FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1998 Commission file number 000-19495
Embrex, Inc.
(Exact name of registrant as specified in its charter)
North Carolina 56-1469825
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
1035 Swabia Court, Durham, North Carolina 27703
(Address of principal executive offices) (Zip Code)
(919) 941-5185
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.01 Par Value Per Share (and Rights Attached Thereto)
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes_ X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of February 26, 1999, the aggregate market value of the voting stock held by
non-affiliates was $37.3 million, based on a price per common share of $4.625 at
the close of business on that date.
As of February 26, 1999, there were 8,302,372 shares of the registrant's common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Document Where Incorporated
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Proxy Statement with respect to the Annual Part III
Meeting of Shareholders to be held on May 20,
1999, to be filed with the Securities
and Exchange Commission
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INDEX
PAGE
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PART I
ITEM 1. BUSINESS ................................................... 1
ITEM 2. PROPERTIES ................................................. 8
ITEM 3. LEGAL PROCEEDINGS .......................................... 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ........ 10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS ........................................ 11
ITEM 6. SELECTED FINANCIAL DATA .................................... 12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ........................ 12
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK . 16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ................ 17
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE ........................ 31
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ......... 32
ITEM 11. EXECUTIVE COMPENSATION ..................................... 32
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT ................................................. 32
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ............. 32
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K ................................................ 33
SIGNATURES ................................................................ 40
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PART I
ITEM 1. BUSINESS
GENERAL
Embrex, Inc. ("Embrex" or the "Company") develops and markets biological
delivery technology and biological products to increase the productivity and
profitability of the global poultry industry. The Company was incorporated in
1985 in North Carolina.
Embrex has developed and commercialized the INOVOJECT(R) system, a proprietary,
automated in-the-egg injection system which can inoculate 20,000 to 50,000 eggs
per hour and eliminates the need for manual, post-hatch injection of certain
vaccines. The INOVOJECT(R) system is designed to inject vaccines and other
compounds in precisely calibrated volumes into targeted compartments within the
egg. Embrex markets the INOVOJECT(R) system to commercial poultry producers,
charging a fee for each egg injected.
In addition to the INOVOJECT(R) system, Embrex has developed and is marketing
its Viral Neutralizing Factor ("VNF(R)") antibody, useful in the development of
certain avian vaccines. The Company also has developed and is marketing
Bursaplex(R), a VNF(R)-based vaccine for protection against avian Infectious
Bursal Disease ("IBD"). Embrex also is developing various other proprietary
pharmaceutical and biological products to improve bird health, reduce bird
production costs and provide other economic benefits to the poultry industry.
These products are in various stages of development, and some are being
developed in collaboration with major drug companies, the United States
Department of Agriculture (the "USDA"), and several leading universities in the
field of avian science. These products are being designed to be delivered
through the INOVOJECT(R) system, and some may also be administered via injection
after hatching.
EXISTING PRODUCTS
INOVOJECT(R) Patented Egg Injection System
Embrex has developed and commercialized a proprietary, automated in-the-egg
injection system which can inoculate 20,000 to 50,000 eggs per hour and
eliminates the need for manual, post-hatch injection of certain vaccines. This
proprietary system, called INOVOJECT(R), is designed to inject vaccines and
other compounds in precisely calibrated volumes into targeted compartments
within the egg. Embrex markets the INOVOJECT(R) system to commercial poultry
producers, charging a fee for each egg injected.
In 1998, the Company converted a number of hatcheries to the INOVOJECT(R) system
and continued operations of INOVOJECT(R) systems in hatcheries converted prior
to 1998. The Company estimates that its INOVOJECT(R) system inoculates in excess
of 80% of all eggs produced for the North America broiler poultry market and,
therefore, expects diminished growth in the number of system installations and
only modest INOVOJECT(R) system revenue growth in this market. Therefore, the
Company must expand its INOVOJECT(R) system installations and product sales in
markets outside North America in order to realize significant overall revenue
growth. The Company estimates that approximately 69% of the world broiler
production occurs outside the U.S. and Canada. Accordingly, the Company is
implementing a strategy to market its INOVOJECT(R) system outside North America.
During 1998, the Company placed a number of INOVOJECT(R) systems for trial and
on contract at locations outside the U.S. and Canada, including Argentina,
China, South Korea, Malaysia, Taiwan, Vietnam, Germany, Portugal, Hungary and
Poland. The Company's expansion outside the U.S. and Canada was focused
initially on Europe, the Middle East, and Africa. In the second half of 1997,
the Company began expansion efforts in Asia and, in 1998, in Latin America. At
year end 1998, the Company had INOVOJECT(R) systems either installed or on trial
in 27 countries, including the United Kingdom, Ireland, France, Spain, the
Netherlands, Belgium, Italy, the Czech Republic, Israel, Egypt, South Africa,
Turkey, Australia, Argentina, South Korea, Thailand, Germany, Portugal, Hungary,
Poland, China, Malaysia, Vietnam and Taiwan. Overall, the placement of
INOVOJECT(R) systems outside the U.S. and Canada is dependent on market
acceptance of various in ovo ("in the egg") vaccines and obtaining regulatory
approval of these vaccines in numerous countries.
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Certain poultry diseases are more prevalent in some geographic regions than in
others. For example, Marek's disease, for which the INOVOJECT(R) system is used
in the U.S., is not as widespread in Europe as in North America. IBD (also known
as Gumboro disease) is prevalent both in Northern Europe and Asia and, to a
lesser extent, in the United States. The Company expects that the primary usage
of its INOVOJECT(R) systems will vary by geographic region according to the
prevailing diseases as well as regulatory approval and market acceptance of
vaccines for in ovo delivery.
