liability. Provided, however, the foregoing covenants and
undertakings of Tenant contained in this Section 35 shall not apply to any
condition or matter constituting a violation of any Law: (i) which existed prior
to the commencement of Tenant's use or occupancy of the Premises and was not
caused, in whole or in part, by Tenant or Tenant's agents, employees, officers,
partners, contractors, representatives or invitees; or (ii) to the extent such
violation is solely caused by the acts or neglects of Landlord, its employees,
agents or representatives.
F. Tenant's Liability After Termination of Lease. The covenants
contained in this Section 35 shall survive the expiration or termination of this
Lease, and shall continue for so long as Landlord and its successors and assigns
may be subject to any expense, liability, charge, penalty, or obligation against
which Tenant has agreed to indemnify Landlord under this Section 35.
36. BROKER'S COMMISSIONS. Tenant represents and warrants that it has
not had dealings with any real estate broker, finder or other person, with
respect to this Lease in any manner, except Corporate Realty Advisors, the
address of which is 4000 WestChase Boulevard, Suite 390, Raleigh, North Carolina
27607 and Tri-Properties, Inc. whose address is 1009 Slater Road, Suite 110,
Durham, North Carolina 27703. Landlord shall pay any commissions or fees that
are payable to the above-named broker or finder with respect to this Lease.
Tenant shall indemnify and hold Landlord harmless from any and all damages
resulting from any claims that may be asserted against Landlord by any other
broker, finder or other person, with whom Tenant has or purportedly has dealt.
The provisions of this Section 36 shall survive the termination or expiration of
this Lease.
37. MISCELLANEOUS. Headings of sections are for convenience only and
shall not be considered in construing the meaning of the contents of such
sections. The invalidity of any portion of this Lease shall not have any effect
on the balance hereof. Should either party institute any legal proceedings
against the other for breach of any provision herein contained, and prevail in
such action, the other party shall in addition be liable for the costs and
expenses of the party initiating the action, including its reasonable attorney's
fees. This Lease shall be binding upon the respective parties hereto and upon
their heirs, executors, successors and assigns. This Lease supersedes and
cancels all prior negotiations between the parties, and changes shall be in
writing signed by the party affected by such change. Landlord reserves the right
to make and change from time to time rules it deems appropriate for the common
use and benefit of all tenants, with which rules Tenant shall comply, provided
such rules are reasonable and nondiscriminatory. Any agreed to measurement of
space shall be done in accordance with Building Owners and Managers Association
("BOMA") standards used to determine "rentable" square feet for warehouse/flex
space. Landlord may sell the Premises subject to the terms of this Lease without
affecting the obligations of Tenant hereunder. This Lease may not be recorded
without Landlord's prior written consent; provided, however, upon the request of
either
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party, the other agrees to execute and deliver a statutory form of memorandum of
lease and the party requesting such memorandum shall prepare the memorandum and
be responsible for any applicable recording fees with respect to same. The
singular shall include the plural, and the masculine, feminine or neuter
includes the other. Each of Landlord and Tenant respectively represents to the
other that each has the lawful authority to enter into this Lease and by signing
it in their name as set forth below, to be legally bound in accordance with its
terms and conditions. No failure by Landlord or Tenant to insist upon the strict
performance or observance of any term or condition of this Lease, or to seek
redress or to exercise any right or remedy after any such failure or breach
hereof, shall constitute a waiver of any such term, condition, obligation, right
or remedy, or any such failure or breach then or thereafter occurring. No term,
condition or obligation of this Lease to be performed or observed by Tenant or
Landlord shall be waived, altered or modified except by a writing executed by
Landlord or Tenant, as the case may be. No waiver of any failure, breach or
default hereof shall affect or alter this Lease, but each and every term,
condition and obligation of this Lease shall continue in full force and effect
with respect to any other failure, breach or default. This Lease, and the rights
and obligations of each of Landlord and Tenant hereunder shall be governed by
and construed in accordance with the laws of the State of North Carolina.
Landlord warrants and represents to Tenant that Landlord is seized of fee
simple, marketable title to the land on which the Building and the Premises will
stand.
38. SPECIAL CONDITIONS, EXHIBITS AND ADDENDA. The following special
conditions, if any, shall apply, and where in conflict with earlier provisions
in this Lease shall control. If any Lease Exhibits or Addenda are noted below,
such exhibits and addenda are incorporated herein and made a part of this Lease.
If there are no special conditions, exhibits or addenda, the word NONE shall be
written in the blank below.
Lease Addendum: Letter of Credit
Exhibit A-1: Floor Plan
Exhibit A-2: Legal Description of Real Property
Exhibit A-3: Building Site Plan
Exhibit A-4: Business Park Site Plan
Exhibit B: Space Plan - Tenant Improvements,
Plans and Specifications
Exhibit B-1: Landlord's Work
Exhibit C: Rules and Regulations
Exhibit D: Contract Standards for HVAC, Inspection
Maintenance and Repair
Exhibit E: [Intentionally Deleted]
Exhibit F: Permitted Signage
Exhibit G: Extension of Term
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IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease by
hand and under seal affixed hereto in duplicate originals, all as of the day and
year first above written.
LANDLORD:
Petula Associates, Ltd.,
an Iowa corporation
ATTEST:
/s/ Timothy E. Minton By: /s/ Ronald B. Franklin
- --------------------- ----------------------
Vice President & Secretary Vice President
By: /s/ Scott D. Harris
[CORPORATE SEAL] -----------------------
Vice President
TENANT:
Embrex, Inc.,
a North Carolina corporation
ATTEST:
/s/ Don T. Seaquist By: /s/ Randall L. Marcuson
- ------------------- -----------------------
Corporate Secretary CEO & President
[CORPORATE SEAL]
27
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STATE OF IOWA
COUNTY OF POLK
I, Susan Wieland, a Notary Public in and for said County and State, do
certify that Timothy E. Minton personally came before me this day and
acknowledged that he is Vice President & Secretary of Petula Associates, Ltd.,
an Iowa corporation, and that by authority duly given and as the act of the
corporation, the foregoing instrument was signed in its name by its Vice
President, sealed with its corporate seal, and attested by him as its Vice
President and Secretary.
WITNESS my hand and notarial seal this 13th day of October, 1997.
/s/ Susan Wieland
-----------------
Notary Public
My Commission Expires:
July 28, 2000
(NOTARIAL SEAL OR STAMP)
STATE OF NORTH CAROLINA
COUNTY OF DURHAM
I, Colleen S. Loree, a Notary Public in and for said County and State,
do certify that Don T. Seaquist and Randall L. Marcuson personally came before
me this day and acknowledged that he/she is __________ Secretary of Embrex,
Inc., a North Carolina corporation, and that by authority duly given and as the
act of the corporation, the foregoing instrument was signed in its name by its
_________ President, sealed with its corporate seal, and attested by him/herself
as its _____ Secretary.
WITNESS my hand and notarial seal this 5th day of September, 1997.
