Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1999
Commission File No. 000-19495
Embrex, Inc.
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(Exact name of registrant as specified in its charter)
North Carolina 56-1469825
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1035 Swabia Court, Durham, NC 27703
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(Address of principal executive offices) (Zip Code)
Registrant's telephone no. including area code: (919) 941-5185
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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
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The number of shares of Common Stock, $0.01 par value, outstanding as of April
30, 1999, was 8,270,763.
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EMBREX, INC.
INDEX
<TABLE>
Part I Page
Financial Information:
Item 1: Financial Statements
<S> <C>
Balance Sheets.....................................................3 of 15
Statements of Operations...........................................4 of 15
Statements of Cash Flows...........................................5 of 15
Notes to Consolidated Financial Statements.........................6 of 15
Item 2:
Management's Discussion and Analysis of
Financial Condition and Results of Operations......................7 of 15
Item 3:
Quantitative and Qualitative Disclosures
About Market Risk.................................................11 of 15
Part II
Other Information:
Item 1:
Legal Proceedings.................................................12 of 15
Item 2:
Changes in Securities.............................................12 of 15
Item 3:
Defaults Upon Senior Securities...................................12 of 15
Item 4:
Submission of Matters to a Vote of Security Holders...............12 of 15
Item 5:
Other Information.................................................12 of 15
Item 6:
Exhibits and Reports on Form 8-K..................................13 of 15
Signatures...............................................................14 of 15
Exhibit Index............................................................15 of 15
</TABLE>
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Embrex, Inc.
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CONSOLIDATED BALANCE SHEETS
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(DOLLARS IN THOUSANDS)
MARCH 31 DECEMBER 31
1999 1998
--------------- ---------------
(UNAUDITED)
ASSETS
CURRENT ASSETS
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Cash and cash equivalents............................... $ 6,721 $ 7,167
Restricted Cash......................................... 275 275
Accounts receivable - trade............................. 3,551 3,454
Inventories:
Materials and supplies.............................. 900 925
Product............................................. 961 1,281
Other current assets................................... 761 738
-------------- ------------
TOTAL CURRENT ASSETS................................. 13,169 13,840
INOVOJECT(R) SYSTEMS UNDER CONSTRUCTION................... 522 568
INOVOJECT(R) SYSTEMS....................................... 24,973 24,161
Less accumulated depreciation........................... (17,069) (16,297)
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7,904 7,864
EQUIPMENT, FURNITURE AND FIXTURES ......................... 5,627 5,060
Less accumulated depreciation and amortization......... (2,615) (2,468)
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3,012 2,592
OTHER ASSETS:
Patents and exclusive licenses of patentable technology
(net of accumulated amortization of $196 in 1998)....... 135 126
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TOTAL ASSETS ............................................... $ 24,742 $ 24,990
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable........................................ $ 225 $ 393
Accrued expenses........................................ 2,008 2,033
Deferred revenue....................................... 131 175
Product warranty accrual............................... 344 322
Current portion of capital lease obligations............ 1,765 2,618
----------- -----------
TOTAL CURRENT LIABILITIES............................ 4,473 5,541
CAPITAL LEASE OBLIGATIONS, less current portion........... 305 634
LONG-TERM DEBT, less current portion.................... 0 10
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value:
Authorized - 30,000,000 shares
Issued and outstanding -
8,302,372 and 8,264,490 shares at March 31, 1999
and December 31, 1998, respectively............ 91 83
Additional paid-in capital.............................. 55,048 54,894
Accumulated other comprehensive income................ (34) 113
Accumulated deficit..................................... (34,928) (36,072)
Treasury stock......................................... (213) (213)
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TOTAL SHAREHOLDERS' EQUITY........................... 19,964 18,805
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $ 24,742 $ 24,990
============ ===========
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Embrex, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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THREE MONTHS ENDED
MARCH 31
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1999 1998
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REVENUES
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INOVOJECT(R) SYSTEM revenue............................ $ 7,690 $ 6,579
Product sales.......................................... 246 254
Other revenue.......................................... 80 24
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TOTAL REVENUES.................................... 8,016 6,857
COST OF PRODUCT SALES AND INOVOJECT(R) SYSTEM REVENUES.... 3,226 3,209
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GROSS PROFIT................................... 4,790 3,648
OPERATING EXPENSES
General and administrative............................ 1,824 1,799
Sales and marketing.................................. 166 197
Research and development.............................. 1,324 861
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TOTAL OPERATING EXPENSES........................... 3,314 2,857
OPERATING INCOME......................................... 1,476 791
OTHER INCOME (EXPENSE)
Interest income..................................... 80 80
Interest expense..................................... (135) (215)
----------- ----------
TOTAL OTHER EXPENSE............................. (55) (135)
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INCOME BEFORE TAXES.................................. 1,421 656
INCOME TAXES ........................................... 284 129
----------- ----------
NET INCOME ........................................ $ 1,137 $ 527
=========== ===========
NET INCOME PER SHARE OF COMMON STOCK:
Basic................................................. $ 0.14 $ 0.06
Diluted.............................................. $ 0.14 $ 0.06
NUMBER OF SHARES USED IN PER SHARE CALCULATION:
Basic................................................. 8,293 8,243
Diluted............................................... 8,368 8,334
</TABLE>
4
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Embrex, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
THREE MONTHS ENDED
MARCH 31
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1999 1998
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Operating Activities
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Net Income.......................................................... $ 1,137 $ 527
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization.................................... 926 1,194
Changes in operating assets and liabilities:
Accounts receivable, inventories and other current assets 225 (948)
Accounts payable and accrued expenses........................ (215) (748)
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NET CASH PROVIDED BY OPERATING ACTIVITIES.............................. 2,073 25
Investing Activities
Purchases of short-term investments.................................. 0 0
Purchases of INOVOJECT(R) systems, equipment, furniture and fixtures (1,333) (1,274)
Decrease in patents and other noncurrent assets...................... (9) (2)
----------- ------------
NET CASH USED IN INVESTING ACTIVITIES................................... (1,342) (1,276)
Financing Activities
Issuance of Common Stock............................................. 162 24
Payments on long-term debt.......................................... (10) (29)
Proceeds from capital lease obligations.............................. 0 26
Payments on capital lease obligations................................ (1,182) (798)
------------ ----------
NET CASH USED IN FINANCING ACTIVITIES................................... (1,030) (777)
------------ ----------
Decrease In Cash And Cash Equivalents .................................. (299) (2,028)
Currency Translation Adjustments........................................ (147) 263
Cash and cash equivalents at beginning of period........................ 7,167 8,580
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............................. $ 6,721 $ 6,815
========== =========
</TABLE>
5
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EMBREX, INC.
FORM 10-Q
March 31, 1999
NOTES TO CONSOLIDATED INTERIM CONDENSED FINANCIAL STATEMENTS (Unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited financial statements include the accounts of Embrex,
Inc. and its wholly owned subsidiaries, Embrex Europe Limited and Embrex BioTech
Trade (Shanghai) Co., Ltd. (collectively referred to as the Company) and have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, these do not include all of the information
and notes required by generally accepted accounting principles. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation of financial condition and results
of operations have been included. Operating results for the three-month period
ended March 31, 1999 are not necessarily indicative of the results that may be
attained for the entire year. For further information, refer to the financial
statements and notes thereto included in the Company's Form 10-K for the year
ended December 31, 1998.
Note 2 - Net Income Per Share
Basic net income per share was determined by dividing net income available for
common shareholders by the weighted average number of common shares outstanding
during each year. Diluted net income per share reflects the potential dilution
that could occur assuming conversion or exercise of all issued and unexercised
stock options and warrants.
Note 3 - Comprehensive Income
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income" (SFAS 130). This statement establishes standards for reporting and
display of comprehensive income and its components in the financial statements.
In accordance with SFAS 130, the Company has determined total comprehensive
income, net of tax, to be $990,000 and $790,000 for the three months ended March
31, 1999 and 1998, respectively. Embrex's total comprehensive income represents
net income plus the after-tax effect of foreign currency translation adjustments
for the periods presented.
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EMBREX, INC.
Item 2. Management's Discussion and Analysis of Financial Condition and 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.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1999 and 1998
Consolidated revenues for the first quarter totaled $8.0 million, representing
an increase of 17% over 1998 first quarter revenues of $6.9 million.
INOVOJECT(R) system revenues amounted to $7.7 million for the 1999 first
quarter, an increase of 17% over 1998 first quarter revenues of $6.6 million.
Most of the 1999 and 1998 INOVOJECT(R) system revenues were generated from
INOVOJECT(R) system lease fees. The growth in INOVOJECT(R) system revenues was
primarily attributable to increased injection activities in North American
hatcheries as well as additional INOVOJECT(R) systems operating in Europe and
Asia.
Sales of Bursaplex(R), the Company's proprietary vaccine for the treatment of
avian Infectious Bursal Disease, was the principal source of $246,000 of product
revenue in the 1999 first quarter and $254,000 in the 1998 first quarter. The
Company's ability to generate revenue from product sales has been constrained by
the previously announced delay associated with obtaining British regulatory
approval for the sale of Bursamune(TM) in the United Kingdom by Fort Dodge
Animal Health ("Ft. Dodge"), a division of American Home Products Corp., lower
levels of breeder and broiler flock vaccination rates, and fewer reported
incidences of bursal disease in the United States. Product sales consequently
declined 3% during the first quarter of 1999 compared to product sales during
the first quarter of 1998.
Consolidated revenues grew at a faster rate than the cost of product sales and
INOVOJECT(R) system revenues, resulting in an improvement in gross profit from
53% of total revenues during the first quarter 1998, to 60% during the
comparable 1999 quarter.
Operating expenses increased from $2.9 million during the first quarter of 1998,
to $3.3 million during the first quarter of 1999. This increase is primarily
attributable to programs focused on INOVOJECT(R) system improvements and
enhancements and biological product development.
Net interest expense amounted to $55,000 for the first quarter of 1999 compared
to $135,000 for the first quarter of 1998. The $80,000 decrease is attributable
to the reduction in lease and debt obligations.