VNF(R) (Viral Neutralizing Factor)
Embrex has developed, patented and commercialized a Viral Neutralizing Factor
technology which permits single-dose immunization of the avian embryo effective
for the life of the bird. By using the VNF(R) technology to form an
antibody-vaccine virus complex, immunization is provided in a single step,
reducing or eliminating many of the multiple vaccinations carried out in the
industry. VNF(R) can temporarily neutralize a virulent vaccine virus without
impairing the virus' ability to stimulate an immune response. By using VNF(R) in
this manner, the virulent vaccine virus can be made into a safe and effective
vaccine which can be used in ovo or after hatching.
The VNF(R) technology is the subject of two issued U.S. patents, a pending U.S.
patent application, and several foreign patents and foreign patent applications.
The U.S. patents are owned by the University of Arkansas and exclusively
licensed to Embrex on a royalty basis for the life of the patents. Embrex also
is researching application of VNF(R) for other avian disease vaccines, including
Newcastle's disease and infectious bronchitis, although there is no assurance
such research will result in product opportunities.
To date, the Company's research efforts with its VNF(R) compound have been
focused primarily on avian uses. Based on initial experimental data, the Company
now believes that the potential exists for VNF(R) to be used in several
non-primate species. A U.S. patent claiming the use of VNF(R) viral vaccines in
all non-primate animals was allowed in 1997 and issued in February 1999. The
Company is in the early stages of exploring collaborative relationships with
other companies for the development and licensing of VNF(R) for non-primate
uses. Embrex has not initiated any regulatory approval processes with respect to
non-primate uses of VNF(R), nor is there any assurance that its efforts in this
area will result in products or collaborative agreements.
Infectious Bursal Disease (IBD) Vaccines
VNF(R) is especially useful in vaccines against avian IBD, which weakens a
bird's immune system. Birds infected by IBD typically exhibit poor growth or can
succumb to other diseases because of a compromised immune system. This disease
is currently widespread in Northern Europe, Asia and, to a lesser extent, in the
U.S. To date, IBD has been treated post-hatch via manually delivered vaccines or
in drinking water. Existing vaccines are associated, however, with certain
limitations, and some vaccines cannot be used safely or effectively in ovo. The
Company estimates the worldwide market for IBD vaccines is approximately $60
million annually.
In January 1995, USDA approval was obtained for post-hatch administration of
Bursaplex(R), the Company's VNF(R)-based vaccine for IBD in broiler chickens.
USDA approval was obtained in January 1997 for in ovo use of Bursaplex(R),
specifically for administration via Embrex's INOVOJECT(R) egg injection systems.
During 1997, the Company conducted clinical trials of Bursaplex(R) involving
more than 43.6 million birds, which Embrex believes demonstrated clear economic
benefits of this IBD vaccine.
In August 1995, the Company entered into an agreement with Cyanamid Websters
("Websters"), a unit of Fort Dodge Animal Health ("Ft. Dodge"), a division of
American Home Products Corp., for the joint development of another IBD vaccine
containing VNF(R), which 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
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process will be completed during the first half of 1999. To date, Bursamune(TM)
has received regulatory approval in South Africa.
Embrex currently is seeking regulatory approval in selected Latin American and
Asian markets for in ovo and post-hatch use of Bursaplex(R). Although Embrex has
received regulatory approval in some of these markets, there is no assurance
that the remaining approvals will be obtained. The placement of INOVOJECT(R)
systems outside the U.S. and Canada depends, in part, on market acceptance of
various in ovo vaccines as well as regulatory approval. To date, regulatory
approval for Bursaplex(R) has been received in Peru, Ecuador, Pakistan, South
Korea, Thailand and Vietnam, and regulatory approval is pending in Canada,
Philippines, People's Republic of China, Indonesia, Venezuela, Argentina, Chile,
Colombia, Malaysia and Taiwan.
PRODUCTS UNDER DEVELOPMENT
Embrex is developing individually and in collaboration with others additional
products which address poultry health and performance needs when administered in
ovo and, in some cases, after hatching. These additional products are in various
stages of development. There can be no assurance that Embrex will successfully
develop or market any of these products. Marketing products developed jointly
with others may require royalty or other payments by Embrex to its
co-developers. Embrex has not initiated the regulatory approval process for any
of these potential products, and there is no assurance regulatory approval will
be obtained.
In Ovo Products for Control of Coccidiosis
In 1995, the Company began an initiative aimed at development of a novel in ovo
biological control method for coccidiosis. Coccidiosis is caused by a protozoan
parasite which attacks the gut of the chicken, causing significant problems with
the intake and digestion of feed and, therefore, the physical and economic
performance of the bird. Currently, virtually all broiler chickens, and most
poultry in general, receive anti-coccidiosis compounds called coccidiostats
incorporated into poultry feed. Over the years, coccidia have developed levels
of resistance to these coccidiostats and thus effectiveness has been somewhat
reduced. A limited number of live vaccines have also been developed and are
administered orally soon after hatch. However, due to difficulties in providing
a precise oral dose to each bird, growth depression can occur in broiler flocks.
Therefore, such live vaccines are used primarily in parent stock. Using its
INOVOJECT(R) technology and its knowledge of avian embryology, the Company has
begun this initiative to develop a novel, efficacious and cost-effective means
of preventing coccidiosis in broiler chickens. This program is aimed at
overcoming many of the problems associated with current practices. In 1997, the
Company established the feasibility of an in ovo biological control method for
coccidiosis. During 1998, this project met the required internal milestones
regarding results and timeliness. Further development of this project will
involve extensive clinical trials. Embrex intends to pursue this research with
collaborative partners. There can be no assurances that any of these development
efforts will be successful. Embrex has not initiated the regulatory approval
process with respect to these development efforts, and does not expect any
coccidiosis product developed by the Company to reach the market in the near
future.
Other Products Under Development
During 1998, Embrex continued to evaluate technologies which, when coupled with
Embrex's proprietary in ovo enabling delivery know-how, might have the potential
to yield improvements in the areas of feed conversion,
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muscle mass and leanness within broiler chickens. These technologies typically
need to be applied in the first several days of embryonic development in order
to have the desired effect. While the Company plans to continue its research
efforts in these areas in 1999, there is no assurance that these efforts will
yield product opportunities.