/s/ Colleen S. Loree
--------------------
Notary Public
My Commission Expires:
April 15, 2001
(NOTARIAL SEAL OR STAMP)
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EXHIBIT A-1
FLOOR PLAN
[map of floor plan appears here]
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EXHIBIT A-2
LEGAL DESCRIPTION OF REAL PROPERTY
Being all of Lot S20 of Imperial Center located in Triangle Township, Durham
County, North Carolina, containing 15.367 acres, as shown on that plat entitled
"Lot S20 - Imperial Center" dated May 4, 1988, prepared by Kenneth Close, Inc.
And recorded in Plat Book, Page 166, Durham County Registry.
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EXHIBIT A-3
BUILDING SITE PLAN
[map of building site plan appears here]
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EXHIBIT A-4
BUSINESS PARK SITE PLAN
[map of business park plan appears here]
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EXHIBIT B
SPACE PLANS
Final plans shall be attached.
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EXHIBIT B-1
LANDLORD'S WORK
A. Structural
1. Steel framing, bar joist and metal deck
2. Exterior load bearing walls (masonry or stud) and demising wall 3.
Metal stairs
B. Exterior Non-Structural
1. Windows, frames, glass and blinds
2. Roofing - membrane, drains and ballast
3. Utilities stubbed to the Building - electrical, water, sewer
C. Interior Non-Structural
1. Fire protection - sprinkler systems, riser
2. Telephone/Telecommunications, conduit to the equipment room only
3. Utilities - water, conduit provided; new tap and line by Tenant
4. Main sewer line and cleanouts
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EXHIBIT C
RULES AND REGULATIONS
The following rules and regulations have been adopted by Landlord for
the care, protection and benefit of the Building and for the general comfort and
welfare of the tenants. These Rules and Regulations shall remain in full force
and effect until Tenant is notified in writing by Landlord of any changes and
amendments. To the extent any of the Rules and Regulations set forth herein are
inconsistent with the provisions of the Lease, the terms and conditions of the
Lease shall prevail.
1. The sidewalks, entrances, halls, passages, elevators, and stairways
of the common areas shall not be obstructed or used by Tenant for any other
purpose than for ingress and egress. All loading and unloading of goods,
furniture, fixtures, equipment and supplies shall be done only in areas and
through entrances designated for such purposes.
2. Toilet rooms and other plumbing facilities shall not be used for any
purpose other than those for which they are constructed and no foreign substance
of any kind shall be disposed of therein. All repairs required due to breakage,
stoppage or damage resulting from a violation of this provision shall be at
Tenant's sole expense.
3. Tenant shall not do anything in the Premises, or bring or keep
anything therein, which shall in any way conflict with any law, ordinance, rule
or regulation affecting the occupancy and use of the Premises, which are or may
hereafter be enacted or promulgated by any public authority or by the Board of
Fire Underwriters.
4. Tenant shall at all times maintain suitable fire extinguishers on
the Premises in compliance with any applicable law or ordinance for use in case
of local fires, including electrical fires.
5. Tenant shall keep the Premises heated at a temperature sufficiently
high to prevent freezing of water in pipes and fixtures.
6. Except for the infrequent overnight parking of unloaded, mid-size
delivery vans and trucks required in the ordinary course of Tenant's business
(such overnight parking not to exceed twelve (12) nights per year), trucks shall
not be allowed to remain overnight in the common area whether loaded, unloaded
or otherwise, without Landlord's prior written consent.
7. All garbage and refuse shall be placed for collection in containers
specified by Landlord outside the Premises or Building. Tenant shall pay the
cost of removal of any of Tenant's refuse or rubbish.
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8. Tenant shall, at Tenant's expense, provide for regular pest
extermination to the Premises and shall provide Landlord with a copy of such
extermination contract.
9. In order to insure proper use and care of the Premises, neither
Tenant nor any agent or employee of Tenant shall:
(a) Allow any furniture, packages or articles of any kind
to remain in corridors outside the Premises except
for short periods incidental to moving same in or out
of Building or to cleaning or rearranging occupancy
of leased space.
(b) Mark or defile elevators, toilet rooms, walls,
windows doors or any part of the Building.
(c) Except for "seeing-eye" dogs, keep animals or birds
on the Premises.
(d) Deposit waste paper, dirt or other substances in
corridors, stairways, elevators, toilets, restrooms,
or any other part of the Building not leased by
Tenant.
(e) Except for pictures, wall hangings and other
customary office decorations and except for items
which would not cause permanent damage to the
structural elements of the Building, fasten any
article, drill holes, drive nails or screws into
walls, floors, doors, or partitions, or otherwise mar
or deface them by paint, papers or otherwise, without
Landlord's prior written consent.
(f) Operate any machinery within the Building without
Landlord's prior written consent except for: (i)
customary office equipment, such as computers,
dictaphones, calculators, electric typewriters, and
the like and (ii) special equipment or machinery used
in the ordinary course of the operations of Tenant's
business, provided such special equipment or
machinery shall not cause permanent damage to the
structural elements of the Premises or the Building
nor interfere with the other tenants of the Building.
(g) Leave Premises unoccupied without: (i) locking all
exterior doors to the Premises, or (ii) extinguishing
lights and turning off all water outlets except as
required in the ordinary course of Tenant's
operations in the Premises.
(h) Burn any trash, refuse, debris or garbage of any kind
in or about the Premises or Building.
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(i) Attach awnings, air-conditioning units or other
fixtures to the outside walls or window sills, or
otherwise affix such so as to project from the
Premises or Building without Landlord's prior written
consent.
(j) Install additional locks or bolts of any kind on any
doors or windows of the Premises without Landlord's
prior written consent. On the termination of Tenant's
tenancy, Tenant shall deliver to Landlord all keys to
the Premises, either furnished to or otherwise
procured by Tenant.
(k) Install or operate any engine, boiler, machinery, or
stove, or use oil or any burning fluid (other than
gas) for heating, warming or lighting, or use any
lighting other than incandescent or fluorescent
electric lights, on the Premises without Landlord's
prior written consent. All stoves permitted in the
Premises shall be placed and installed according to
city ordinances. No articles deemed extra hazardous
on account of fire, and no explosives, shall be
brought into the Premises.
(l) Use loudspeakers, televisions, radios or other
devices in such a manner as to be heard outside the
Premises, or make, or permit to be made, any
unseeming or disturbing noises, nuisance or other
activity objectionable to other tenants.
(m) Use the Premises for the purpose of lodging or
sleeping rooms, or for any immoral or illegal
purposes.
(n) Install any aerial, antenna, satellite dish or other
equipment or structure on the roof or exterior walls
of the Premises, or on the grounds without, in each
instance, the prior written consent of Landlord. Any
installation so made without such prior written
consent shall be subject to removal without notice at
any time, at Tenant's expense.
10. Landlord shall have the right to prohibit any advertising by Tenant
which, in its opinion, shall damage the reputation of the Building or its
desirability, and upon written notice from Landlord, Tenant shall discontinue
any such advertising.
11. Landlord reserves the right to designate the time when and method
whereby freight, furniture, safes, goods, merchandise and other articles may be
brought into, moved or taken from the Building and the Premises leased by
Tenant, provided such designation shall not unreasonably interfere with the
normal conduct of Tenant's business in the Premises. Workmen employed by Tenants
for repairs, painting, material moving and other similar work that may be done
on the Premises must be properly insured and must perform the work in a manner
consistent with Building standards; provided, however, any workmen employed by
Tenant to work on the structure of the Building or the Building systems
(including without limitation HVAC) must be approved in writing by Landlord.