INOVOJECT(R) system revenues and improved gross margins resulted in a $610,000
increase in net income, to $1.1 million in the first quarter of 1998 compared to
$527,000 during the comparable period in 1998. Diluted net income per common
share was $0.14 for 1999 first quarter based on 8.4 million average shares
outstanding, compared to diluted net income of $0.06 per share based on 8.3
million average shares outstanding in the first quarter 1998.
The Company estimates that as of March 31, 1999, it was vaccinating in excess of
80% of the broiler birds grown in the United States during the first three
months of 1999. Given its market penetration, the Company expects only moderate
INOVOJECT(R) system revenue growth in this market. Overall, management expects
moderate growth throughout the balance of 1999 relative to levels achieved in
1998. This growth is expected to come primarily from existing INOVOJECT(R)
system operations in the United States, and new INOVOJECT(R) system operations
in other countries, and secondarily from sales of the Company's Bursaplex(R)
product to poultry producers. During the first quarter 1999, one third of the
growth in revenues came from the Company's operations outside the United States.
The Company estimates that approximately 75% of first quarter 1999 product
revenue occurred outside the United States and that approximately 70% of the
Company's new INOVOJECT(R) system installations occurred overseas during the
first quarter of this year. The Company currently has INOVOJECT(R) systems
either
7
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installed or on trial in 27 countries, including the United States and
Canada.
Bursaplex(R), a product which uses the Company's Viral Neutralizing Factor
(VNF(R)) technology to form an antibody-vaccine when combined with an Infectious
Bursal Disease (IBD) virus, was granted approval from the United States
Department of Agriculture (the "USDA") in 1997 for in ovo (in-the-egg) use,
specifically for administration via the Company's INOVOJECT(R) system. To date,
regulatory approval for Bursaplex(R) has been received in Peru, Ecuador,
Pakistan, South Korea, Thailand and Vietnam, and regulatory approval is pending
in Canada, the Phillippines, People's Republic of China, Indonesia, Venezuela,
Argentina, Chile, Colombia, Malaysia and Taiwan.
Bursamune(TM), which also utilizes the Company's VNF(R) technology, is an IBD
vaccine produced by Cyanamid Websters, a unit of Ft. Dodge and which will be
marketed by Ft. Dodge in Europe, the Middle East and Africa under Ft. Dodge=s
trade name "Bursamune(TM)" upon receipt of regulatory approvals. In June 1997,
Ft. Dodge indicated that its U.K. application for in ovo regulatory approval of
Bursamune(TM) had been provisionally refused. Ft. Dodge also indicated that the
U.K. regulatory authority requested that further data be supplied. The Company
has worked with Ft. Dodge, which is responsible for obtaining the necessary
approvals for Bursamune(TM) in both the U.K. and other European Community
markets, to respond to the U.K. regulatory authority requests for data with
respect to Bursamune(TM). The Company anticipates that the regulatory review
process will be completed during 1999. To date, Bursamune(TM) has received
regulatory approval in South Africa and Spain.
For the rest of 1999, the goals of management are to maintain revenue growth and
profitability, to continue efforts to achieve worldwide placements of the
INOVOJECT(R) system, to obtain regulatory approvals and initiate marketing of
Bursaplex(R) in these markets, to continue development of proprietary in ovo
vaccines and to develop enhancements to the INOVOJECT(R) system. Growth in
INOVOJECT(R) systems and product revenues during 1999 will be dependent on the
rate at which markets outside the United States accept INOVOJECT(R) system
technology, and the timing of regulatory approvals for Bursaplex(R) and
Bursamune(TM) as well as regulatory approval and market acceptance of other
vaccines for in ovo delivery. In addition, normal fluctuations in the market
price of grain, domestic and international consumption levels of chicken, the
supply of broiler chicken eggs, country-specific regulations and economic
conditions, and export opportunities for the Company's U.S. customers may impact
the timing and quantity of egg injections and the corresponding in ovo delivery
of vaccines. Moreover, additional delays in obtaining U.K. regulatory approval
for the sale of Bursamune(TM) would negatively impact the Company's ability to
generate revenue from both the use of INOVOJECT(R) systems for the in ovo
delivery of Bursamune(TM) and the sale of its VNF(R) compound for the production
of Bursamune(TM) in the U.K. market.
CHANGES IN FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
At March 31, 1999, the Company's cash and cash equivalents amounted to $6.7
million, down $446,000 from $7.2 million on hand at year-end 1998.
Operating activities generated $2.1 million in cash during the first three
months of 1999. Cash was provided by net income of $1.1 million, by depreciation
of nearly $1.0 million, by reductions in accounts receivable and other current
assets of $0.2 million, and offset by reductions in accounts payable and accrued
expenses of $0.2 million.
During the first quarter, investing activities used $1.4 million of cash,
principally for additional INOVOJECT(R) systems as well as hardware and software
for the Company's new information system.
Financing activities used $1.0 million, primarily for the repayment of capital
lease obligations.
As of March 31, 1998, the Company had outstanding purchase commitments of
approximately $3.5
8
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million related to the production of the Company's Bursaplex(R) product, VNF(R)
for the manufacture of Bursaplex(R) and Bursamune(TM) and materials and supplies
for the construction and maintenance of its INOVOJECT(R) systems.
In April 1999, the Company obtained a $6.0 million secured revolving line of
credit from its bank. This line of credit may be used for working capital
purposes and has a term of eighteen months.
Based on its current operations, management believes that available cash and
cash equivalents, together with cash flow from operations and its bank line of
credit, will be sufficient to meet its foreseeable cash requirements in support
of its operations, including necessary capital investments, continued global
expansion, funding new product development and repurchase of its common stock.
YEAR 2000 ISSUE
The Company established a team to address the Year 2000 issue in June 1998. The
team has conducted an inventory and assessment of the Company's computer
hardware and software systems, as well as embedded systems in its INOVOJECT(R)
system, manufacturing and laboratory equipment and office facilities, such as
security and fire alarm systems. The team is currently developing remediation,
testing, and implementation plans for imbedded systems, including the
Inovoject(R) system. The Company anticipates completing its test plans not later
than May 1999. The Company is in the process of developing contingency plans to
address what would happen if its execution of these plans were to fail to
address the Year 2000 issue. The Company expects to complete all remediation,
testing and implementation not later than October 1999.
To date, the Company has determined that its general ledger and primary
financial accounting software, a DOS-based application, uses only two digits to
identify a year in the date field. The Company is currently on schedule to
replace this application with a Year 2000-compliant Windows-based system by
October 1999; however, the Company had planned to make this upgrade irrespective
of the Year 2000 problem in order to meet the demands of its business. The
Company is in the process of upgrading its computer software and hardware
systems as necessary to address both its increased internal needs and the impact
of the year 2000 on its systems. The inability of the Company or its software
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 adversely impact the
Company's ability to produce the information necessary to manage its business,
communicate with its customers and suppliers, and prepare financial statements.
The Company has surveyed nearly all of its customers and vendors through a Year
2000 questionnaire regarding the strategies, activities, and contingency plans
undertaken by those parties to achieve Year 2000 compliance. The information
being received in response to the questionnaire will assist the Company in
assessing its readiness for the Year 2000 issue and identify any potential
negative impact to the Company from possible disruptions in other parties'
ability to do business with the Company after December 31, 1999. There is no
assurance that the systems of other parties on which the Company relies will be
compliant on a timely basis. The inability of the Company's vendors and
customers to fully address the Year 2000 issue could have an adverse impact on
the Company's ability to operate and manage the INOVOJECT(R) system at its
customers hatcheries, to manage its business and to communicate with its
customers and suppliers, any of which could have a material adverse effect on
the Company's financial results.
The Company is in the process of developing contingency plans to address what
would happen if its execution of these plans were to fail to address the Year
2000 issue. These contingency plans may include the purchasing and redeployment
to various locations of additional materials and supplies needed to operate the
business and provide services and products to its customers; and the
preservation of perishable biological products in the event of electrical power
interruptions at the Company's facilities.
9
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The Company expects to incur no more than $500,000 in addressing Year 2000
issues, including an estimated $30,000 spent to date. The Company's estimates
regarding the cost and timing of addressing the Year 2000 issue are based upon
presently available information and assumptions about future events. Embrex
cannot guarantee that its assumptions will be correct or that its estimates will
be achieved. Actual results could differ materially from the Company's
expectations as a result of numerous factors, including the continued
availability of certain resources, the cooperation of third parties, the ability
to locate and correct all relevant computer codes, unforeseen circumstances that
would cause the Company to allocate its resources elsewhere, and similar
uncertainties.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements, including statements with
respect to future products, services, markets and financial results. These
statements involve risks and uncertainties that could cause actual results to
differ materially, including without limitation the ability of the Company to
penetrate new markets, place INOVOJECT(R) systems worldwide, establish a degree
of market acceptance for new products such as but not limited to Bursaplex(R)
and Bursamune(TM) , prevail in the outcome of its patent litigation appeal,
complete commercial development of potential future products or obtain
regulatory approval of its products, which approval is dependent upon a number
of factors, such as results of trials, the discretion of regulatory officials,
potential changes in regulations and the Company's dependence on certain
customers. These statements are also contingent upon continued growth of the
global poultry industry and the economic viability of certain markets.
Additional information on these risks and other factors which could affect the
Company's financial results is included in the Company's Form 10-K filed with
the Securities and Exchange Commission and other filings with the SEC, including
the Company's Forms 10-Q and 8-K.
10
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
A portion of the Company's operations are in jurisdictions outside North
America. The Company leases INOVOJECT(R) systems and sells products in Europe,
Asia and Latin America. As a result, the Company's financial results could be
affected by factors such as changes in foreign currency exchange rates or weak
economic conditions in the foreign markets in which the Company distributes its
products. At March 31, 1999, the Company's operations outside North America were
not material to the Company's consolidated results as a whole, and a significant
change in currency exchange rates or economic conditions in the jurisdictions
outside North America in which the Company operates would not have a material
effect on the Company's consolidated financial results.
11
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
For a description of certain patent infringement proceedings initiated by
the registrant and related legal proceedings, see the registrant's Form
10-K for the year ended December 31, 1998 filed with the Securities and
Exchange Commission on March 31, 1999.