Embrex is also evaluating technologies and developing capabilities for
characterizing and sorting eggs before injection by the INOVOJECT(R) system.
These capabilities include automatic sexing and gender sorting. Early gender
sorting improves processing plant efficiencies by enabling gender-specific feed
rations and improved feed conversion. There is no assurance, however, that such
research will result in product opportunities.
The Company is also researching the feasibility of developing a treatment for
avian leukosis disease, a viral infection that can result in production losses
for poultry producers. There is no assurance, however, that this effort will
result in product opportunities.
Embrex routinely enters into collaborative agreements with various animal health
companies, pharmaceutical companies and research and academic institutions to
evaluate the utility of certain of their compounds or devices when delivered or
applied in ovo. Depending upon the outcome of these evaluations, Embrex may or
may not proceed with these collaborations for further development. There is no
assurance that these efforts will yield products or further collaborations.
In March 1998, Embrex entered into a marketing agreement with UniSoma, Inc., the
U.S. subsidiary of UniSoma Matematica para Productividade, S.A. ("UniSoma"). The
marketing agreement grants Embrex the exclusive North American marketing rights
for 5 years for the poultry management decision support system developed by
UniSoma. This decision support system is designed to assist producers in
optimizing decisions in production, scheduling, processing and marketing to
maximize profitability. The system is being developed for the North American
market. Embrex has not, to date, sold this system to a poultry producer, and
there is no assurance that the system will attain commercial acceptance in North
America.
PATENTS AND PROPRIETARY RIGHTS
Embrex controls (either through direct ownership or exclusive license) 23 issued
U.S. patents, 13 pending U.S. patent applications, and over 60 issued foreign
patents and over 50 pending foreign patent applications. In addition, Embrex has
executed confidentiality agreements with its collaborators, subcontractors,
employees and directors.
The INOVOJECT(R) system utilizes a process of injecting viral, bacterial or
fungal vaccines into avian eggs that was patented in the U.S. by the USDA in
1984. Embrex holds the exclusive license to this patent through its expiration
in 2002. Embrex has supplemented the USDA patent with five additional issued
U.S. patents (and multiple foreign patents and patent applications) covering
specific design features of the INOVOJECT(R) system. See Item 3, "Legal
Proceedings", below.
Embrex also owns or licenses method-of-use patents for the in ovo administration
of VNF(R) vaccines and other compounds to elicit various beneficial responses in
poultry. Two U.S. patents for methods of treating IBD virus infections using
VNF(R) vaccines, including in ovo administration, were issued to Embrex in March
1995. A U.S. patent claiming the use of VNF(R) viral vaccines in all non-primate
animals was allowed in 1997 and issued in February 1999. These patents and
additional patent applications encompass the use of VNF(R) vaccine compoundS
regardless of the source of the VNF(R). These VNF(R) patents additionally
include composition-of-matter claims to VNF(R) vaccines against IBD virus
disease and composition-of-matter claims to VNF(R) vaccines for combating viral
diseases in non-primate animals. These patent claims cover the vaccine
preparation, regardless of the manner in which the preparation is used.
In 1998, three new U.S. patent applications were filed covering various aspects
of in ovo technology.
Embrex continues its efforts to patent methods of delivering compounds in ovo,
including early intervention methods and devices. In 1998, five U.S. patents
with claims to methods of, or devices for, delivering compounds to avian embryos
in ovo were allowed or issued.
Additionally, Embrex has federally registered the trademarks EMBREX(R),
INOVOJECT(R), VNF(R), and BURSAPLEX(R) in the U.S., and has applied for federal
registration of various trademarks.
COMPETITION
The primary competition for the INOVOJECT(R) system is the manual, post-hatch
administration of biological products. Since most of Embrex's products and
potential products are being designed to be administered
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through the INOVOJECT(R) system, the INOVOJECT(R) system must continue to be
accepted within the poultry industry and operated as intended under long-term
commercial conditions for these potential products to be marketed successfully.
The Company holds the exclusive license to the U.S. patent for injecting
vaccines into an avian embryo. Embrex has supplemented this patent with five
additional U.S. patents covering specific design features of the INOVOJECT(R)
system. In addition, Embrex relies on numerous foreign patents to protect its
intellectual properties and to afford a competitive advantage. See "Patents and
Proprietary Rights," above. There can be no assurance, however, that a
competitive delivery method, either within or outside the United States, will
not be developed and gain commercial acceptance. Embrex continues to monitor for
the presence of any competitive in ovo administration systems worldwide. See
Item 3, "Legal Proceedings," below.
Competitive success for Embrex will be based primarily on commercial acceptance
of its in ovo products, achieving and retaining scientific expertise and
technological superiority, identifying and pursuing scientifically feasible and
commercially viable opportunities, obtaining proprietary protection for its
research achievements, obtaining adequate funding and timely regulatory
approvals, and attracting corporate sponsors or partners in developing, testing,
producing, and marketing products, none of which can be assured. In addition, a
primary competitive factor affecting Embrex is its ability to conduct research
and development. Embrex's ability to compete also is dependent on its ability to
attract and retain key personnel. Maintaining financial and human resources,
therefore, are important factors for success.
PRODUCTION, MARKETING AND DISTRIBUTION
Production
Embrex currently subcontracts the production of substantially all of its
mechanical and biological products and expects to continue to do so for the
foreseeable future. The Company believes that alternative sources of manufacture
and supply generally exist.
INOVOJECT(R) System
Embrex's in-house engineering staff designs the INOVOJECT(R) system, which
incorporates proprietary mechanical, pneumatic and electronic sub-systems and
concepts. The Company uses a single contract manufacturer to fabricate its
INOVOJECT(R) systems. While other machine fabricators exist and have constructed
limited numbers of INOVOJECT(R) systems, a change in fabricators could cause a
delay in manufacturing and a possible delay in the timing of future INOVOJECT(R)
system installations and revenues from those installations.