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12. Tenant will reimburse Landlord for the cost of repairing any damage
to the Premises or other parts of the Building caused by Tenant or the agents or
employees of Tenant, including replacing any glass broken.
13. Tenant shall not install in the Premises any metal safes or permit
any concentration of excessive weight in any portion thereof without first
having obtained the written permission of Landlord.
14. Landlord reserves the right at all times to exclude newsboys,
loiterers, vendors, solicitors and peddlers, from the Building or common area
and to require registration, satisfactory identification and credentials from
all persons seeking access to any part of the Building or common area outside of
ordinary business hours. Ordinary business hours shall mean Monday through
Friday, 8:00 a.m. to 6:00 p.m., except on legal holidays. Landlord shall
exercise its best judgment in the execution of such control but shall not be
held liable for the granting or refusal of such access. Landlord reserves the
right to exclude the general public from the Building after ordinary business
hours and on weekends and holidays. Landlord shall not unreasonably deny
Tenant's employees, contractors or invitees access to the Building or common
areas outside ordinary business hours.
15. The attaching of wires to the outside of the Building is absolutely
prohibited, and no wires shall be run or installed in any part of the Building
without Landlord's permission and direction.
16. Requests for services of janitors or other Building employees must
be made to Landlord. Agents or employees of Landlord shall not perform any work
or do anything outside of their regular duties unless under special instructions
from Landlord.
17. Signs or any other Tenant identification shall be in accordance
with building standard signage. No signs of any nature shall be placed in the
windows so as to be visible from the exterior of the Building. All signs not
approved in writing by Landlord shall be subject to removal without notice.
18. Except as otherwise set forth in the Lease, any improvements or
alterations to the Premises by Tenant shall be approved in advance by Landlord
and all such work, if approved, shall be done at Tenant's sole expense under the
supervision of Landlord.
19. Tenant shall have a non-exclusive right to use of all driveways and
parking areas designated for Tenant and Tenant's employees, if deemed necessary
by Landlord.
20. If additional drapes or window decorations are desired by Tenant,
they shall be approved by Landlord and installed at Tenant's expense under the
direction of Landlord. Lining on drapes visible from the exterior shall be of a
color approved by Landlord.
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21. The possession of weapons, including concealed handguns, is
strictly forbidden on the Premises and Building.
22. Tenant shall not use nor permit the use of the common area by its
employees, agents or invitees for the purpose of displaying or selling personal
property, automobiles, equipment, furniture, fixtures, merchandise or any other
item whether owned by Tenant or its employees, agents or invitees.
23. Landlord reserves the right to rescind, amend, alter or waive any
of the foregoing rules and regulations at any time in a reasonable and
nondiscriminatory manner, or make such other reasonable rules and regulations as
in its sole judgement it deems necessary, desirable or proper for its best
interest and for the best interests of the tenants, or as may from time to time
be necessary for the safety, care and cleanliness of the Premises, the Building
or adjacent areas, and for the preservation of good order therein. Any such
recision, amendment, alteration or waiver of any rules or regulations or
creation of any such new rules or regulations shall be effective five (5) days
after all tenants have been given written notice thereof. Landlord shall not be
responsible to any tenant for the non-observance or violation by any other
tenant of any of these rules and regulations at any time.
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EXHIBIT D
CONTRACT STANDARDS FOR HVAC
INSPECTION, MAINTENANCE AND REPAIR
Pursuant to Section 9 of the Lease, Tenant is obligated to enter into
and maintain a maintenance contract for heating and air conditioning systems and
equipment at the Premises, for the Term, and any renewal or extension hereof.
The following sets forth minimum standards in connection with the services
contract so as to accomplish a preventative maintenance inspection and service
program for the HVAC systems and equipment at the Premises. At minimum, contract
services shall include four (4) scheduled inspections and routine preventative
maintenance service calls per year. The contract shall further provide that
emergency call service shall be available on a twenty-four (24) hour a day
on-call basis. The services contract shall include, without limitation, the
following types of services:
(1) Regular preventative maintenance to heating, ventilation and air
conditioning equipment as follows:
A. Compressors
1. Check suction and head pressures
2. Electrical amperes
3. All electrical connections
B. Condenser Coil
1. Clean coil (if needed) and check fan
condition
2. Check oil level and condition
3. Check for refrigerant leaks
C. Air Handling Side
1. Volts and amperes of motor
2. Electrical connections
3. Adjust belts and pulleys
4. Check and lube bearings and motors
5. Clean coil (if needed) and check fan
condition
6. Change filters
7. Check for condensate leaks
D. Boiler (if applicable)
1. Check fire
40
<PAGE>
2. Pressures
3. Oil and check pumps
4. Burners
5. Water temperature
6. Safety controls
E. Check out heating side of units as well as cooling
side.
F. Check to make sure thermostats are operating
properly.
(2) Emergency call service as needed (beyond routine preventative
service) due to mechanical failure of HVAC equipment.
41
<PAGE>
EXHIBIT E
CONSUMER PRICE INDEX
[Intentionally Deleted]
42
<PAGE>
EXHIBIT F
PERMITTED SIGNAGE
[drawing of proposed signage appears here]
43
<PAGE>
EXHIBIT G
EXTENSION OF TERM
Provided no Event of Default has occurred and is continuing hereunder,
Tenant is hereby granted the option to extend the Term once for an additional
period of five (5) years (the "Extension Term") commencing upon the expiration
of the initial Term on the same terms and conditions (except as provided in this
Section) as contained in the other provisions of this Lease. This option shall
be exercised only by delivery of written notice to Landlord no later than nine
(9) months prior to the scheduled expiration date of the initial Term. The
Minimum Rent for the Premises during the five year extension term shall be as
follows:
Lease Year Rate per Monthly Rent Annual Rent
Rentable s.f.
- --------------------------------------------------------------------------
1 13.00 13,827.67 165,932.00
2 13.52 14,380.77 172,569.28
3 14.06 14,955.15 179,461.84
4 14.62 15,550.81 186,609.68
5 15.21 16,178.37 194,140.44
Tenant agrees that it will continue to occupy the Premises during the Extension
Term in its "as is" condition without any further improvements thereto or
additional upfitting allowance. Tenant's occupancy of the Premises during the
Extension Term shall be subject to all other terms and conditions of this Lease,
expressly including without limitation, Tenant's obligation to pay Tenant's
proportionate share of insurance costs, taxes and operating expenses.
44
<PAGE>
LEASE ADDENDUM
LETTER OF CREDIT: Tenant shall deliver to Landlord within five (5) days
after this Lease has been fully executed, an irrevocable Letter of Credit (the
"Letter of Credit") drawn on a national bank with an office in Wake or Durham
Counties of North Carolina (at which office Landlord shall be able to draw on
such letter) in the principal amount of:
Lease Years: 1 - 4: $275,000.00
5 - 7: $175,000.00
The Letter of Credit shall provide that if Tenant defaults under the
terms of the Lease and does not cure such default within the applicable cure
periods, if any, that Landlord may draw on the same. This Letter of Credit shall
be for a period of seven (7) years, or alternatively shall be for seven (7)
successive periods of one (1) year each with a provision that if a renewal
Letter of Credit is not delivered to Landlord within sixty (60) days of the date
of expiry on the Letter of Credit, Landlord may draw it down. After seven (7)
years, Landlord shall not require any further Letter of Credit from Tenant.