On April 7, 1999, the registrant announced that the U.S. District Court
for the District of Maryland had granted the United States Department of
Agriculture's ("USDA") motion for summary judgment in the litigation
brought against the USDA by Service Engineering Corporation and Edward G.
Bounds ("SEC/Bounds"). The court agreed that "the plaintiff (SEC/Bounds)
lacked standing to challenge the USDA's actions in this matter and that
the [USDA's] motion for summary judgment will be granted." In this
lawsuit, SEC/Bounds filed suit against the USDA with respect to its grant
to Embrex of an exclusive license for U.S. Patent No. 4,458,630 ("patent
'630", or the "Sharma patent"). Patent '630 relates to in ovo (in-the-egg)
injection.
This decision, combined with the verdict rendered in Embrex's favor in the
U.S. District Court for the Eastern District of North Carolina in July
1998, reaffirms both the validity of the USDA's actions and the validity
of the Sharma patent.
The July 1998 verdict fully upheld the validity of all claims of the
Sharma patent, finding that SEC/Bounds had willingly infringed all
asserted claims of the patent. The jury also found that SEC/Bounds had
breached a 1995 Consent Judgment and Settlement Agreement and that such
breach was not in good faith. In October 1998, SEC/Bounds filed a notice
of appeal in the U.S. Court of Appeals for the Federal Circuit seeking
reversal of the judgment. Embrex plans to oppose the appeal.
Finally, on April 15, 1999, Embrex learned that Machining Technologies,
Inc. had served on Embrex a Complaint for Declaratory Judgment against
Embrex in the U. S. District Court for the District of Maryland. Machining
Technologies seeks a declaration that U.S. Patent No. 4,458,630 is not
infringed, invalid and/or not enforceable. Machining Technologies was a
manufacturer of egg injection machine parts to Bounds and Service
Engineering. Embrex believes the action to be without legal basis and
expects to move for its dismissal.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
12
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Agreement among Embrex, Inc., Micro Cap Partners, L.P.,
Palo Alto Investors, Inc., Walter Smiley, and William L.
Edwards dated as of April 18, 1999.
10.2 Indemnification Agreement among Embrex, Inc., Randall L.
Marcuson, Charles E. Austin, C. Daniel Blackshear,
Lester M. Crawford, Peter J. Holzer, Kenneth N. May, and
Arthur M. Pappas dated as of April 1, 1999.
10.3 Amended and Restated Incentive Stock Option and
Nonstatutory Stock Option Plan (January 14, 1999).
21. Subsidiaries
27. Financial Data Schedule
(b) Reports on Form 8-K. Not applicable.
13
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 10, 1999
EMBREX, INC.
By: /s/ Randall L. Marcuson
---------------------------------
Randall L. Marcuson
President and Chief Executive Officer
By: /s/ Don T. Seaquist
--------------------------------------
Don T. Seaquist
Vice President, Finance and Administration
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EMBREX, INC.
File No. 000-19495
Form 10-Q
For the Quarterly Period
Ended March 31, 1999
EXHIBIT INDEX
Exhibit
10.1 Agreement among Embrex, Inc., Micro Cap Partners, L.P., Palo Alto
Investors, Inc., Walter Smiley, and William L. Edwards dated as of April
18, 1999.
10.2 Indemnification Agreement among Embrex, Inc., Randall L. Marcuson,
Charles E. Austin, C. Daniel Blackshear, Lester M. Crawford, Peter J.
Holzer, Kenneth N. May, and Arthur M. Pappas dated as of April 1, 1999.
10.3 Amended and Restated Incentive Stock Option and Nonstatutory Stock
Option Plan (January 14, 1999).
21. Subsidiaries
27. Financial Data Schedule
15
EXHIBIT 10.1
CONFIDENTIAL
AGREEMENT
This Agreement is made and dated as of April 18, 1999 among Embrex,
Inc., a North Carolina corporation ("Embrex"), Micro Cap Partners, L.P., a
Delaware limited partnership ("Micro Cap"), Palo Alto Investors, Inc., a
California corporation ("Palo Alto"), Walter Smiley, a resident of Arkansas, and
William L. Edwards, a resident of California. Mr. Smiley and Mr. Edwards are
executing this Agreement only for purposes of Sections 3(a) and Sections 3(b)
and (c), respectively.
For good and valuable consideration, the receipt and sufficiency of
which the parties acknowledge, the parties hereby agree as follows:
1. Agreements of Embrex.
(a) As soon as practicable, but no later than Friday, April 23, 1999,
Embrex shall increase the number of directors of Embrex from seven to eight,
thereby creating a vacancy, and shall elect Mr. Smiley as a director of Embrex.
(b) Embrex shall include Mr. Smiley as a nominee for director at
Embrex's next Annual Meeting of Shareholders, scheduled for May 20, 1999 (the
"1999 Annual Meeting").
(c) As soon as practical, but no later than Friday, April 23, 1999,
Embrex shall amend its Amended and Restated Bylaws (restated effective May 21,
1998) so that Article III, Section 4 shall read in its entirety as follows:
"SECTION 4. Special Meetings. Special meetings of shareholders
may be called at any time by any two directors. 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."
(d) Embrex shall immediately withdraw its preliminary proxy materials
filed with the Securities and Exchange Commission ("SEC") on April 9, 1999 and
on April 16, 1999.
(e) The Board of Directors of Embrex shall not at any time prior to
the Embrex 2000 Annual Meeting: (i) remove Mr. Smiley as a director; or (ii)
amend or directly or indirectly render ineffective Article III, Section 4 of the
Embrex Amended and Restated Bylaws.
(f) If Mr. Smiley shall be unable to fulfill his term as a director
of Embrex by reason of his death, disability or resignation because of
unexpected personal or family circumstances, Micro Cap shall have the right to
recommend to the Board of Directors another person or persons as candidates to
fill his vacancy and the Board of Directors shall consider such person or
persons. The Board of Directors and Micro Cap shall use their reasonable best
efforts to reach mutual agreement on a substitute for Mr. Smiley and the Board
of Directors shall elect such mutually agreeable substitute to fill the vacancy
as soon as practicable.
2. Agreements of Micro Cap and Palo Alto.
(a) Micro Cap and Palo Alto shall immediately withdraw all of their
preliminary proxy materials regarding Embrex, including the preliminary proxy
materials filed with the SEC on April 14, 1999.
<PAGE>
(b) Micro Cap and Palo Alto hereby withdraw in its entirety the
request dated December 17, 1999 that Embrex include in its proxy statement for
the 1999 Annual Meeting a proposal for Embrex to retain an investment banking
firm.
(c) Micro Cap and Palo Alto hereby withdraw in its entirety the
notice dated March 29, 1999, which was made by CEDE & Co. on behalf of Micro
Cap, regarding the presentation at the 1999 Annual Meeting of a proposal to
amend the provisions of Embrex's Bylaws pertaining to the call of special
meetings of shareholders and a proposal to retain an investment banking firm.
(d) Micro Cap and Palo Alto will not directly or indirectly make any
proposals at, or bring any matters before, the 1999 Annual Meeting.
(e) Micro Cap and Palo Alto acknowledge and agree that the only
proposals to be included in Embrex's proxy materials for the 1999 Annual Meeting
shall be the election of directors and the ratification of accountants.
(f) Micro Cap and Palo Alto acknowledge and agree that all requests
for inspection of corporate records and other information of Embrex made by or
on behalf of Micro Cap and Palo Alto have been satisfied or withdrawn.
3. Other Agreements.
(a) Mr. Smiley consents and agrees to be nominated and elected, and
to serve, as a director of Embrex as contemplated by this Agreement.
(b) Mr. Edwards shall not make any proposals at, or bring any matters
before, the 1999 Annual Meeting. Mr. Edwards shall cause each of Micro Cap and
Palo Alto to perform its obligations under this Agreement.
(c) Micro Cap, Palo Alto and Mr. Edwards release Embrex, and Embrex
releases Micro Cap, Palo Alto and Mr. Edwards, from any and all claims, causes
of action, liabilities, costs and expenses, known or unknown, arising out of
related to any of the matters or materials referred to in this Agreement,
including, without limitation, relating to any proposals for the 1999 Annual
Meeting. The provisions of this Section 3(c) also shall apply to any affiliate,
director, officer, employee, agent, partner, or representative of Embrex, Micro
Cap, Palo Alto and Mr. Edwards. Nothing in this Agreement shall be construed as
an admission of any liability or otherwise by any party.
(d) This Agreement constitutes the full understanding of the parties
and a complete statement of the terms of their agreement with respect to the
subject matter contained herein and supersedes and cancels all prior agreements,
negotiations, correspondence, undertakings and communications of the parties,
oral or written, respecting such subject matter. This Agreement, or any
provision hereof, may not be amended, changed, modified or waived, except by
written instrument signed by the parties hereto. This Agreement shall be
governed by and construed under the laws of the State of North Carolina.
(e) The parties acknowledge and agree that an award of money damages
would be inadequate for the breach of this Agreement, and any such breach would
cause irreparable harm; accordingly, the parties agree that in the event of any
breach of this Agreement, a party will be entitled, without the requirement of
posting a bond or other security, to equitable relief, including injunctive
relief and specific performance.
2
<PAGE>
(f) This Agreement may be executed in any number of counterparts,
each of which when executed and delivered shall be deemed to be and original and
all of which counterparts taken together shall constitute but one and the same
instrument. This Agreement may be executed and delivered by facsimile.
EMBREX, INC.
By: /s/ Randall L. Marcuson
--------------------------------------
Randall L. Marcuson
President and Chief Executive Officer
MICRO CAP PARTNERS, L.P.
By: Its General Partner,
Palo Alto Investors, Inc.
By: /s/ William L. Edwards
--------------------------------------
Name:
Title:
PALO ALTO INVESTORS, INC.