VNF(R) (Viral Neutralizing Factor)
In 1993, Embrex signed multi-year agreements with SPAFAS, Inc. ("SPAFAS"), a
subsidiary of Charles River Laboratories, Inc., under which SPAFAS will supply
the active ingredient in VNF(R). In connection with this agreement, Embrex
maintains appropriate inventory levels and places orders with SPAFAS to allow
Embrex to satisfy anticipated customer demand for VNF(R). The regulatory
approval granted by the USDA for Bursaplex(R) in January 1997 specifically
covers the vaccine produced with SPAFAS-manufactured VNF(R).
The Company has granted Merial Select, Inc. ("Select") (a Merck Rhone-Poulenc
company) exclusive rights to manufacture Infectious Bursal Disease vaccines
containing Embrex's VNF(R) product, known as Bursaplex(R), for Embrex to market
in North America, Latin America and Asia. Embrex has also granted Ft. Dodge (a
unit of American Home Products Corp.) rights to manufacture IBD vaccines
containing the Company's VNF(R) product, known as Bursamune(TM), to be marketed
in Europe, the Middle East and Africa. Abic Ltd. has been granted similar rights
to manufacture and market an IBD vaccine, known as GuMBryo(TM), in Israel. The
manufacture of the IBD vaccines being produced by Select and Ft. Dodge, and the
Company's VNF(R) product, generally must be performed in licensed facilities or
under approved regulatory methods. Although there are other manufacturers who
are capable of manufacturing IBD products and producing products such as VNF(R),
a
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change of supplier for the Company could adversely affect Embrex's future
operating results due to the time it would take a new supplier to obtain
regulatory approval of its production process or manufacturing facilities.
MARKETING AND DISTRIBUTION
Because of the geographical and industrial concentration of the poultry industry
in the U.S., Embrex markets its products and provides ongoing service directly
to the industry. Embrex's marketing is focused principally on the broiler
chicken segment of the poultry industry, but the Company also has adapted its
products for use by, and initiated trials and entered into commercial contracts
with, a limited number of turkey producers.
In order to encourage proper use of the INOVOJECT(R) system technology within an
appropriate production environment, Embrex leases and licenses INOVOJECT(R)
systems to hatcheries. The agreements cover the use of the mechanical equipment
and ongoing field service, maintenance and technical support. The agreements
also include a license with royalty fees for use of Embrex's proprietary
injection process. Products which are delivered in ovo are sold separately.
The Company also is initiating arrangements for international distribution of
Bursaplex(R), subject in each case to the availability of required regulatory
approvals. In 1996, the Company entered into agreements with other parties to
distribute Bursaplex(R) in Chile, Ecuador, Peru and Pakistan. To date,
regulatory approval has been granted in Ecuador, Peru, and Pakistan. An
agreement for Israel also entitles a distributor, Abic Ltd., to manufacture a
VNF(R)-based IBD vaccine mentioned above. Subject to these agreements, the
Company also will conduct international marketing directly.
Other significant poultry markets exist in Asia and Latin America. Embrex has
held a number of discussions regarding marketing and distribution in each of
these markets. In 1997 and 1998, the Company entered into agreements with other
parties to distribute Bursaplex(R) in Venezuela, Colombia, South Korea,
Malaysia, Taiwan, Japan and Vietnam, subject to regulatory approvals. To date,
regulatory approval has been granted in South Korea, Thailand and Vietnam, as
well as the other countries indicated above, and regulatory approval is pending
in Canada, Philippines, People's Republic of China, Indonesia, Venezuela,
Argentina, Chile, Colombia, Malaysia and Taiwan. Embrex also hired management
for selected Asian and Latin American markets and installed INOVOJECT(R) systems
on a commercial or trial basis in certain Asian markets. In 1998, Embrex
installed its INOVOJECT(R) system in a hatchery in China and established Embrex
BioTech Trade (Shanghai) Co., Ltd. in China, which will focus on marketing and
distribution of Embrex products in China. Also in 1998, Embrex established
Embrex Inc. Sucursal Argentina, a branch office in Argentina, responsible for
commercial development and customer service and support. Initially, this office
will serve only Argentina, but may extend to other regional markets such as
Chile, Paraguay or Uruguay. Embrex has installed INOVOJECT(R) systems at three
of Argentina's top broiler producers and one breeder operation.
Embrex has initiated activities necessary for the commercialization of its
technology in Japan. In 1992, Embrex entered into a distribution agreement with
Ishii Company, Ltd. ("Ishii"), a leading chick producer and the dominant
supplier of hatchery equipment in Japan. Upon veterinary medical device
regulatory approval by the Japanese Ministry of Agriculture, Fisheries and
Forestry, Ishii intends to distribute the INOVOJECT(R) egg injection system to
poultry producers throughout Japan. In 1997, the Company sold two INOVOJECT(R)
systems to Ishii.
The Company's revenues attributable to international operations in 1998, 1997
and 1996 were 20%, 15% and 14% of the Company's consolidated revenues,
respectively. The Company's identifiable assets attributable to international
operations in 1998, 1997 and 1996 were 26%, 24% and 18% of the Company's
consolidated assets, respectively. See "Notes to Consolidated Financial
Statements."
RESEARCH AND DEVELOPMENT
In 1998, Embrex opened a 12,800 square-foot research facility near the Company's
headquarters. This new facility is expected to increase the Company's clinical
trial capabilities. Research and development expense was $4.0 million in 1996,
$4.2 million in 1997 and $5.0 million in 1998. The increase in research and
development expense from 1996 to 1998 largely reflects increases in outside
contract research, supplies
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consumption, operating activities at the new research facility, and INOVOJECT(R)
design and development and global technical support activity. Research and
development is principally Company sponsored and funded primarily from internal
sources.