Landlord agrees to contribute up to $2,750.00 per year for Lease Years
one (1) through four (4) and $1,750.00 per year for Lease Years five (5) through
seven (7) to be applied toward Tenant's cost of the Letter of Credit. Landlord
shall reimburse to Tenant Landlord's share of such cost of the Letter of Credit.
After the end of the seventh Lease Year of the Term, Tenant shall not
be required to deposit any Letter of Credit or sum with Landlord to secure its
obligations under this Lease provided Tenant provides to Landlord reasonably
acceptable evidence of Tenant's creditworthiness. If, in the exercise of its
reasonable judgment, Landlord determines that a security deposit is necessary,
Tenant shall deposit with Landlord a sum equal to the then-current amount of one
month's rent thirty (30) days prior to the date of expiry of the Letter of
Credit. Landlord shall deposit this amount in a non-interest bearing account and
shall not commingle this deposit with other funds of Landlord or other tenant
deposits. Within thirty days after expiration of the Term, Landlord shall return
the security deposit to Tenant less the amount of any charges or damages Tenant
is obligated to pay Landlord hereunder or for which Tenant is liable hereunder.
45
<PAGE>
EXHIBIT 10.34*
INOVOJECT(R) EGG INJECTION SYSTEM
LEASE, LIMITED LICENSE, SUPPLY
AND SERVICE AGREEMENT
This Agreement is made as of the 1st day of September, 1994, between
EMBREX, INC., a North Carolina corporation ("EMBREX"), and Tyson Foods, Inc., a
Delaware corporation ("Lessee") upon the following terms, and supersedes the
agreement of May 4, 1993.
1. LEASE AND LIMITED LICENSE: EMBREX leases to Lessee ("the Lease")
INOVOJECT(R) systems and grants Lessee a limited sublicense to practice U.S.
Patent 4,458,630, "Disease Control in Avian Species by Embryonal Vaccination"
(the "License") for use at the hatcheries listed in Schedule A and Schedule B
(the "Hatcheries") subject to the EMBREX Standard Terms and Conditions of Lease
set forth in Attachment A hereto; provided, however, that, in the event of any
inconsistencies between the Standard Terms and Conditions of Lease and express
terms of this Agreement, the terms of this Agreement shall control. The term of
this Agreement shall be for the period commencing September 1, 1994, and
continuing for each of the Hatcheries listed on Schedule A until August 31,
1998, and for each of the Hatcheries listed on Schedule B until December 31,
1998.
2. INSTALLATION: INOVOJECT(R) systems have been installed in the Hatcheries
listed in Schedule A, and the parties agree that they will use their best
efforts to install INOVOJECT(R) systems in the Hatcheries listed in Schedule B
on or before the Installation Dates indicated.
3. COMPENSATION: *
* Selected portions have been deleted as confidential pursuant to Rule 24b-2.
Complete copies of the entire exhibit have been filed separately with the
Commission and marked "CONFIDENTIAL TREATMENT."
<PAGE>
4. SUPPLIES: EMBREX shall supply Lessee with standard System disposables
(i.e., needles, punches and tubing) at no charge (collectively, the "Supplies").
5. SERVICE: EMBREX will provide at no cost to Lessee initial training for a
reasonable number of Lessee personnel in the proper use and routine maintenance
of INOVOJECT(R), all non-routine service and reasonable modifications of
INOVOJECT(R) to accommodate Lessee's specific Hatchery needs. Any other service
shall be charged to Lessee at standard EMBREX rates.
6. PAYMENT TERMS: Within ten (10) days following the end of each calendar
month, Lessee shall notify EMBREX of the number of eggs which have been injected
during such prior month and shall remit the appropriate payment for the Lease,
License and Supplies used during such month. Lessee shall remit payment for
other supplies and services provided by EMBREX within thirty (30) days of
receipt of invoice.
* Selected portions have been deleted as confidential pursuant to Rule 24b-2.
Complete copies of the entire exhibit have been filed separately with the
Commission and marked "CONFIDENTIAL TREATMENT."
<PAGE>
7. TERMINATION: *
8. CONFIDENTIALITY: Each party agrees that for the term of this Agreement
they shall use their best efforts to prevent disclosure of the financial terms
of this Agreement to any third party without the prior written consent of the
other. This commitment shall not affect, however, the right of either party to
announce or disclose the existence of this Agreement.
9. DESIGNATED CONTACT PERSON: Lessee agrees that during the term of this
Agreement it shall designate to EMBREX one individual at each of the Hatcheries
where an INOVOJECT(R) system has been placed responsible for -coordinating
operation, training and minor maintenance. Until further notice in writing to
EMBREX, the individual designated at each of the Hatcheries shall be as set
forth in Schedule A and Schedule B.
EMBREX, INC. (Lessor) TYSON FOODS, INC. (Lessee)
By: /s/ Randall L. Marcuson By: /s/ David S. Purtle
--------------------------- -------------------------------
Randall L. Marcuson David S. Purtle
President Senior Vice-president
* Selected portions have been deleted as confidential pursuant to Rule 24b-2.
Complete copies of the entire exhibit have been filed separately with the
Commission and marked "CONFIDENTIAL TREATMENT."
<PAGE>
SCHEDULE A
*
Acknowledged and Agreed:
TYSON FOODS, INC. (Lessee) EMBREX, INC. (Lessor)
By: /s/ David S. Purtle By: /s/ Kenneth P. West
------------------------------ -------------------------------
David S. Purtle Kenneth P. West
Sr. Vice President Vice President
Date: September 1, 1994 Date: August 31, 1994
* Selected portions have been deleted as confidential pursuant to Rule 24b-2.
Complete copies of the entire exhibit have been filed separately with the
Commission and marked "CONFIDENTIAL TREATMENT."
<PAGE>
SCHEDULE B
*
Acknowledged and Agreed:
TYSON FOODS, INC. (Lessee) EMBREX, INC. (Lessor)
By: /s/ David S. Purple By: /s/ Randall L. Marcuson
----------------------------- --------------------------------
David S. Purtle Randall Marcuson
Sr. Vice President President
Date: 9/1/94 Date: 9/1/94
* Selected portions have been deleted as confidential pursuant to Rule 24b-2.
Complete copies of the entire exhibit have been filed separately with the
Commission and marked "CONFIDENTIAL TREATMENT."
EXHIBIT 10.35*
26 March 1997
Gene Lovette
Tyson Foods, Inc.
P.O. Box 88
1600 River Road
Wilkesboro, NC 28697
Dear Mr. Lovette;
As discussed, EMBREX INC. and TYSON FOODS, INC. wish to make certain amendments
to their Lease, Limited License, Supply and Service Agreement dated September
1994 (the "Agreement"). This Amendment is intended to document the amendments,
which are as follows
1. The term of the Agreement shall be extended to 31 December 2004.
2. The pricing will be: *
3. *
* Selected portions have been deleted as confidential pursuant to Rule 24b-2.