By: /s/ William L. Edwards
--------------------------------------
Name: William L. Edwards
Title: President and Chief Executive Officer
/s/ Walter Smiley
------------------------------------
WALTER SMILEY
/s/ William L. Edwards
------------------------------------
WILLIAM L.EDWARDS
3
EXHIBIT 10.2
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT (this "Agreement") dated as of this
1st day of April, 1999 among Embrex, Inc., a North Carolina corporation (the
"Company"), Randall L. Marcuson, Charles E. Austin, C. Daniel Blackshear, Lester
M. Crawford, D.V.M. Ph.D., Peter J. Holzer, Kenneth N. May, Ph.D., and Arthur M.
Pappas (each an "Indemnitee" and collectively the "Indemnitees").
WITNESSETH:
For good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree as follows:
1. Indemnification. To the fullest extent from time to time permitted by
law, the Company will indemnify and hold harmless each Indemnitee who was or is
a party or is threatened to be made a party to any threatened, pending, or
completed action, suit or proceeding, whether civil, criminal, administrative,
or investigative by reason of the fact that he is or was a director, officer,
employee, shareholder, agent, or other representative of the Company, or is or
was serving at the request of the Company as a director, officer, employee,
trustee, or agent of another corporation, partnership, joint venture, trust, or
other enterprise, against any and all costs or losses whatsoever, including but
not limited to expenses (including attorneys' and other fees), judgments, fines
and amounts paid in settlement, incurred by the Indemnitee in connection with
such action, suit or proceeding. Provided, however, indemnification shall not be
permitted under this Agreement: (i) in connection with any proceeding charging
improper personal benefit to the Indemnitee, whether or not involving action in
his official capacity, in which the Indemnitee was adjudged liable on the basis
that personal benefit was improperly received by the Indemnitee; (ii)
<PAGE>
with respect to any criminal action or proceeding, unless the Indemnitee acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interest of the Corporation and had no reasonable cause to believe his
conduct was unlawful; and (iii) as to an Indemnitee in the capacity of a
shareholder, in connection with any report, form, or other filing required to be
made by the Indemnitee, in the capacity as a shareholder, under federal or state
securities laws.
2. Indemnification under By-Laws. In furtherance of the indemnification
provided in Section 1, the Company agrees that it shall maintain in full force
and effect the indemnification provisions of the Company's By-Laws as currently
in effect (the "By-Laws") with respect to the Indemnitees, shall not amend or
otherwise restrict or impair such provisions as they may apply to the
Indemnitees and shall indemnify the Indemnitees to the fullest extent permitted
by the By-Laws; provided, however, that the Company shall not be required by
this Section 2 to indemnify the Indemnitees to any extent prohibited by law.
3. Expenses; Indemnification Procedure.
(a) Advancement of Expenses. Expenses (including attorneys' and other
fees) incurred by an Indemnitee in defending any civil, criminal, administrative
or investigative action, suit or proceeding shall be paid by the Company in
advance of the final disposition of such action, suit or proceeding. All
advances to be made hereunder shall be paid by the Company to the Indemnitee
within 10 days following a written request therefor from the Indemnitee.
(b) Notice/Cooperation by Indemnitee. An Indemnitee shall give the
Company prompt notice in writing of the commencement of any action, suit or
proceeding, or the threat thereof against the Indemnitee, for which
indemnification will or could be sought under this Agreement. In addition, the
Indemnitee shall give the Company such information and cooperation as it may
reasonably require and as shall be within the Indemnitee's power.
2
<PAGE>
(c) Procedure. (i) Any amounts payable by the Company pursuant to the
indemnification under this Agreement shall be paid no later than ten business
days after receipt of the written request of Indemnitee. If a claim is brought
by an Indemnitee under this Agreement, any statute, or any provision of the
Company's Certificate of Incorporation or By-Laws which provides for
indemnification, and if such claim is not paid in full by the Company within 30
days after a written request by the Indemnitee for payment thereof was first
received by the Company, the Indemnitee may, but need not, at any time
thereafter bring an action against the Company to recover the unpaid amount of
the claim and, subject to Section 9 of this Agreement, the Indemnitee shall also
be entitled to be reimbursed for the expense (including reasonable attorneys'
fees) of bringing such action. It shall be a defense to any such action (other
than an action brought to enforce a claim for expenses incurred in connection
with any action or proceeding in advance of its final disposition) that the
Indemnitee has not met the standards of conduct which make it permissible under
applicable law for the Company to indemnify the Indemnitee for the amount
claimed, but the burden of proving such defense shall be on the Company, and the
Indemnitee shall be entitled to receive interim payments of expenses pursuant to
Subsection 3(a) unless and until such defense shall be finally adjudicated by
court order or judgment from which no further right of appeal exists.
(ii) If the Company refuses or rejects an Indemnitee's claim for
indemnification hereunder, and in the event the Indemnitee shall thereafter seek
judicial enforcement of this Agreement, neither the failure of the Company
(including its Board of Directors, any committee or subgroup of the Board of
Directors, or independent legal counsel) to have made a determination that
indemnification of the Indemnitee is proper in the circumstance because the
Indemnitee has met the applicable standard of conduct required by applicable
law, nor an actual
3
<PAGE>
determination by the Company (including its Board of Directors, any committee or
subgroup of the Board of Directors, or independent legal counsel) that the
Indemnitee has not met such applicable standard of conduct, shall create a
presumption that the Indemnitee has or has not met the applicable standard of
conduct.
(d) Notice to Insurers. If, at the time of the receipt of a notice of
prospective claim pursuant to Section 3(b) hereof, the Company has in effect any
insurance, including directors' and officers' liability insurance, which may
provide for payment of or reimbursement for such claim, the Company shall give
prompt notice of the assertion of such claim to each issuer of such insurance in
accordance with the procedures set forth in the respective policies. The Company
shall thereafter take all necessary or desirable action to cause such insurers
to pay, on behalf of an Indemnitee, all amounts payable as a result of such
proceeding in accordance with the terms of, and to the extent provided in, such
policies.
(e) Insurance Offset. The Company's obligation to provide
indemnification to an Indemnitee under this Agreement shall be reduced to the
extent the Indemnitee actually receives indemnification from any other source
(including any otherwise applicable insurance coverage available to the
Indemnitee) to the extent the failure to reduce the indemnification under this
Agreement would result in Indemnitee being paid in excess of Indemnitee's total
loss.
(f) Expenses. "Expenses" referred to in this Agreement shall be
construed as broad as allowed by law and shall include all costs and losses
whatsoever, including but not limited to the cost of investigations, hearings,
attorneys' fees, court costs, damages, liabilities, judgments, fines, and
settlements, plus any costs of establishing a right to indemnification under
this Agreement.
4
<PAGE>
4. Partial Indemnification. If an Indemnitee is entitled under any
provision of this Agreement to indemnification by the Company for some or a
portion of the expenses, judgments, fines or penalties incurred by the
Indemnitee in the investigation, defense, appeal or settlement of any civil or
criminal action or proceeding, but not, however, for the total amount thereof,
the Company shall nevertheless indemnify the Indemnitee for the portion of such
expenses, judgments, fines or penalties to which the Indemnitee is entitled.
5. Scope of Indemnification. Notwithstanding any other provisions of
this Agreement, the Company hereby agrees to indemnify the Indemnitees to the
fullest extent permitted by law, whether or not such indemnification is
specifically authorized by the other provisions of this Agreement or by the
Company's Certificate of Incorporation, the By-Laws, or statute. In the event of
any change after the date of this Agreement, in any applicable law, statute or
rule which expands the right of the Company to indemnify persons serving in any
of the capacities set forth in Section 1 above, such changes shall, without
further action by the Company, be included within the scope of the
indemnification provided to the Indemnitees by, and the Company's obligations
under, this Agreement. In the event of any change in the applicable law, statute
or rule that limits or restricts the right of the Company to indemnify persons
serving in any of the capacities set forth in Section 1 above, such changes
shall have no effect on this Agreement or the parties' rights and obligations
hereunder, except to the extent required by such law, statute or rule.
6. Benefit of Agreement. The rights of the Indemnitees hereunder shall
inure to the benefit of each Indemnitee, whether or not he is a director,
officer, or in any other position or relationship with the Company at the time
such liabilities or expenses are imposed or incurred,
5
<PAGE>
and whether or not the claim asserted against him is based on matters that
antedate the execution of this Agreement.
7. Nonexclusivity. The rights of the Indemnitees hereunder are in
addition to any other rights to which the Indemnitee may be entitled under any
law, statute, certificate of incorporation, bylaw, agreement, vote of
stockholders or directors, insurance policy, or otherwise, both as to action in
his official capacity and as to action in another capacity while holding such
office. The rights of any Indemnitee hereunder shall not be affected by any
adverse change in the rights to which Indemnitee may be entitled under any such
law, statute, certificate of incorporation, bylaw, or agreement.
8. Directors' and Officers' Liability Insurance. The Company may
maintain a policy or policies of directors' and officers' insurance with
reputable insurance companies providing the Indemnitees with coverage for losses
from wrongful acts or omissions, or to ensure the Company's performance of its
indemnification obligations under this Agreement. In all policies of directors'
and officers' liability insurance, the Indemnitees shall be named as insureds in
such a manner as to provide the Indemnitees the same rights and benefits as are
accorded to the most favorably insured of the Company's insured.
9. Attorneys' Fees. In the event that any action is instituted by an
Indemnitee or the Company under this Agreement to enforce or interpret any of
the terms hereof and such action is adjudicated in favor of the Indemnitee, the
Indemnitee shall be entitled to be paid all court costs and expenses, including
reasonable attorneys' fees, incurred by the Indemnitee with respect to such
action.
10. Notices. All notices, requests, demands and other communications
under this Agreement shall be in writing and shall be deemed duly given (i) if
delivered by hand and
6
<PAGE>
receipted for by the party addressee, on the date of such receipt or (ii) if
mailed by domestic certified or registered mail with postage prepaid, on the
third business day after the date postmarked. Addresses for notice to either
party are as shown on Schedule A hereto, or as subsequently designated by
written notice to the other parties.
11. Successors. This Agreement shall be binding upon the successors and
assigns of the Company and shall inure to the benefit of the successors, heirs
and legal representatives of the Indemnitees.