GOVERNMENTAL REGULATION
Regulation by governmental authorities in the U.S. and other countries is a
significant factor in the production and marketing of Embrex's products and in
its on-going research and development activities. Although the use of the
INOVOJECT(R) system is not subject to regulatory approval in the U.S., animal
health products being developed by Embrex and other companies must receive
approval for marketing from either the USDA or the Food and Drug Administration
(the "FDA") and from similar agencies in foreign countries where the Company has
begun or contemplates doing business. These countries may also require approval
of the INOVOJECT(R) system. Regulatory agencies require that products be tested
and demonstrate appropriate levels of safety and efficacy. Generally, with
respect to animal health products, the USDA has regulatory authority over
products which are biological in origin or which stimulate or affect an animal's
immune system, and the FDA has authority over all other products. The time and
cost of USDA approvals are generally less than those for FDA approvals. FDA
approval generally requires more extensive animal and toxicology testing than
USDA approvals and may take five or more years to obtain, whereas USDA approvals
generally require one to three years to obtain. Embrex's VNF(R) technology
received USDA approval in January 1995 for IBD applications post-hatch, and for
in ovo use in January 1997. Embrex believes all of its other biological products
under development will be subject only to USDA approval. Embrex's existing
products have received all necessary governmental approvals in the U.S. The
Company's products also are subject to regulatory approval in other countries.
Management believes that compliance with environmental regulations currently has
no material adverse effect on the Company's capital expenditures, earnings or
competitive position.
EMPLOYEES
At December 31, 1998, Embrex employed 132 persons, 125 of whom were full-time
employees, an increase of 17 persons from the 115 full-time employees at
December 31, 1997.
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SIGNIFICANT CUSTOMERS
Tyson Foods, Inc.("Tyson") accounted for approximately 27% of Embrex's
consolidated 1998 revenues. Based on millions of pounds of ready-to-cook poultry
meat produced in 1998, Tyson accounted for approximately 24% of the broilers
grown in the U.S. During 1997, Tyson extended its contract with Embrex through
2004. There are no customers besides Tyson that represent 10 percent or greater
of total revenues. However, Embrex's three largest customers, including Tyson,
accounted for approximately 42% of consolidated 1998 revenues.
See "Risk Factors" filed as Exhibit 99 to this report.
ITEM 2. PROPERTIES
Embrex leases its corporate headquarters and research and development
facilities, which occupy approximately 23,000 square feet and are located
adjacent to Research Triangle Park, North Carolina. Two-thirds of the space is
devoted to research and development. The lease is for a 15-year term expiring
March 31, 2002. Embrex paid an annual rent of approximately $218,000 during
1998. Annual rent increases thereafter amount to approximately 3%. In addition
to research and development activities conducted at its corporate headquarters,
Embrex opened a new 12,800 square-foot research facility near its headquarters
in 1998. The lease is for a 10-year term expiring November 14, 2007, with a
5-year renewal option. The annual rent is approximately $136,000, with annual
increases of approximately 3% through the first 10 years and approximately 4%
during the 5-year renewal term.
Embrex leases approximately 3,000 square feet of warehouse space in Springdale,
Arkansas, on a year-to-year basis, which is used to support the Embrex customer
service function in the region. The Company also leases offices of 1,250 square
feet and warehouse space of 2,500 square feet in Great Dunmow, Essex, England.
Embrex also has access to facilities at certain universities. The use of these
facilities is important to Embrex's ongoing research and development efforts.
Embrex has had agreements with North Carolina State University ("NCSU")
providing access to facilities used for incubating eggs and growing live birds
and for research and testing purposes. Reliance on the NCSU facilities is
expected to decline as a result of Embrex's new research facility. Embrex
believes that suitable alternative facilities exist if the above agreements are
not renewed.
-8-
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
In September 1996, Embrex filed a patent infringement suit in the United States
District Court for the Eastern District of North Carolina against Service
Engineering Corporation, a Maryland corporation, and Edward G. Bounds, Jr., a
Maryland resident and officer of Service Engineering Corporation. The suit
alleged that each of the defendants' development of an in ovo injection device,
designed to compete with Embrex's patented INOVOJECT(R) injection method,
infringes at least one claim of the U.S. Patent No. 4,458,630 exclusively
licensed to Embrex for the in ovo injection of vaccines into an avian embryo
(the "Sharma Patent"). Further, Embrex claimed that the defendants had violated
the terms of a Consent Judgment and Settlement Agreement entered into with
Embrex in November 1995 in which prior litigation was concluded with Service
Engineering Corporation and Edward G. Bounds, Jr. agreeing not to engage in
future activities violating the Sharma Patent. Embrex sought injunctive relief
to prevent infringement of the Sharma Patent as well as monetary damages. In
November 1996, Service Engineering Corporation and Edward G. Bounds, Jr.
responded to Embrex's patent infringement suit by asserting various affirmative
defenses and denying the substantive allegations in Embrex's complaint. This
suit concluded on July 30, 1998 with a jury verdict in favor of Embrex. The
verdict fully upheld the validity of all claims of the Sharma Patent, finding
that the defendants had willingly infringed all asserted claims of the patent.
The jury also found that Service Engineering Corporation and Edward G. Bounds,
Jr. had breached the 1995 Consent Judgment and Settlement Agreement and that
such breach was not in good faith. The jury awarded Embrex damages of $500,000
plus litigation expenses and court costs. The United States District Court for
the Eastern District of North Carolina entered a Judgment in favor of Embrex on
September 28, 1998, which included a monetary award of $2,612,885 and an
injunction prohibiting Service Engineering Corporation and Edward G. Bounds, Jr.
from practicing methods claimed in, or otherwise infringing, the Sharma Patent.
On October 28, 1998, Service Engineering Corporation and Edward G. Bounds, Jr.
filed a notice of appeal in the United States Court of Appeals for the Federal
Circuit seeking a reversal of the Judgment. The Company plans to oppose the
appeal.