Complete copies of the entire exhibit have been filed separately with the
Commission and marked "CONFIDENTIAL TREATMENT."
<PAGE>
4. [This section left blank in original agreement.]
5. If either party wishes to discontinue the Agreement, a written twelve month
notice must be given.
6. EMBREX has the right of last refusal to meet any offer being considered by
Tyson Foods for chick vaccination (any method).
7. Tyson will not release Embrex pricing to its hatcheries until the first of
each year.
8. *
9. All hatcheries will operate under the same pricing. Any hatchery that is
added or converted will be priced according to the date and year of
installation.
10. Tyson will maintain the provisions of the Agreement in confidence except as
(and only to the extent) otherwise required by applicable law, and even
then only with prior notice to Embrex.
11. Except as so amended, the Agreement shall remain unchanged and in full
force and effect.
Please indicate Tyson Food's agreement to these amendments by signing below and
returning one signed copy of this letter to Embrex.
EMBREX, INC. (Lessor) TYSON FOODS, INC. (Lessee)
By: /s/ Brian V. Cosgriff By: /s/ David S. Purtle
--------------------------- ----------------------------------------
Brian V. Cosgriff Name: David S. Purtle
Vice-president Title: Executive Vice President
Operations, Warehousing & Transportation
* Selected portions have been deleted as confidential pursuant to Rule 24b-2.
Complete copies of the entire exhibit have been filed separately with the
Commission and marked "CONFIDENTIAL TREATMENT."
EXHIBIT 21
EMBREX, INC.
SUBSIDIARIES
Jurisdiction of
Name Organization
- ---- ---------------
Embrex Europe Limited United Kingdom
Embrex Sales, Inc. North Carolina
50
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion in the Annual Report (Form 10-K) of Embrex, Inc. of
our report dated February 20, 1998 with respect to the consolidated financial
statements of Embrex, Inc. and subsidiaries and of our report dated March 19,
1998 with respect to the financial statements of Embrex, Inc. Employee Stock
Purchase Plan.
We also consent to the incorporation by reference in the Registration Statement
on Form S-3 (No. 333-18231) and the Registration Statements on Form S-8 (Nos.
33-51582, 33-63318, 333-04109) of our report dated February 20, 1998 with
respect to the consolidated financial statements of Embrex, Inc. and
subsidiaries included in the Annual Report (Form 10-K) for the year ended
December 31, 1997.
We also consent to the incorporation by reference in the Registration Statement
on Form S-8 (No. 33-63318) of our report dated March 19, 1998 with respect to
the consolidated financial statements of Embrex, Inc. Employee Stock Purchase
Plan included in the Annual Report (Form 10-K) for the year ended December 31,
1997.
/s/ Ernst & Young LLP
Raleigh, North Carolina
March 30, 1998
EXHIBIT 24
POWER OF ATTORNEY
We, the undersigned directors and officers of EMBREX, INC., a North Carolina
corporation (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, 1997, 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 sign 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.
IN WITNESS THEREOF, the undersigned have signed this instrument in the
capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Randall L. Marcuson President, Chief Executive March 19, 1998
- ------------------------ Officer, and Director
Randall L. Marcuson
/s/ C.E. Austin Director March 19, 1998
- ------------------------
Charles E. Austin
/s/ C. Daniel Blackshear Director March 19, 1998
- ------------------------
C. Daniel Blackshear
/s/ Lester M. Crawford Director March 19, 1998
- ------------------------
Lester M. Crawford
/s/ Kenneth N. May Director March 19, 1998
- ------------------------
Kenneth N. May
/s/ Arthur M. Pappas Director March 19, 1998
- ------------------------
Arthur M. Pappas
/s/ Don T. Seaquist Vice President, Finance March 19, 1998
- ------------------------ and Administration, and
Don T. Seaquist Chief Financial Officer
52
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 8,855
<SECURITIES> 0
<RECEIVABLES> 2,772
<ALLOWANCES> 0
<INVENTORY> 2,096
<CURRENT-ASSETS> 13,723
<PP&E> 25,628
<DEPRECIATION> (14,190)
<TOTAL-ASSETS> 25,161
<CURRENT-LIABILITIES> 6,142
<BONDS> 3,278
0
0
<COMMON> 82
<OTHER-SE> 15,659
<TOTAL-LIABILITY-AND-EQUITY> 25,161
<SALES> 24,789
<TOTAL-REVENUES> 24,789
<CGS> 12,244
<TOTAL-COSTS> 12,244
<OTHER-EXPENSES> 9,781
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 582
<INCOME-PRETAX> 2,182
<INCOME-TAX> 422
<INCOME-CONTINUING> 1,760
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,760
<EPS-PRIMARY> 0.21
<EPS-DILUTED> 0.21
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 8,480
<SECURITIES> 1,379
<RECEIVABLES> 2,635
<ALLOWANCES> 0
<INVENTORY> 1,811
<CURRENT-ASSETS> 14,035
<PP&E> 22,530
<DEPRECIATION> 11,062
<TOTAL-ASSETS> 25,773
<CURRENT-LIABILITIES> 7,000
<BONDS> 5,012
0
0
<COMMON> 81
<OTHER-SE> 13,680
<TOTAL-LIABILITY-AND-EQUITY> 25,773
<SALES> 5,925
<TOTAL-REVENUES> 5,925
<CGS> 2,822
<TOTAL-COSTS> 2,822
<OTHER-EXPENSES> 2,578
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 200
<INCOME-PRETAX> 325
<INCOME-TAX> 63
<INCOME-CONTINUING> 262
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 262
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 9,036
<SECURITIES> 876
<RECEIVABLES> 2,313
<ALLOWANCES> 0
<INVENTORY> 1,758
<CURRENT-ASSETS> 13,983
<PP&E> 21,765
<DEPRECIATION> 10,194
<TOTAL-ASSETS> 25,554
<CURRENT-LIABILITIES> 6,431
<BONDS> 5,814
0
0
<COMMON> 80
<OTHER-SE> 13,229
<TOTAL-LIABILITY-AND-EQUITY> 25,554
<SALES> 20,632
<TOTAL-REVENUES> 20,632
<CGS> 11,032
<TOTAL-COSTS> 11,032
<OTHER-EXPENSES> 7,811
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,253
<INCOME-PRETAX> 536
<INCOME-TAX> 195
<INCOME-CONTINUING> 341
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 341
<EPS-PRIMARY> $0.05
<EPS-DILUTED> $0.06
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<CIK> 0000878725
<NAME> EMBREX, INC.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 5,366
<SECURITIES> 1,875
<RECEIVABLES> 2,230
<ALLOWANCES> 0
<INVENTORY> 2,062
<CURRENT-ASSETS> 11,533
<PP&E> 21,018
<DEPRECIATION> 9,425
<TOTAL-ASSETS> 23,126
<CURRENT-LIABILITIES> 7,169
<BONDS> 6,641
0
0
<COMMON> 48,506
<OTHER-SE> (39,190)
<TOTAL-LIABILITY-AND-EQUITY> 23,126
<SALES> 15,304
<TOTAL-REVENUES> 15,304
<CGS> 8,064
<TOTAL-COSTS> 8,064
<OTHER-EXPENSES> 5,631
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 991
<INCOME-PRETAX> 618
<INCOME-TAX> 164
<INCOME-CONTINUING> 454
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 454
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 5,837
<SECURITIES> 1,508
<RECEIVABLES> 2,054
<ALLOWANCES> 0
<INVENTORY> 2,272
<CURRENT-ASSETS> 11,671
<PP&E> 19,676
<DEPRECIATION> 8,429
<TOTAL-ASSETS> 22,918
<CURRENT-LIABILITIES> 6,675
<BONDS> 7,768
0
0
<COMMON> 47,868
<OTHER-SE> (39,393)