12. Severability. If this Agreement or any portion thereof shall be
invalidated on any ground by any court of competent jurisdiction, the Company
shall nevertheless indemnify each Indemnitee to the full extent permitted by any
applicable portion of this Agreement that shall not have been invalidated or by
any other applicable law.
13. Miscellaneous. This Agreement shall be governed by and construed in
accordance with the laws of the State of North Carolina. This Agreement may be
executed in any number of counterparts, each of which shall constitute an
original.
7
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
as of the date first written above.
EMBREX, INC.
By: /s/ Randall L. Marcuson
---------------------------------
Name: Randall L. Marcuson
Title: President and Chief
Executive Officer
INDEMNITEES:
/s/ Randall L. Marcuson
------------------------------------
Randall L. Marcuson
/s/ Charles E. Austin
------------------------------------
Charles E. Austin
/s/ C. Daniel Blackshear
------------------------------------
C. Daniel Blackshear
/s/ Lester M. Crawford
------------------------------------
Lester M. Crawford, D.V.M. Ph.D.
/s/ Peter J. Holzer
------------------------------------
Peter J. Holzer
/s/ Kenneth N. May, Director
------------------------------------
Kenneth N. May, Ph.D.
/s/ Arthur M. Pappas
-----------------------------------
Arthur M. Pappas
8
<PAGE>
SCHEDULE A
Addresses
Embrex, Inc.
1035 Swabia Court
Durham, North Carolina 27703
Randall L. Marcuson
3001 Old Weaver Trail
Creedmoor, NC 27522
Charles E. Austin
2832 Wilfred Reid Circle
Sarasota, FL 34240
C. Daniel Blackshear
104 Point Shore Drive
Goldsboro, NC 27534
Lester M. Crawford, D.V.M. Ph.D.
5815 Highland Drive
Chevy Chase, MD 20815
Peter J. Holzer
183 Edgerstoune Road
Princeton, NJ 08540
Kenneth N. May, Ph.D.
203 McElwee Street, Finley Park
North Wilkesboro, NC 28659
Arthur M. Pappas
4000 Dover Road
Durham, NC 27707
9
EMBREX, INC.
AMENDED AND RESTATED INCENTIVE STOCK OPTION
AND NONSTATUTORY STOCK OPTION PLAN
JANUARY 14, 1999
1. PURPOSE
-------
The purpose of this Incentive Stock Option and Nonstatutory Stock Option
Plan (hereinafter referred to as the "Plan") is to provide a special incentive
to selected individuals ("Participants") who have made significant contributions
to the business of Embrex, Inc. (hereinafter referred to as the "Company"). The
Plan is designed to accomplish this purpose by offering such individuals an
opportunity to purchase shares of the Common Stock of the Company so that they
will share in the Company's future growth and success.
2. ADMINISTRATION AND TYPES OF OPTION
----------------------------------
(A) ADMINISTRATION. The Plan shall be administered by a Compensation
Committee (the "Committee") to be established by the Board of Directors of the
Company (the "Board"). To the extent that the Board determines it to be
desirable to qualify options and stock awards granted hereunder as
"performance-based compensation" within the meaning of Section 162(m) of the
Internal Revenue Code of 1986, as amended (the "Code"), or to qualify
transactions hereunder as exempt under Rule 16b-3 under Section 16(b) of the
Securities Exchange Act of 1934, as amended, the Compensation Committee shall
consist, as applicable, of two or more "outside directors" within the meaning of
Section 162(m) or two or more "non-employee directors" within the meaning of
Rule 16b-3. The Committee shall have authority, consistent with the Plan,
(1) to grant options and stock awards pursuant to this Plan;
(2) to determine which individuals shall be granted options and
stock awards;
(3) to determine the time or times when options and stock awards
shall be granted and the number of shares of Common Stock to be subject to each
grant;
(4) to determine which options shall constitute incentive stock
options and which options shall constitute nonstatutory stock options;
(5) to determine the option price of the shares subject to each
option and the method of payment of such price;
(6) to determine the time or times when each option becomes
exercisable and the duration of the exercise period, subject to the limitations
contained in Paragraph 6(b);
<PAGE>
(7) to prescribe the form or forms of the instruments evidencing
any options and stock awards granted under the Plan and of any other instruments
required under the Plan and to change such forms from time to time;
(8) to adopt, amend and rescind rules and regulations for the
administration of the Plan and the options and stock awards and for its own acts
and proceedings; and
(9) to decide all questions and settle all controversies and
disputes which may arise in connection with the Plan. All decisions,
determinations and interpretations of the Committee shall be binding on all
parties concerned.
(B) TYPES OF OPTIONS. Pursuant to this Plan, the Company is authorized
to grant two types of options: incentive stock options within the meaning of
Section 422 of the Code and nonstatutory stock options.
(C) STOCK AWARDS. Pursuant to this Plan, the Company is authorized to
award bonus compensation in the form of stock awards. Stock awards shall be paid
in shares of Common Stock of the Company.
3. PARTICIPANTS
------------
(A) INCENTIVE STOCK OPTIONS. Incentive stock options shall be granted
only to Participants who are, at the time of grant, employees of the Company or
of any Parent Corporation or Subsidiary. No Participant shall be granted any
incentive stock option under the Plan who, at the time such option is granted,
owns, directly or indirectly, Common Stock of the Company possessing more than
10% of the total combined voting power of all classes of stock of the Company or
of any Parent Corporation or Subsidiary, unless the requirements of paragraph
(4)(ii) of Section 7(a) are satisfied. A Participant who has been granted an
incentive stock option may, if he or she is otherwise eligible, be granted an
additional option or options if the Board shall so determine.
(B) NONSTATUTORY STOCK OPTIONS. Nonstatutory stock options shall be
granted only to Participants who are, at the time of grant, employees of the
Company, officers, directors, consultants or any other parties who have made a
significant contribution to the business and success of the Company, as may be
selected from time to time by the Board or Committee in its discretion. A
Participant who has been granted a nonstatutory stock option may, if he or she
is otherwise eligible, be granted an additional option or options if the Board
shall so determine.
(C) STOCK AWARDS. Stock Awards shall be granted, in the sole discretion
of the Board or Committee, to Participants who are, at the time of grant,
employees, officers, directors, consultants or advisors of the Company or any
Parent or Subsidiary corporation or any branch or representative office of the
Company.
2
<PAGE>
4. STOCK SUBJECT TO THE PLAN
-------------------------
No option or stock award shall be granted under the Plan after December
31, 2002, but options theretofore granted may extend beyond that date. Subject
to adjustment as provided in Section 14 of the Plan, the maximum number of
shares of Common Stock of the Company which may be issued and sold under the
Plan is one million, nine hundred thousand (1,900,000) shares. Such shares may
be authorized and unissued shares or may be shares issued and thereafter
acquired by the Company. If an option or stock award granted under the Plan
shall expire or terminate for any reason without having been exercised in full,
the unpurchased shares subject to such option or stock award shall again be
available for subsequent grants under the Plan. Stock issuable upon exercise of
an option or stock award granted under the Plan may be subject to such
restrictions on transfer, repurchase rights or other restrictions as shall be
determined by the Board or the Committee.
5. FORMS OF OPTION AGREEMENTS
--------------------------
As a condition to the grant of an option under the Plan, each recipient
of an option shall execute an option agreement substantially in the form of
Exhibit A, or in such other form not inconsistent with the Plan as shall be
specified by the Board or the Committee at the time such option is authorized to
be granted.
6. ANNUAL LIMITATIONS.
-------------------
The following limitations shall apply to grants of options:
(A) No Participant shall be granted, in any fiscal year of the Company,
options to purchase more than 300,000 shares of Common Stock.
(B) In connection with his or her initial service, a Participant may be
granted options to purchase more than 300,000 shares of Common Stock which shall
not count against the limit set forth in Section 6(a) above.
(C) The foregoing limitations shall be adjusted proportionately in
connection with any change in the Company's capitalization as described in
Section 15 hereof.
(D) If an option is canceled in the same fiscal year of the Company in
which it was granted (other than in connection with a transaction described in
Section 16), the canceled option will be counted against the limits set forth in
Section 6(a) and Section 6(b) above. For this purpose, if the exercise price of
an option is reduced, the transaction will be treated as a cancellation of the
option and the grant of a new option.
3
<PAGE>
7. TERMS AND CONDITIONS OF OPTIONS
-------------------------------
All options granted under the Plan shall be subject to the following
terms and conditions (except as provided in Section 11) and to such other terms
and conditions as the Board or Committee shall determine to be appropriate to
accomplish the purposes of the Plan:
(A) INCENTIVE STOCK OPTIONS
-----------------------
(1) PURCHASE PRICE. The purchase price per share of stock
deliverable upon exercise of an option shall be determined by the Board or
Committee on the date such option is granted; provided, however, that the
exercise price shall not be less than 100% of the fair market value of such
stock, as determined by the Board, at the grant of such option, or less than
110% of such fair market value in the case of options described in paragraph
(4)(ii) of Section 7(a).
(2) OPTION PERIOD. Each option and all rights hereunder shall
expire on such date as the Board or the Committee shall determine on the date
such option is granted, but in no event after the expiration of ten years from
the day on which the option is granted (or five years in the case of options
described in paragraph (4)(ii) of Section 7(a)), and shall be subject to earlier
termination as provided in the Plan.