In November 1996, Embrex filed a patent infringement suit in the United States
District Court for the Eastern District of North Carolina against IGI, Inc., a
Delaware corporation. The suit alleged that IGI, Inc., through its activities
with Service Engineering Corporation and Edward G. Bounds, Jr. was engaging in
activities that constitute infringement of the Sharma Patent. Embrex sought
injunctive relief to prevent infringement of the Sharma Patent as well as
monetary damages. In January 1997, IGI, Inc. responded to Embrex's patent
infringement suit by asserting various affirmative defenses and denying the
substantive allegations in Embrex's complaint. This suit was concluded by
agreement between Embrex and IGI, Inc. in January 1998, pursuant to which Embrex
and IGI have agreed to dismiss all pending claims against each other, and IGI
has agreed to abide by the terms of a royalty-bearing sublicense to the Sharma
Patent for avian vaccination.
In March 1997, Service Engineering Corporation and Edward G. Bounds, Jr. filed
suit against the United States Department of Agriculture in the United States
District Court for the District of Maryland with respect to its grant to Embrex
of an exclusive license for the Sharma Patent. The complaint alleges that the
USDA did not adequately comply with statutory and regulatory requirements in
making the grant to Embrex of an exclusive license to the Sharma Patent, the
revision of the exclusive license in 1991 and the revision of the exclusive
license in 1994, which extended the period of exclusivity, originally set to
terminate on December 31, 1996, through the patent expiration date. Plaintiffs
allege that in December 1996 (after Embrex had instituted the above referenced
action for patent infringement and breach of contract), the Plaintiffs requested
the USDA to grant them a license of the Sharma Patent. The Plaintiffs allege
that the USDA refused to do so because the USDA said that the license was not
available and that the Plaintiffs had no basis for relief. Plaintiffs also
allege that the USDA wrongfully consented to Embrex's bringing suit against the
Plaintiffs. Plaintiffs are seeking to have the court set aside the extension of
the exclusive license, the USDA's grant of permission for Embrex to sue Service
Engineering Corporation, Edwards G. Bounds, Jr. and IGI, Inc. for patent
infringement, the USDA's refusal to grant to Service Engineering Corporation a
non-exclusive license to the Sharma Patent and the USDA's refusal to act
favorably upon Service Engineering Corporation's appeal from the refusal to
grant it a non-exclusive license. In addition, Plaintiffs seek to have the court
issue an order requiring the USDA, prior to granting any exclusive license under
the Sharma Patent, including by extending the term of a pre-existing exclusive
license, to observe the procedures set forth under laws and regulations
governing the grant of licenses to patents owned by the USDA, and to remand the
matter to the USDA to take action in accordance with the order. Plaintiffs also
seek attorneys' fees and costs from the USDA. The USDA has filed motions to
-9-
<PAGE>
dismiss plaintiffs' complaint, and plaintiffs have filed motions for summary
judgment. Those motions are pending before the Court.
On February 5, 1999, Embrex learned that Machining Technologies, Inc. of Hebron,
Maryland has filed a Complaint for Declaratory Judgment against Embrex in the
United States District Court for the District of Maryland. Machining
Technologies, Inc. seeks a declaration that the Sharma Patent is not infringed,
invalid and/or not enforceable. Machining Technologies, Inc. was a manufacturer
of egg injection machine parts to Edward G. Bounds, Jr. and Service Engineering
Corporation. Embrex believes the action is without legal basis and plans to file
a motion to dismiss the action if and when Machining Technologies, Inc. serves
the Complaint on the Company.
See "Risk Factors" filed as Exhibit 99 to this report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1998.
-10-
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock trades on the Nasdaq National Market System under the
symbol EMBX. The quarterly trading ranges of the Company's Common Stock for the
last two fiscal years were as shown in the table below:
Common Stock
Price Per Share
---------------
Quarter Ended High Low
------------- ---- ---
1997
----
March 31, 1997 7 13/16 6 3/8
June 30, 1997 7 3/8 6 3/16
September 30, 1997 7 3/8 5 15/16
December 31, 1997 7 5
1998
----
March 31, 1998 6 3/8 5
June 30, 1998 6 7/8 5 3/8
September 30, 1998 6 3/16 4 5/16
December 31, 1998 6 3 5/8
At February 26, 1999 (the most recent practicable date), there were 479 holders
of record of the Common Stock. The Company has paid no dividends on any stock
since inception and has no plans to pay dividends on its Common Stock in the
foreseeable future.
-11-
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
SUMMARY OF OPERATIONS BY QUARTERS (UNAUDITED)
(Dollars In Thousands, Except Per
Share Amounts)
<TABLE>
<CAPTION>
1998 1997
---- ----
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............................ $6,857 $6,961 $7,404 $7,393 $5,925 $5,922 $6,531 $6,412
Operating Expenses.................. 2,857 2,618 3,179 3,178 2,577 2,403 2,585 2,230
Net income.......................... 527 605 753 976 262 417 540 542
Net income (per share of Common Stock)
Basic....................... $0.06 $0.07 $0.09 $0.12 $0.03 $0.05 $0.06 $0.07
Diluted..................... $0.06 $0.07 $0.09 $0.12 $0.03 $0.05 $0.06 $0.07
Number of Shares Used in Per Share
Calculation (thousands)
Basic........................ 8,243 8,249 8,262 8,264 8,058 8,203 8,236 8,238
Diluted...................... 8,334 8,340 8,339 8,341 8,278 8,380 8,369 8,331
</TABLE>
5-YEAR SUMMARY OF SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(Dollars In Thousands, Except Per 1998 1997 1996 1995 1994
Share Amounts) ---- ---- ---- ---- ----
(Restated)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA
Revenues............................ $28,615 $24,789 $20,632 $13,719 $6,897
Research and development expenses... 4,995 4,188 4,036 3,416 4,271
Other operating expenses............ 6,837 5,607 3,775 3,836 3,561
Net income (loss)................... 2,861 1,760 341 (4,512) (6,710)
Net income (loss) per share of Common
Stock
Basic......................... $0.35 $0.21 $0.05 ($0.73) ($1.19)
Diluted....................... $0.34 $0.21 $0.06 ($0.73) ($1.19)
Number of Shares Used in Per Share
Calculation (thousands)
Basic.......................... 8,255 8,184 7,218 6,187 5,645
Diluted........................ 8,339 8,339 7,520 6,187 5,645
BALANCE SHEET DATA
Working capital..................... $8,299 $7,585 $7,552 $5,934 $1,608
Total assets........................ 24,990 25,161 25,554 21,789 13,379
Long-term liabilities............... 644 3,278 5,814 10,966 3,093
Accumulated deficit................. (36,072) (38,933) (40,693) (41,034) (36,522)
Shareholders' equity................ 18,805 15,741 13,309 5,909 5,323
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Company's financial statements and related notes appearing elsewhere in this
report.