<TOTAL-LIABILITY-AND-EQUITY> 22,918
<SALES> 9,663
<TOTAL-REVENUES> 9,663
<CGS> 5,151
<TOTAL-COSTS> 5,151
<OTHER-EXPENSES> 3,476
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 687
<INCOME-PRETAX> 349
<INCOME-TAX> 98
<INCOME-CONTINUING> 251
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 251
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 4,876
<SECURITIES> 2,216
<RECEIVABLES> 1,931
<ALLOWANCES> 0
<INVENTORY> 2,215
<CURRENT-ASSETS> 11,238
<PP&E> 18,488
<DEPRECIATION> 7,560
<TOTAL-ASSETS> 22,166
<CURRENT-LIABILITIES> 4,781
<BONDS> 10,069
0
0
<COMMON> 46,902
<OTHER-SE> (39,586)
<TOTAL-LIABILITY-AND-EQUITY> 22,166
<SALES> 222
<TOTAL-REVENUES> 4,595
<CGS> 2,466
<TOTAL-COSTS> 2,466
<OTHER-EXPENSES> 1,628
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 372
<INCOME-PRETAX> 129
<INCOME-TAX> 71
<INCOME-CONTINUING> 58
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 58
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
EXHIBIT 99
RISK FACTORS
DEPENDENCE ON CERTAIN CUSTOMERS
The Company's revenues are highly dependent on expenditures by the poultry
producing industry. The Company's operations could be materially and adversely
affected by a general economic decline in this industry. The Company has in the
past derived, and may in the future derive, a significant portion of its
revenues from a relatively limited number of customers. In 1997, one customer,
Tyson Foods, Inc., accounted for approximately 28% of the Company's consolidated
revenues. Also, Perdue Farms and ConAgra Poultry accounted for approximately 8%
and 7%, respectively, of consolidated 1997 revenues. The Company continues to
experience such concentration in the current year and is likely to do so in
future years. The loss of any such customer could materially adversely affect
the Company's revenues.
EFFECT OF ECONOMIC FACTORS ON REVENUES AND EARNINGS
The Company's revenues and earnings may be impacted by domestic and global
economic factors that are beyond the Company's control, such as fluctuations in
the price of poultry feed, export demand for U.S. poultry products, and the
extent to which its cost of products and operating expenses could increase
faster than contractual price adjustments with its customers. A principal
component of the Company's revenues is fees charged to customers for the number
of eggs injected with the INOVOJECT(R) system. Rising poultry feed prices
increase the production costs of commercial poultry producers and may cause them
to reduce production which, in turn, could adversely impact the Company's
revenues. Adverse economic conditions in markets outside the United States could
also have a negative impact on the Company's revenues and earnings in those
markets.
INTERNATIONAL SALES AND MARKETING
The Company intends to continue its efforts to expand into markets outside of
North America. Sales outside of North America have accounted for approximately
9%, 10%, and 6% of revenues in fiscal 1997, 1996 and 1995, respectively. The
volume and consistency of such sales is subject to economic and political
conditions in the markets in which Embrex does business, which are beyond the
Company's control. In addition, there is no assurance that the INOVOJECT(R)
system will be successfully marketed outside of North America since market
acceptance is often dependent on the need for biological products to be
administered and on regulatory approval of in ovo administration of these
products.
NO ASSURANCE OF MARKET ACCEPTANCE OR DEVELOPMENT OF NEW PRODUCTS
Embrex's principal existing product, the INOVOJECT(R) system, has only been in
full commercial use since 1993. The market acceptance of new technologies,
including those of the Company, is subject to a number of factors, including the
ability of the technology to meet potential customers' needs more effectively
than competitive products or technologies, and any concerns which may be
associated with the use of new technology, such as reliability and maintenance.
Furthermore, future growth in INOVOJECT(R) system revenue will be dependent on
markets outside the United States where barriers to entry include commercial
acceptance of the INOVOJECT(R) system for prevailing poultry diseases and
regulatory approval of both the INOVOJECT(R) system and biological products.
In addition to the presently marketed INOVOJECT(R) system, Embrex, both itself
and together with collaborators, is developing vaccines for control of viral and
parasitic diseases and products for health and performance modification which
are in various stages of development. These products are subject to the risks
inherent in the development of products based on innovative technologies and are
subject to various regulatory approval requirements.
Embrex has developed and commercialized a technology using its proprietary viral
neutralizing factor ("VNF(R)") which permits a single dose immunization of an
egg embryo for the life of the bird. The Company markets a vaccine known as
Bursaplex(TM) which uses Embrex's VNF(R). The vaccine has been approved by the
United States Department of Agriculture ("USDA") for in ovo and post-hatch use.
However, Bursaplex(TM) has only recently been sold in commercial quantities and
there is no assurance that the product will continue to be sold in commercial
quantities even if it is shown to be effective.
55
<PAGE>
The development and commercialization of additional new products will require
substantial testing and development and regulatory approval.
DEPENDENCE ON OTHERS
Embrex plans to continue to conduct its operations with third party
collaborators, licensors or licensees. While Embrex believes its present and
future collaborators, licensors and licensees will have an economic motivation
to succeed in performing their obligations under its agreements with them, the
amount and timing of funds and other resources to be devoted under such
agreements will be controlled by such other parties and are subject to financial
or other difficulties that may befall such other parties.
Thus, no assurance can be given that Embrex will generate any revenues from such
agreements.
Embrex does not have large scale facilities for the production of Embrex's
INOVOJECT(R) system and biological products and does not plan to develop such
facilities in the foreseeable future. Embrex therefore will rely principally
upon relationships with contract manufacturers. There can be no assurance that
manufacture and supply agreements will be maintained on terms and at costs
acceptable to Embrex.
The Company has developed a strategic relationship with a single contract
manufacturer to fabricate its INOVOJECT(R) systems. While other machine
fabricators exist and have constructed limited numbers of INOVOJECT(R) systems,
a change in fabricators could cause a delay in manufacturing and a possible
delay in the timing of future INOVOJECT(R) installations and revenues from those
installations.