(3) TERMINATION OF EMPLOYMENT. No option may be exercised unless,
at the time of such exercise, the Participant is, and has been, since the date
of grant of his or her option, continuously employed by one or more of the
Company, a Parent Corporation or a Subsidiary, except that if and to the extent
the option agreement or instrument so provides:
(i) the option may be exercised within such period of time
as is specified in the option agreement to the extent that the option is vested
on the date of termination (but in no event later than the expiration of the
term of such option as set forth in the option agreement). In the absence of a
specified time in the option agreement, the option shall remain exercisable for
three (3) months following the Participant's termination;
(ii) if the Participant dies while in the employ of the
Company, a Parent Corporation or a Subsidiary or within three months after the
Participant ceases to be such an employee, the option may be exercised within
such period of time as is specified in the option agreement to the extent that
the option is vested on the date of death (but in no event later than the
expiration of the term of such option as set forth in the option agreement) by
the Participant's estate or by a person who acquires the right to exercise the
option by bequest or inheritance. In the absence of a specified time in the
option agreement, the option shall remain exercisable for twelve (12) months
following the Participant's death; and
(iii) if the Participant becomes disabled (within the
meaning of Section 22(e)(3) of the Code) while in the employ of the Company, a
Parent Corporation or Subsidiary, and ceases to be an employee as a result of
such disability, the Participant may exercise his or her option within such
period of time as is specified in the option agreement to the extent the option
is vested on the date of termination, but in no event later than the expiration
4
<PAGE>
date of the term of such option as set forth in the option agreement. In the
absence of a specified time in the option agreement, the option shall remain
exercisable for twelve (12) months following the Participant's termination;
(iv) if the Participant ceases his or her employment with
the Company, a Parent Corporation or Subsidiary because he or she is discharged
for cause, the right to exercise the option shall terminate immediately upon
such cessation of employment;
provided, however, that in no event may any option be exercised after the
expiration date of the option nor may any option be exercised to an extent
greater than that exercisable on the last day of the Participant's employment.
For all purposes of the Plan and any option granted hereunder, "employment"
shall be defined in accordance with the provisions of Section 1.421-7(h) of the
Income Tax Regulations (or any successor regulations).
(4) LIMITATIONS.
(i) Dollar Limitation. The aggregate fair market value
(determined as of the respective date or dates of grant) of the Common Stock
with respect to which options granted to any employee under the Plan (and under
any other incentive stock option plans of the Company, and any Parent
Corporation and Subsidiary) are exercisable for the first time shall not exceed
$100,000 in any one calendar year. In the event that Section 422 of the Code is
amended to alter the limitation set forth therein so that following such
amendment such limitation shall differ from the limitation set forth in this
paragraph, the limitation of this paragraph shall be automatically adjusted
accordingly.
(ii) Ten Percent Shareholder. If any employee to whom an
option is to be granted under the Plan is at the time of the grant of such
option the owner of stock possessing more than 10% of the total combined voting
power of all classes of stock of the Company or of any Parent Corporation or any
Subsidiary, then the following special provisions shall be applicable to the
option granted to such individual: the purchase price per share of the Common
Stock subject to such option shall not be less than 110% of the fair market
value of one share of Common Stock at the time of grant and the option exercise
period shall not exceed five years from the date of grant.
(B) NONSTATUTORY STOCK OPTIONS
--------------------------
(1) PURCHASE PRICE. The purchase price per share of stock
deliverable upon exercise of an option shall be determined by the Board or
Committee on the date such option is granted; provided, however, that the
exercise price shall not be less than one hundred percent (100%) of the fair
market value of such stock, as determined by the Board or Committee, at the
grant of such option.
(2) PERIOD OF OPTIONS. The period of an option shall not exceed
ten years from the date of grant.
5
<PAGE>
(3) TERMINATION OF EMPLOYMENT. No option may be exercised unless,
at the time of such exercise, the Participant is, and has been continuously
since the date of grant of his or her option, employed by one or more of the
Company, a Parent Corporation or a Subsidiary, except that if and to the extent
the option agreement or instrument so provides:
(i) the option may be exercised within such period of time
as is specified in the option agreement to the extent that the option is vested
on the date of termination (but in no event later than the expiration of the
term of such option as set forth in the option agreement). In the absence of a
specified time in the option agreement, the option shall remain exercisable for
three (3) months following the Participant's termination;
(ii) if the Participant dies while in the employ of the
Company, a Parent Corporation or a Subsidiary or within three months after the
Participant ceases to be such an employee, the option may be exercised within
such period of time as is specified in the option agreement to the extent that
the option is vested on the date of death (but in no event later than the
expiration of the term of such option as set forth in the option agreement) by
the Participant's estate or by a person who acquires the right to exercise the
option by bequest or inheritance. In the absence of a specified time in the
option agreement, the option shall remain exercisable for twelve (12) months
following the Participant's death; and
(iii) if the Participant becomes disabled (within the
meaning of Section 22(e)(3) of the Code) while in the employ of the Company, a
Parent Corporation or Subsidiary, and ceases to be an employee as a result of
such disability, the Participant may exercise his or her option within such
period of time as is specified in the option agreement to the extent the option
is vested on the date of termination, but in no event later than the expiration
date of the term of such option as set forth in the option agreement. In the
absence of a specified time in the option agreement, the option shall remain
exercisable for twelve (12) months following the Participant's termination;
(iv) if the Participant ceases his or her employment with
the Company, a Parent Corporation or Subsidiary because he or she is discharged
for cause, the right to exercise the option shall terminate immediately upon
such cessation of employment;
provided, however, that in no event may any option be exercised after the
expiration date of the option nor may any option be exercised to an extent
greater than that exercisable on the last day of the Participant's employment.
For all purposes of the Plan and any option granted hereunder, "employment"
shall be defined in accordance with the provisions of Section 1.421-7(h) of the
Income Tax Regulations (or any successor regulations).
(6) DIRECTOR OPTIONS. Notwithstanding the Committee's authority
to administer the Plan as set forth in Section 2(a) hereinabove, options shall
be granted to all nonofficer members of the Board upon their initial election to
the Board and on an annual basis without further action by the Committee or the
Board. Each qualifying director shall receive an option to purchase 2,500 shares
at the fair market value of such shares on the date of grant upon his or her
initial election or appointment to the Board (commencing with appointments or
6
<PAGE>
elections of nonofficer directors in and after 1995) and shall receive annually
an option to purchase additional shares at the fair market value of such shares
on the date of grant in accordance with the following schedule:
Year Number of Shares
---- ----------------
1993 2,000
1994 3,000
1995 4,000
1996 and each 5,000
year thereafter
Director options shall be exercisable for a full ten-year period,
whether or not a director remains with the Company for the entire period, and
the vesting schedule for director options shall be at the discretion of the
Committee. If a director has not qualified for an annual award under the
schedule above because he or she was not still a director at the time of the
annual grant, whether by reason of resignation, removal or death, the Committee
shall, in its sole discretion, determine whether or not an option shall be
awarded and the number of shares purchasable under any such option.
8. EXERCISE OF OPTIONS
-------------------
(A) Each option granted under the Plan shall be exercisable either in
full or in installments at such time or times, and during such period, as shall
be set forth in the agreement evidencing such option; provided, however, that no
option granted under the Plan shall have a term in excess of ten years from the
date of grant.
(B) A person electing to exercise an option shall give written notice to
the Company, as specified by the Board or Committee, of his election and of the
number of shares he/she has elected to purchase, such notice to be accompanied
by such instruments or documents as may be required by the Board or Committee,
and unless otherwise directed by the Board or Committee shall at the time of
such exercise tender the purchase price in cash of the shares he/she has elected
to purchase. For all nonstatutory stock options granted prior to April 30, 1998
and for all nonstatutory and all incentive stock options issued after April 30,
1998, payment of the purchase price of the shares may be made, at the discretion
of the Participant, and to the extent permitted by the Board or Committee, (i)
in cash, (ii) in Common Stock of the Company (valued at the fair market value
thereof on the date of exercise) through the surrender of previously held shares
of Common Stock of the Company (by delivery of stock certificates in negotiable
form), (iii) by a combination of cash and Common Stock of the Company or (iv)
with any other consideration (including payment in accordance with a cashless
exercise program under which, if so instructed by the participant, shares of
Common Stock of the Company may be issued directly to the participant's broker
or dealer upon receipt of the purchase price in cash from the broker or dealer).
7
<PAGE>
9. PAYMENT FOR ISSUANCE OF SHARES
------------------------------
The Board or Committee may in its sole discretion permit the issuance of
stock upon a partial payment under any plan it deems reasonable, provided that
the then unpaid portion of the purchase price shall be evidenced by a promissory
note at such rate of interest and upon such other terms and conditions as the
Board or Committee shall deem appropriate. In all cases where stock is issued
for less than present full payment of the purchase price, there shall be placed
upon the certificate a legend setting forth the amount paid at issuance, and the
amount remaining unpaid thereon, and that the shares are subject to call for the
remainder and may not be transferred by the holder until the balance due thereon
shall be fully paid.
The Company shall not be obligated to issue any shares unless and until,
in the opinion of the Company's counsel, all applicable laws and regulations
have been complied with, nor, in the event the outstanding Common Stock is at
the time listed upon any stock exchange, unless and until the shares to be
issued have been listed or authorized to be added to the list upon official
notice of issuance upon such exchange, nor unless or until all other legal
matters in connection with the issuance and delivery of shares have been
approved by the Company's counsel. Without limiting the generality of the
foregoing, the Company may require from the Participant such investment
representation or such agreement, if any, as counsel for the Company may
consider necessary in order to comply with the Securities Act of 1933 as then in
effect, and may require that the Participant agree that any sale of the shares
will be made only in such manner as is permitted by the Board or Committee and
that the Participant will notify the Company when he/she intends to make any
disposition of the shares whether by sale, gift or otherwise. The Participant
shall take any action reasonably requested by the Company in such connection. A
Participant shall have the rights of a shareholder only as to shares actually
acquired by him/her under the Plan.
10. NONTRANSFERABILITY OF OPTIONS
-----------------------------
Unless determined otherwise by the Committee, an option may not be sold,
pledged, assigned, hypothecated, transferred, or disposed of in any manner other
than by will or by the laws of descent or distribution and may be exercised,
during the lifetime of the Participant, only by the Participant. If the
Committee makes an option transferable, such option shall contain such
additional terms and conditions as the Committee deems appropriate.
11. REPLACEMENT OPTIONS
-------------------
The Company may grant options under the Plan on terms differing from
those provided for in Section 7 where such options are granted in substitution
for options held by employees of other corporations who concurrently become
employees of the Company or a subsidiary as the result of a merger,
consolidation or other reorganization of the employing corporation with the
Company or subsidiary, or the acquisition by the Company or a subsidiary of the
business, property or stock of the employing corporation. The Committee may
direct that the substitute options be granted on such terms and conditions as
the Board or Committee considers appropriate in the circumstances.