Consolidated net income for 1998 was $2.9 million compared to $1.8 million in
1997 and $341,000 in 1996. Diluted earnings per share increased from $0.06 in
1996 and $0.21 in 1997, to $0.34 in 1998. For the years ended 1998 and 1997,
shares outstanding on a diluted basis were 8.3 million, up from 7.5 million at
year-end 1996.
-12-
<PAGE>
Revenues
Consolidated revenues in 1998 totaled $28.6 million, representing an increase of
15% over 1997 revenues of $24.8 million, which were 20% over 1996 revenues of
$20.6 million. INOVOJECT(R) revenues totaled $27.4 million in 1998 compared to
$23.6 million in 1997 and $19.3 million in 1996, representing increases of 16%
from 1997 to 1998, and 22% from 1996 to 1997, with the 1998 increase coming
principally from increased placement and throughput of INOVOJECT(R) systems in
North America, Europe and Asia.
The 1998 revenues include INOVOJECT(R) lease fees derived from multi-year
contracts and paid trials in the U.S. and foreign countries, and the sale of
INOVOJECT(R) systems to distributors. Embrex estimates that as of December 31,
1998, it was vaccinating in excess of 80% of the estimated 8.0 billion broiler
birds grown in the U.S. in 1998, 1997 and 1996. Given its market penetration,
the Company expects only moderate INOVOJECT(R) systems revenue growth in this
market.
Management anticipates moderate revenue and earnings growth in 1999 from
existing INOVOJECT(R) operations in the United States and Canada, new
INOVOJECT(R) system leases in other countries, and sales of Bursaplex(R) product
to poultry producers in the United States and other countries. However, the rate
at which the marketplace will accept the INOVOJECT(R) technology outside the
United States and Canada, the timing of regulatory approvals of third-party
vaccines for in ovo use outside the United States and Canada, start-up costs in
new markets, possible variability in U.S. hatchery bird production as a result
of grain price fluctuations, and possible variability in the demand for U.S.
poultry and poultry products outside the U.S., will impact the pace of revenue
growth, if any, and the sustaining of profitability from the installation and
operational throughputs of INOVOJECT(R) systems.
Sales of Bursaplex(R), the Company's proprietary vaccine for the treatment of
avian Infectious Bursal Disease, was the principal source of $931,000 of product
revenues in 1998 and $1.1 million of product revenues in 1997. The Company's
ability to generate revenue from product sales has been constrained by the
previously announced delay associated with Ft. Dodge's obtaining British
regulatory approval for the sale of Bursamune(TM) in the United Kingdom, lower
levels of breeder and broiler flock vaccination rates, and fewer reported
incidences of bursal disease in the United States. Product sales consequently
declined 12% during 1998 from the $1.1 million recorded for the same period in
1997. Sales of VNF(R) for inclusion in IBD vaccines were the principal source of
previous years' product revenues, which generated $1.2 million and $817,000 in
1996 and 1995, respectively.
Cost of Product Sales and INOVOJECT(R) Revenues
Cost of revenues as a percentage of revenues decreased from 49% and 53% of total
revenues in 1997 and 1996, respectively, to 47% of total revenues in 1998. The
improvement in 1998 is primarily attributable to INOVOJECT(R) system-related
cost reductions and some price increases in selected markets.
Operating Expenses
Operating expenses totaled $11.8 million in 1998 compared to $9.8 million in
1997, and $7.8 million in 1996.
General and administrative ("G&A") expenses were $6.2 million in 1998, up 24%
from $5.0 million in 1997, and up 52% from $3.3 million in 1996. The 1998 and
1997 G&A increases over 1996 were primarily attributable to development costs in
Asia and Latin America as well as legal expenses incurred in connection with
various patent infringement lawsuits filed by the Company.
Sales and marketing expenses totaled $633,000 in 1998 compared to $587,000 and
$510,000 in 1997 and 1996, respectively. Fluctuations during these periods
resulted from various levels of activity in the Company's sales and customer
service functions to support market expansion and field support of INOVOJECT(R)
systems, as well as stepped-up international activity, principally in Europe.
Certain 1997 and 1996 operating expenses were reclassified to cost of revenues
to conform to the 1998 presentation. These reclassifications had no effect on
previously reported net income or shareholders' equity.
-13-
<PAGE>
Research and development ("R&D") expenses were $5.0 million in 1998 compared to
$4.2 million in 1997 and $4.0 million in 1996. The increase in R&D expense from
1996 to 1998 largely reflects an increase in outside contract research, supplies
consumption, operating expenses for the new research facility and INOVOJECT(R)
design and development and global technical support activity. The Company
continues to manage its research and development effort to leverage its
know-how, patent position, market presence and expenditures.
Other Income and Expense
Interest income totaled $402,000, $488,000, and $355,000 in years 1998, 1997,
and 1996, respectively. The 1998 decrease relative to 1997 resulted principally
from lower cash balances and lower interest rates, while the increase in 1997
relative to 1996 was a function of higher cash balances.