The Company has granted Select Laboratories, Inc. ("Select"), a wholly-owned
subsidiary of Rhone Merieux SA, exclusive rights to manufacture Infectious
Bursal Disease vaccines containing Embrex's proprietary VNF(R) product for
Embrex to market in North America, Latin America and Asia under the trade name
Bursaplex(TM). Embrex has also granted Cyanamid Websters ("Websters"), a unit of
Ft. Dodge Animal Health, which is a division of American Home Products Corp.,
exclusive rights to manufacture and market Infectious Bursal Disease vaccines
containing the Company's VNF(R) product to be marketed in Europe, the Middle
East and Africa under the trade name Bursamune(TM). Additionally, the Company
has one contract supplier of its VNF(R) product, the only supplier that was
included in the USDA's approval for in ovo use of Bursaplex(TM). The manufacture
of the bursal disease vaccines being produced by Select and Websters, and the
Company's VNF(R) product, generally must be performed in licensed facilities or
under approved regulatory methods. Although there are other manufacturers who
are capable of manufacturing bursal disease products and producing products such
as VNF(R), a change of suppliers could adversely affect the Company's future
operating results due to the time it would take a new supplier to obtain
regulatory approval of its production process and/or manufacturing facilities.
In June 1997, the Company announced that Ft. Dodge Animal Health indicated that
its application for U.K. in ovo regulatory approval of Bursamune(TM) had been
provisionally refused. Both the Company and Ft. Dodge had anticipated approval
by the middle of 1997, however, Ft. Dodge indicated that the U.K. regulatory
authority requested that further data be supplied. The Company is working with
Ft. Dodge and Websters, which are responsible for obtaining the necessary
approvals for Bursamune(TM) in both the U.K. and other European Community
markets, to respond to the U.K. regulatory authority request for data with
respect to Bursamune(TM). While the Company anticipates that regulatory approval
in the U.K., as well as some other European Community markets, will occur during
the summer of 1998, there can be no assurances that such approvals will be
forthcoming.
POSSIBLE NEED FOR ADDITIONAL FINANCING
From its inception in May 1985 through December 31, 1997, Embrex had cumulative
operating losses (accumulated deficit) of $38.9 million. Until the first quarter
of 1996, Embrex had incurred operating losses since its inception. Although the
Company has been profitable in 1996 and 1997, there can be no assurance that
Embrex will continue to operate profitably.
The ability of Embrex to attain revenues sufficient to meet its cash
requirements for operations is dependent upon continued market acceptance of the
INOVOJECT(R) system on lease terms acceptable to Embrex and on the successful
development and commercialization of additional products. The extent of the
Company's future revenues, if any, derived
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from INOVOJECT(R) fees is subject to many variables such as whether additional
agreements for INOVOJECT(R) systems are reached, the timing of any agreements,
whether existing or new installation schedules are met, and the extent to which
customers use the INOVOJECT(R) system.
Although the Company anticipates that its existing funds, as well as revenues
from operations, will be adequate to sustain its existing operations for the
foreseeable future, there are no assurances that such funds will be sufficient.
If additional funds become necessary to sustain existing operations or
anticipated growth, the Company will be required to seek additional financing,
and there can be no assurance that such financing will be obtainable or that, if
available, such financing will be on terms favorable or acceptable to the
Company. Obtaining additional financing for such purposes may be difficult or
impossible, or financing may only be available on terms unfavorable or
unacceptable to the Company.
GOVERNMENT REGULATION AND NEED FOR REGULATORY APPROVAL
Although the use of the INOVOJECT(R) system is not subject to regulatory
approval in the U.S., the research and development activities of Embrex as well
as the investigation, manufacture and sale of poultry health and performance
enhancement products are subject to regulation either by the USDA or the United
States Food and Drug Administration ("FDA") and state and foreign agencies.
Foreign agencies may also require approval of the INOVOJECT(R) system. The
process of obtaining governmental approval is costly and at the USDA generally
takes from one to three years and at the FDA five or more years. There can be no
assurance that any future product that Embrex may develop will be approved by
the USDA, the FDA or any other regulatory agency. Delays in obtaining regulatory
approval may adversely affect the marketing of any products developed by Embrex
and the ability of Embrex to receive product revenues and royalties. There can
be no assurance that regulatory approvals for Embrex's future products will be
obtained without lengthy delays, if at all.
Moreover, Embrex is, or may become, subject to various federal, state and local
laws, regulations and recommendations relating to safe working conditions,
laboratory and manufacturing practices and the use and disposal of hazardous
substances used in conjunction with Embrex's research work. In addition, Embrex
cannot predict the extent of governmental regulations which might have an
adverse effect on the production and marketing of Embrex's products.
Embrex has entered into and intends to continue to enter into licensing or joint
development agreements pursuant to which costs associated with the regulatory
approval process for some products are and will be borne by the licensees or
joint developers. To the extent that Embrex is unable to generate sufficient
funds from operations or enter into licensing or joint development agreements to
develop products, it may not have the financial resources to complete the
regulatory approval process with respect to all or any of the products currently
under development. Products developed by Embrex may not be marketed commercially
in any jurisdiction in which required approvals have not been obtained.
PATENTS AND PROPRIETARY RIGHTS
Certain of Embrex's products and certain of the processes by which Embrex is
able to produce its products are proprietary. Embrex has ownership rights to
some of the technologies employed in these processes, and some are owned by
others and exclusively licensed to Embrex. Embrex believes that patent
protection of materials or processes it develops and any products that may
result from Embrex's and licensors' research and development efforts are
important to the possible commercialization of Embrex's products. The patent
position of companies such as Embrex generally is highly uncertain and involves
complex legal and factual questions. To date no consistent policy has emerged
regarding the breadth of claims allowed in biotechnology patents. Accordingly,
there can be no assurance that patent applications relating to Embrex's products
or technology will result in patents being issued or that, if issued, the
patents will afford protection against competitors with similar technology.
Moreover, some patent licenses held by Embrex may be terminated upon the
occurrence of certain events or become non-exclusive after a specified period.
In addition, companies that obtain patents claiming products or processes that
are necessary for or useful to the development of Embrex's products could bring
legal actions against Embrex claiming infringement. Embrex is currently not the
subject of any patent infringement claim. There can be no assurance that Embrex
will have the financial resources necessary to enforce any patent rights it may
hold. Also, Embrex may be required to obtain licenses from others to develop,
manufacture or market its products. There can be no assurance that Embrex will
be able to obtain such licenses on commercially reasonable terms or that the
patents underlying the licenses will be valid and enforceable.
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Embrex also relies upon unpatented, proprietary technology, and no assurance can
be given that others will not independently develop substantially equivalent
proprietary information or techniques or properly gain access to Embrex's
proprietary technology, or disclose such technology, or that Embrex can
meaningfully protect its rights in such unpatented proprietary technology.
Embrex attempts and will continue to attempt to protect its proprietary
materials and processes by relying on trade secret laws and non-disclosure and
confidentiality agreements with its employees and certain other persons who have
access to its proprietary materials or processes or who have licensing or
research arrangements with Embrex. Despite these protections, no assurance can
be given that others will not independently develop or obtain access to such
materials or processes or that Embrex's competitive position will not be
adversely affected thereby.