8
<PAGE>
12. STOCK AWARDS
------------
Stock awards are bonus awards payable to Participants in shares of
Common Stock. Stock awards may be granted either alone or in addition to cash
awards or options granted under this Plan. The Board or the Committee, in its
sole discretion, shall determine eligibility, the number of shares covered by
stock awards and all other terms and conditions of stock awards, which need not
be identical with respect to all stock awards.
13. GENERAL RESTRICTIONS
--------------------
(A) INVESTMENT REPRESENTATION. The Company may require any person to
whom an option or stock award is granted, to give written assurances in
substance and form satisfactory to the Company to the effect that such person is
acquiring the Common Stock subject to the option or stock award for his or her
own account for investment and not with any present intention of selling or
otherwise distributing the same, and to such other effects as the Company deems
necessary or appropriate in order to comply with Federal and applicable state
securities laws.
(B) COMPLIANCE WITH SECURITIES LAWS. Each option and stock award shall
be subject to the requirement that, if at any time counsel to the Company shall
determine that the listing, registration or qualification of the shares subject
to such option or stock award upon any securities exchange or under any state or
Federal law, or the consent or approval of any governmental or regulatory body,
is necessary as a condition of, or in connection with, the issuance or purchase
of shares thereunder, such option or stock award may not be accepted or
exercised in whole or in part unless such listing, registration, qualification,
consent or approval shall have been effected or obtained on conditions
acceptable to the Board. Nothing herein shall be deemed to require the Company
to apply for or to obtain such a listing, registration or qualification.
14. RIGHTS AS A SHAREHOLDER
-----------------------
The holder of an option or stock award shall have no rights as a
shareholder with respect to any shares covered by the option or stock award
until the date of issue of a stock certificate to him or her for such shares.
Except as otherwise expressly provided in the Plan, no adjustments shall be made
for dividends or other rights for which the record date is prior to the date
such stock certificate is issued.
15. RECAPITALIZATION
----------------
In the event that the outstanding shares of Common Stock of the Company
are changed into or exchanged for a different number or kind of shares or other
securities of the Company by reason of any recapitalization, reclassification,
stock split, stock dividend, combination or subdivision, appropriate adjustment
shall be made in the number and kind of shares available under the Plan and
under any options or stock awards granted under the Plan. Such adjustment to
outstanding options shall be made without change in the total price applicable
to the unexercised portion of such options, and a corresponding adjustment in
the applicable option
9
<PAGE>
price per share shall be made. No such adjustment shall be made which would,
within the meaning of any applicable provisions of the Code, constitute a
modification, extension or renewal of any option or a grant of additional
benefits to the holder of an option or which would cause any incentive stock
option to fail to continue to qualify as an incentive stock option within the
meaning of Section 422 of the Code.
16. REORGANIZATION
--------------
In case the Company is merged or consolidated with another corporation
and the Company is not the surviving corporation, or in case all or
substantially all of the assets or more than 50% of the outstanding voting stock
of the Company is acquired by any other corporation, or in case of a
reorganization or liquidation of the Company, the Board or the board of
directors of any corporation assuming the obligations of the Company, shall, as
to outstanding options, either (i) make appropriate provisions for the
protection of any such outstanding options by the substitution on an equitable
basis of appropriate stock of the Company, or of the merged, consolidated or
otherwise reorganized corporation which will be issuable in respect of the
shares of Common Stock of the Company, provided that no additional benefits
shall be conferred upon Participants as a result of such substitution, and the
excess of the aggregate fair market value of the shares subject to the options
immediately after such substitution over the purchase price thereof is not more
than the excess of the aggregate fair market value of the shares subject to such
options immediately before such substitution over the purchase price thereof, or
(ii) provide written notice to the Participants that all unexercised options
must be exercised within a specified number of days of the date of such notice
or they will be terminated. In any such case, the exercise dates of outstanding
options shall automatically accelerate and the options shall become fully vested
and exercisable as of the date of such notice and shall remain exercisable for
such specified period of days thereafter.
17. NO SPECIAL RIGHTS
-----------------
In the event the holder of an option or stock award is also an employee
of, or has any other relationship with, the Company, nothing contained in this
Plan or in any option or stock award granted under the Plan shall confer upon
any holder of an option or stock award any right with respect to the
continuation of his or her employment or other relationship with the Company (or
any Parent Corporation or Subsidiary), nor shall it interfere in any way with
the right of the Company (or any Parent Corporation or Subsidiary) at any time
to terminate such employment or other relationship or to increase or decrease
the compensation of the holder of the option or stock award from the rate in
existence at the time of the grant of an option or stock award. Whether an
authorized leave or absence, or absence in military or governmental service,
shall constitute termination or cessation of employment for purposes of this
Plan shall be determined by the Board, except as regulated by law.
10
<PAGE>
18. DEFINITIONS
-----------
(A) SUBSIDIARY. The term "Subsidiary" as used in the Plan shall mean any
corporation in an unbroken chain of corporations beginning with the Company if
each of the corporations other than the last corporation in the unbroken chain
owns stock possessing 50% or more of the total combined voting power of all
classes of stock in one of the other corporations in such chain.
(B) PARENT CORPORATION. The term "Parent Corporation" as used in the
Plan shall mean any corporation (other than the Company) in an unbroken chain of
corporations ending with the Company if each of the corporations other than the
Company owns stock possessing 50% or more of the combined voting power of all
classes of stock in one of the other corporations in such chain.
19. AMENDMENT
---------
The Board or the Committee may at any time discontinue granting options
or stock awards under the Plan. In addition, the Board may at any time and from
time to time modify or amend the Plan in any respect, except that without the
approval of the shareholders of the Company, the Board may not (a) materially
increase the benefits accruing to individuals who participate in the Plan, (b)
materially increase the maximum number of shares which may be issued under the
Plan (except for permissible adjustments provided in the Plan), or (c)
materially modify the requirements as to eligibility for participation in the
Plan. The modification or amendment of the Plan shall not, without the consent
of a Participant, affect his or her rights under an option or stock award
previously granted to him or her; provided, however, that with the consent of
the Participant affected, the Board may amend outstanding option agreements and
stock awards in a manner not inconsistent with the Plan and, with respect to
incentive stock options, the Board shall have the right to amend or modify the
terms and provisions of the Plan and of any such options outstanding granted
under the Plan to the extent necessary to qualify any or all such options for
favorable income tax treatment (including deferral of taxation upon exercise) as
may be afforded incentive stock options under Section 422 of the Code.
20. WITHHOLDING
-----------
The Company's obligation to deliver shares upon the exercise of any
option or any stock award granted under the Plan shall be subject to the
holder's satisfaction of all applicable Federal, state and local tax withholding
requirements.
21. SECTION 16 COMPLIANCE
---------------------
With respect to persons subject to Section 16 of the Securities Exchange
Act of 1934 (the "1934 Act"), transactions under this Plan are intended to
comply with all applicable conditions of Rule 16b-3 or its successor rules under
the 1934 Act. To the extent that any provision of this Plan or action by the
Committee or Board fails to so comply, such provision or action shall be
11
<PAGE>
deemed null and void to the extent permitted by law and deemed advisable by the
Committee or Board.
22. EFFECTIVE DATE AND DURATION OF THE PLAN
---------------------------------------
(A) EFFECTIVE DATE. The Plan shall become effective when adopted by the
Board, but no option granted under the Plan shall become exercisable and no
stock award shall be granted unless and until the Plan shall have been approved
by the Company's shareholders. If such shareholder approval is not obtained
within twelve months after the date of the Board's adoption of the Plan, any
options and stock awards previously granted under the Plan shall terminate and
no further options or stock awards shall be granted. Subject to this limitation,
options and stock awards may be granted under the Plan at any time after the
effective date and before the date fixed for termination of the Plan.
(B) TERMINATION. The Plan shall terminate upon the earlier of (i) the
close of business on the day preceding the tenth anniversary of the date of its
adoption by the Board, or (ii) the date on which all shares available for
issuance under the Plan shall have been issued pursuant to the exercise or
cancellation of options and stock awards granted under the Plan. If the date of
termination is determined under (i) above, options and stock awards outstanding
on such date shall continue to have force and effect in accordance with the
provisions of the instruments evidencing such grants.
12
<PAGE>
EXHIBIT A
EMBREX, INC.
AMENDED AND RESTATED INCENTIVE STOCK OPTION
AND NONSTATUTORY STOCK OPTION PLAN
STOCK OPTION AGREEMENT
Unless otherwise defined herein, the terms defined in the Amended and
Restated Incentive Stock Option and Nonstatutory Stock Option Plan (the "Plan")
shall have the same defined meanings in this Option Agreement.
I. NOTICE OF STOCK OPTION GRANT
----------------------------
You have been granted an Option to purchase Common Stock of the Company,
subject to the terms and conditions of the Plan and this Option Agreement, as
follows:
Grant Number
-----------
Date of Grant __________
Exercise Price per Share $_________
Total Number of Shares Granted
-------------
Type of Option: ---------- Incentive Stock Option
---------- Nonstatutory Stock Option
Term/Expiration Date: ______________
Vesting Schedule:
This Option shall be exercisable, in whole or in part, according
to the following vesting schedule:
<PAGE>
25% of the Shares subject to the option shall vest on each of the first
anniversaries of the Vesting Commencement Date, subject to you continuing to be
an employee, consultant or director of the Company on such dates; provided,
however, that upon an "ownership change"( as that term is used in Internal
Revenue Code section 382), all outstanding options granted pursuant to this
Agreement shall become immediately exercisable in full.
Period for Exercise Following Termination:
This Option shall be exercisable for 90 days after you cease to be an
employee, consultant or director (a "Service Provider"). Upon your death or
disability, this Option may be exercised for one year after you cease to be a
Service Provider. In no event shall this Option be exercised later than the
Term/Expiration Date as provided above.
II. AGREEMENT
---------
1. Grant of Option. The Committee hereby grants to the optionee named in
the Notice of Grant attached as Part I of this Agreement (the "Optionee"), an
option (the "Option") to purchase the number of Shares set forth in the Notice
of Grant, at the exercise price per share set forth in the Notice of Grant (the
"Exercise Price"), subject to the terms and conditions of this Agreement and the
Plan, which is incorporated herein by reference. Subject to Section 18 of the
Plan, in the event of a conflict between the terms and conditions of the Plan
and the terms and conditions of this Option Agreement, the terms and conditions
of the Plan shall prevail.