In September 1996, Embrex filed a patent infringement suit in the United States
District Court for the Eastern District of North Carolina against Service
Engineering Corporation, a Maryland corporation, and Edward G. Bounds, Jr., a
Maryland resident and officer of Service Engineering Corporation. The suit
alleged that each of the defendants' development of an in ovo injection device,
designed to compete with Embrex's patented INOVOJECT(R) injection method,
infringes at least one claim of the U.S. patent No. 4,458,630 exclusively
licensed to Embrex for the in ovo injection of vaccines into an avian embryo
(the "Sharma Patent"). Further, Embrex claims that the defendants have violated
the terms of a Consent Judgment and Settlement Agreement entered into with
Embrex in November 1995 in which prior litigation was concluded with Service
Engineering and Bounds agreeing not to engage in future activities violating the
Sharma Patent. Embrex sought injunctive relief to prevent infringement of the
Sharma Patent as well as monetary damages. In November 1996, Service Engineering
Corporation and Edward G. Bounds responded to Embrex's patent infringement suit
by asserting various affirmative defenses and denying the substantive
allegations in Embrex's complaint. This suit is still pending and final
disposition is expected in 1998. The outcome of this litigation is uncertain and
there is no assurance that Embrex will prevail on the merits or successfully
defend the validity of its patent.
In March 1997, Service Engineering Corporation, a Maryland corporation, and
Edward G. Bounds, Jr., a Maryland resident and an officer of Service Engineering
Corporation, filed suit against the United States Department of Agriculture in
the United States District Court for the District of Maryland with respect to
its grant to Embrex of an exclusive license for the Sharma Patent. The complaint
alleges that the USDA did not adequately comply with statutory and regulatory
requirements in making the grant to Embrex of an exclusive license to the Sharma
Patent, the revision of the exclusive license in 1991 and the revision of the
exclusive license in 1994, which extended the period of exclusivity, originally
set to terminate on December 31, 1996, through the patent expiration date.
Plaintiffs allege that in December 1996 (after Embrex had instituted the above
referenced action for patent infringement and breach of contract), the
Plaintiffs requested the USDA to grant them a license of the Sharma Patent. The
Plaintiffs allege that the USDA refused to do so because the USDA said that the
license was not available and that the Plaintiffs had no basis for relief.
Plaintiffs also allege that the USDA wrongfully consented to Embrex's bringing
suit against the Plaintiffs. Plaintiffs are seeking to have the court set aside
the extension of the exclusive license, the USDA's grant of permission for
Embrex to sue Service Engineering Corporation, Edwards G. Bounds, Jr. and IGI,
Inc. for patent infringement, the USDA's refusal to grant to Service Engineering
Corporation a non-exclusive license to the Sharma Patent and the USDA's refusal
to act favorably upon Service Engineering Corporation's appeal from the refusal
to grant it a non-exclusive license. In addition, Plaintiffs seek to have the
court issue an order requiring the USDA, prior to granting any exclusive license
under the Sharma Patent, including by extending the term of a pre-existing
exclusive license, to observe the procedures set forth under laws and
regulations governing the grant of licenses to patents owned by the USDA, and to
remand the matter to the USDA to take action in accordance with the order.
Plaintiffs also seek attorneys' fees and costs from the USDA. This suit was
stayed in January 1998 for 60 days pending resolution of the suit between Embrex
and Service Engineering Corporation and Edward G. Bounds, Jr. The outcome of
this litigation is uncertain and there is no assurance that its resolution will
be favorable to Embrex.
DEPENDENCE ON KEY PERSONNEL
Embrex's ability to develop marketable products and maintain a competitive
research and technological position will depend on its ability to continue to
attract and retain experienced and highly educated scientific and management
personnel and advisors. Competition for qualified employees among biotechnology
companies is intense and the loss of key scientific or management personnel
would adversely affect Embrex. Embrex has obtained insurance in the amount of
$1,000,000 on the life of Randall L. Marcuson, its President and Chief Executive
Officer, of which Embrex is the sole beneficiary. There can be no assurance that
Embrex will be able to continue to attract and retain qualified staff.
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SUPPORT AND MAINTENANCE REQUIREMENTS
The Company is required to supply, support, and maintain large numbers of
INOVOJECT(R) systems at its customers' hatcheries on a timely basis at a
reasonable cost to the Company. There can be no assurance that the Company will
be able to continue to provide such services on a cost-effective basis.
TECHNOLOGY AND COMPETITION
The areas of technology in which Embrex is involved are subject to rapid and
significant technological change. Competitors include independent companies that
specialize in biotechnology as well as major chemical and pharmaceutical
companies, universities, and public and private research organizations, many of
which are well established and have substantially greater marketing, financial,
technological and other resources than Embrex. There can be no assurance that a
competitive delivery method, either within or outside the United States, will
not be developed and gain commercial acceptance. Also, there can be no assurance
that competitors will not succeed in developing technologies and products that
are more effective than any which have been or are being developed by Embrex or
which would render Embrex's technology and products obsolete or non-competitive.
ISSUANCE OF PREFERRED STOCK; SHAREHOLDER RIGHTS PLAN; ANTI-TAKEOVER EFFECTS
The Board of Directors has the authority to issue up to 15,000,000 shares of
Preferred Stock in one or more series and to determine the designations,
preferences and relative participating, optional or other special rights and
qualifications, limitations or restrictions thereof, of the shares constituting
any series of Preferred Stock, without any further vote or action by the
shareholders. The issuance of Preferred Stock by the Board of Directors could
affect the rights of the holders of Common Stock. For example, such issuance
could result in a class of securities outstanding that would have preferences
with respect to voting rights and dividends and in liquidation over the Common
Stock, and could (upon conversion or otherwise) enjoy all of the rights
appurtenant to Common Stock.
The authority of the Board of Directors to issue Preferred Stock could
potentially be used to discourage attempts by others to obtain control of the
Company through merger, tender offer, proxy contest or otherwise by making such
attempts more difficult to achieve or more costly. The Board of Directors may
issue the Preferred Stock without shareholder approval and with voting and
conversion rights which could adversely affect the voting power of the holders
of Common Stock. There are no agreements or understandings for the issuance of
Preferred Stock and the Board of Directors has no present intention to issue any
Preferred Stock.
Embrex adopted a shareholder rights plan which could have the effect of
discouraging a takeover of the Company. The rights plan, if triggered, would
make it more difficult to acquire the Company by, among other things, allowing
existing shareholders to acquire additional shares at a substantial discount,
thus substantially inhibiting an acquiror's ability to obtain control of the
Company.
UPGRADE TO COMPANY'S INTERNAL SYSTEMS AND YEAR 2000 COMPLIANCE
The efficient management of information is critical to the Company as it grows
and the complexity of its business increases. The Company believes that keeping
pace with technological advances in this area is important to the Company's
continued success. As a result, the Company intends to continue to upgrade its
internal systems and software. As the year 2000 approaches, an important
business issue have emerged regarding how existing application software and
operating systems can accommodate this date value. Many existing application
software products, including the Company's, were designed to accommodate only a
two-date year. For example, "98" may be stored on a system to represent 1998 and
"00" represents 1900. Irrespective of the Year 2000 issue, the Company needs to
upgrade its accounting system to meet the demands of its business. The Company
is developing plans for the upgrade of its software and hardware as necessary to
address both its increased internal needs and the impact of the year 2000 on its
systems. The Company believes that the additional costs associated with the Year
2000 aspects of the upgrade will be immaterial. The inability of the Company or
its software and hardware vendors to upgrade the Company's systems in a manner
that fully addresses the Company's needs and the year 2000 issue could have an
adverse impact on the Company's ability to produce the information necessary to
manage its business, communicate with its customers and suppliers, and prepare
financial statements.
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