If designated in the Notice of Grant as an Incentive Stock Option
("ISO"), this Option is intended to qualify as an Incentive Stock Option under
Section 422 of the Code. However, to the extent that an option designated as an
ISO exceeds the $100,000 rule of Code Section 422(d), it shall be treated as a
Nonstatutory Stock Option ("NSO").
2. Exercise of Option.
(a) Right to Exercise. This Option shall be exercisable during
its term in accordance with the Vesting Schedule set out in the Notice of Grant
and with the applicable provisions of the Plan and this Option Agreement.
(b) Method of Exercise. This Option shall be exercisable by
delivery of an exercise notice in the form attached as Exhibit B (the "Exercise
Notice"), which shall state the election to exercise the Option, the number of
Shares with respect to which the Option is being exercised (the "Exercised
Shares"), and such other representations and agreements as may be required by
the Company pursuant to the provisions of the Plan. The Exercise Notice shall be
completed by the Optionee and delivered to the Stock Plan Administrator. The
Exercise Notice shall be accompanied by payment of the Exercise Price as to all
Exercised Shares. This Option shall be deemed to be exercised upon receipt by
the Company of such fully executed Exercise Notice accompanied by the Exercise
Price.
2
<PAGE>
No Shares shall be issued pursuant to the exercise of this
Option unless such issuance and exercise complies with any applicable
registration requirements of the Securities Act of 1933, any applicable listing
requirement of any national securities exchange on which stock of the same class
is then listed, and any other requirements of federal, state or local law or of
any regulatory bodies having jurisdiction over such issuance and exercise.
Assuming such compliance, for income tax purposes the Exercised Shares shall be
considered transferred to the Optionee on the date the Option is exercised with
respect to such Shares.
(c) Method of Payment. Payment of the aggregate Exercise Price
shall be by any of the following, or a combination thereof, at the election of
the Optionee:
(1) cash or cash equivalent; or
(2) consideration received by the Company under a cashless
exercise program implemented by the Company in connection with the Plan; or
(3) surrender of other Shares that (i) in the case of
Shares acquired upon exercise of an option, have been owned by the Optionee for
more than six (6) months on the date of surrender and (ii) have a Fair Market
Value on the date of surrender equal to the aggregate Exercise Price of the
Exercised Shares.
(d) Tax Withholding. The Company shall have the right to deduct
from any payment or settlement under this Agreement, including, without
limitation, the exercise of this Option and the delivery of the Option Shares,
any federal, state, local or other taxes that the Committee, in its sole
discretion, deems necessary to be withheld to comply with the Code or any other
applicable law, rule or regulation.
3. Non-Transferability of Option. This Option may not be transferred in
any manner otherwise than by will or by the laws of descent or distribution and
may be exercised during the lifetime of Optionee only by the Optionee. The terms
of the Plan and this Option Agreement shall be binding upon the executors,
administrators, heirs, successors and assigns of the Optionee.
4. Term of Option. This Option may be exercised only within the term set
out in the Notice of Grant, and may be exercised during such term only in
accordance with the Plan and this Option Agreement.
5. Tax Consequences. The federal tax consequences relating to this
Option are set forth below. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX
LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE OPTIONEE SHOULD CONSULT A TAX
ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.
(a) Exercising the Option.
3
<PAGE>
(i) Nonstatutory Stock Option. The Optionee may incur
regular federal income tax liability upon the exercise of an NSO. The Optionee
will be treated as having received compensation income (taxable at ordinary
income tax rates) equal to the excess, if any, of the Fair Market Value of the
Exercised Shares on the date of exercise over their Exercise Price. If the
Optionee is an Employee or a former Employee, the Company will be required to
withhold for income and employment tax purposes, as set forth in Section 2(d)
above.
(ii) Incentive Stock Option. If this Option qualifies as
an ISO, the Optionee will have no regular federal income tax liability upon its
exercise, although the excess, if any, of the Fair Market Value of the Exercised
Shares on the date of exercise over their Exercise Price will be treated as an
adjustment to alternative minimum taxable income for federal tax purposes and
may subject the Optionee to alternative minimum tax in the year of exercise. In
the event that the Optionee ceases to be an Employee but remains a Service
Provider, any Incentive Stock Option of the Optionee that remains unexercised
shall cease to qualify as an Incentive Stock Option and will be treated for tax
purposes as a Nonstatutory Stock Option on the date three (3) months and one (1)
day following such change of status.
(b) Disposition of Shares.
(i) NSO. If the Optionee holds NSO Shares for at least one
year, any gain realized on disposition of the Shares will be treated as
long-term capital gain for federal income tax purposes.
(ii) ISO. If the Optionee holds ISO Shares for at least
one year after exercise and two years after the grant date, any gain realized on
the disposition of the Shares will be treated as long-term capital gain for
federal income tax purposes. If the Optionee disposes of ISO Shares within one
year after exercise or two years after the grant date (a "Disqualifying
Disposition"), any gain realized on such disposition will be treated as
compensation income (taxable at ordinary income rates) to the extent of the
excess, if any, of the lesser of (A) the difference between the Fair Market
Value of the Shares acquired on the date of exercise and the Exercise Price, or
(B) the difference between the sale price of such Shares and the Exercise Price.
Any additional gain will be taxed as capital gain, short-term or long-term,
depending on the period that the ISO Shares are held.
(c) Notice of Disqualifying Disposition of ISO Shares. In the
event of a Disqualifying Disposition, the Optionee shall immediately notify the
Company in writing of such disposition.
6. Entire Agreement; Governing Law. The Plan and this Option Agreement
constitute the entire agreement of the parties with respect to the subject
matter hereof and supersede in their entirety all prior undertakings and
agreements of the Company and Optionee. Neither the Plan nor the Option
Agreement may be modified adversely to the Optionee's interest except by means
of a writing signed by the Company and Optionee. This agreement is governed by
the internal substantive laws, but not the choice of law rules, of North
Carolina.
4
<PAGE>
7. No Guarantee of Continued Service. OPTIONEE ACKNOWLEDGES AND AGREES
THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED
ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (AND NOT
THROUGH THE ACT OF BEING HIRED, BEING GRANTED AN OPTION OR PURCHASING SHARES
HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE
TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO
NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A
SERVICE PROVIDER AND SHALL NOT INTERFERE WITH THE COMPANY'S OR THE OPTIONEE'S
RIGHT TO TERMINATE THE OPTIONEE'S RELATIONSHIP AS A SERVICE PROVIDER AT ANY
TIME, WITH OR WITHOUT CAUSE.
Optionee and the Company agree that this Option is granted under and
governed by the terms and conditions of the Plan and this Option Agreement.
Optionee has reviewed the Plan and this Option Agreement in their entirety, has
had an opportunity to obtain the advice of counsel prior to executing this
Option Agreement and fully understands all provisions of the Plan and Option
Agreement. Optionee hereby agrees to accept as binding, conclusive and final all
decisions or interpretations of the Committee upon any questions relating to the
Plan and Option Agreement.
OPTIONEE EMBREX, INC.
_____________________________ By:___________________________________
Signature
_____________________________ Title:________________________________
Print Name
- -----------------------------
Residence Address
- -----------------------------
Date:_________________________ Date:_________________________________
5
<PAGE>
EXERCISE NOTICE
Embrex, Inc.
1035 Swabia Court
Durham, North Carolina 27703
Attention: Chief Financial Officer
1. Exercise of Option. Effective as of today, ________________________,
____, the undersigned ("Purchaser") hereby elects to purchase _________ shares
(the "Shares") of the Common Stock of Embrex, Inc. (the "Company") under and
pursuant to the Amended and Restated Incentive Stock Option and Nonstatutory
Stock Option Plan (the "Plan") and the Stock Option Agreement dated
______________________, ___ (the "Option Agreement"). The purchase price for the
Shares shall be $_________, per share, as set by the Option Agreement.
2. Delivery of Payment. Purchaser herewith delivers to the Company the
full purchase price for the Shares.
3. Representations of Purchaser. Purchaser acknowledges that Purchaser
has received, read and understood the Plan and the Option Agreement and agrees
to abide by and be bound by their terms and conditions.
4. Rights as Shareholder. Until the issuance (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company) of the Shares, no right to vote or receive dividends or
any other rights as a shareholder shall exist with respect to the Optioned
Stock, notwithstanding the exercise of the Option. The Shares so acquired shall
be issued to the Optionee as soon as practicable after exercise of the Option.
No adjustment shall be made for a dividend or other right for which the record
date is prior to the date of issuance, except as provided in Section 14 of the
Plan.
5. Tax Consultation. Purchaser understands that Purchaser may suffer
adverse tax consequences as a result of Purchaser's purchase or disposition of
the Shares. Purchaser represents that he or she has consulted with any tax
consultants Purchaser deems advisable in connection with the purchase or
disposition of the Shares and that he or she is not relying on the Company for
any tax advice.
6. Entire Agreement; Governing Law. The Plan and Option Agreement are
incorporated herein by reference. This Agreement, the Plan and the Option
Agreement constitute the entire agreement of the parties with respect to the
subject matter hereof and supersede in their entirety all prior undertakings and
agreements of the Company and Purchaser and may not be modified adversely to the
Purchaser's interest except by means of a writing signed by the Company and
Purchaser. This Agreement is governed by the internal substantive laws, but not
the choice of law rules, of North Carolina.
<PAGE>
Submitted by: Accepted by:
PURCHASER EMBREX, INC.
_____________________________ By:___________________________________
Signature
_____________________________ Title:________________________________
Print Name
Date Received: ______________________
2
EXHIBIT 21
EMBREX, INC.
SUBSIDIARIES
Name Jurisdiction of Incorporation
- ---- -----------------------------
Embrex Europe Limited United Kingdom
Embrex Sales, Inc. North Carolina
Embrex BioTech Trade (Shanghai) Co., Ltd. People's Republic of China
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0
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