Interest expense totaled $645,000 in 1998 compared to $1.1 million in 1997, and
$1.6 million in 1996. In 1998, the decrease in interest expense reflected the
repayment of approximately $2.8 million of external financing, primarily in the
form of equipment leases. In 1997 and 1996, the amount of interest expense was
principally attributable to the Company's funding of its growing installed base
of INOVOJECT(R) systems with the use of capital lease financing. Management
expects to continue to rely on the use of internally generated funds to finance
the cost of additional INOVOJECT(R) systems in 1999, as was the case in 1998.
Effect of Inflation
Management expects cost of product sales and INOVOJECT(R) systems revenues,
operating expenses and capital equipment costs to change in line with periodic
inflationary changes in price levels. While management generally believes that
the Company will be able to offset the effect of price level changes by
adjusting selling/lease prices and effecting operating efficiencies, any
material unfavorable changes in price levels could have a material adverse
affect on its results of operations.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company's cash and short-term investment balances
totaled $7.2 million compared to $8.6 million and $9.9 million at December 31,
1997 and 1996, respectively. The decrease reflected the ability of the Company
to fund capital expenditures with internal cash instead of equipment lease
financing. Working capital increased to $8.3 million in 1998 from $7.6 million
in 1997, as a decrease in cash was more than offset by a reduction in the
short-term portions of both capital lease obligations and long-term debt.
During 1998, operating activities generated $5.7 million in cash, primarily due
to non-cash depreciation and net income. Within investing activities,
INOVOJECT(R) systems, the Company's new research facility, and equipment
purchases required $4.9 million. In addition, $2.8 million was used to repay
long-term debt and capital lease obligations.
In October 1998, the Company established a share repurchase program which
provides for shares of the Company's Common Stock to be purchased by the Company
in open market or privately negotiated transactions. See "Notes to Consolidated
Financial Statements."
As of December 31, 1998, the Company had outstanding purchase commitments of
approximately $3.5 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 construction and maintenance of
INOVOJECT(R) egg injection systems.
The Company maintained during 1998 a $2.0 million secured line of credit with a
bank in the United Kingdom, which could be used to finance the construction of
additional INOVOJECT(R) systems for Europe, the Middle East and Africa. The
Company utilized $0.4 million of this line during 1998. This line of credit was
repaid and terminated by year-end 1998.
-14-
<PAGE>
Based on its current operations, management believes that the Company's
available cash and short-term investments, together with cash flow from
operations, will be sufficient to meet its foreseeable cash requirements.
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 no later
than May 1999. The Company expects to complete all remediation, testing and
implementation no 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 or
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 prepare its 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.
The Company expects to incur no more than $500,000 in addressing Year 2000
issues, including an estimated $20,000 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
Information set forth in this Annual Report on Form 10-K contains various
"forward looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of
-15-
<PAGE>
1934, which statements represent the Company's judgment concerning the future
and are subject to risks and uncertainties that could cause the Company's actual
operating results and financial position to differ materially. Such forward
looking statements can be identified by the use of forward looking terminology
such as "may," "will," "expect," "anticipate," "estimate," "believe," or
"continue," or the negative thereof or other variations thereof or comparable
terminology.
The Company cautions that any such forward looking statements include statements
with respect to future products, services, markets and financial results. These
statements involve risks and uncertainties that could cause actual results to
differ materially, including without limitation the ability of the Company to
penetrate new markets, the outcome of its patent litigation, the Company's
ability to 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, and potential changes in regulations, and the Company's dependence on
certain customers. Additional information on these risks and other factors which
could affect the Company's financial results are included in the Risk Factors
described in Exhibit 99 to this report and in the Company's other filings with
the SEC, including the Company's Forms 10-Q, 10-K and 8-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 South 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 December 31, 1998, 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
jurisdiction outside North America in which the Company operates would not have
a material effect on the Company's consolidated financial results.
-16-
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Auditors
The Board of Directors and Shareholders
Embrex Inc.
We have audited the accompanying consolidated balance sheets of Embrex, Inc. and
subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Embrex, Inc. and
subsidiaries at December 31, 1998 and 1997, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Raleigh, North Carolina
March 1, 1999
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<PAGE>
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31,
------------
ASSETS 1998 1997
---- ----
<S> <C> <C>
Current Assets
Cash and cash equivalents................... $7,167 $8,580
Restricted cash (Note 2).................... 275 275
Inventories:
Materials and supplies................. 925 898
Product................................ 1,281 603
Accounts receivable - trade................. 3,454 2,772
Other current assets........................ 738 599
--- ---
Total Current Assets............. 13,840 13,727
INOVOJECT(R) Systems under construction......... 568 690
INOVOJECT(R) Systems............................ 24,161 21,024
Less accumulated depreciation............... (16,297) (12,149)
-------- --------
7,864 8,875
Equipment, furniture and fixtures............... 5,060 3,601
Less accumulated depreciation................ (2,468) (2,041)
------- -------
2,592 1,560
OTHER ASSETS:
Patents and exclusive licenses of patentable
technology (net of accumulated amortization of $196
in 1998 and $80 in 1997)................. 126 309
TOTAL ASSETS.................................... $24,990 $25,161
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable............................ $ 393 $1,312
Accrued expenses............................ 2,033 1,976
Deferred revenue............................ 175 -0-
Product warranty accrual.................... 322 171
Current portion of capital lease obligations 2,618 2,391
Current portion of long-term debt (Note 4).. -0- 292
--- ---
Total Current Liabilities........ 5,541 6,142
Capital lease obligations, less current portion 634 3,269
(Note 3)........................................
Long-term debt, less current portion (Note 4)... 10 9
Shareholders' Equity (Notes 5, 6, 7 and 8)
Common Stock, $.01 par value per share
Authorized - 30,000,000 shares
Issued and outstanding - 8,264,490
and 8,239,946 shares 83 82
at December 31, 1998 and 1997, respectively
Additional paid-in capital.................. 54,894 54,788
Accumulated other comprehensive income...... 113 (196)
Accumulated deficit......................... (36,072) (38,933)
Treasury stock.............................. (213) -0-
----- ---
Total Shareholders' Equity....... 18,805 15,741
------ ------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY...... $24,990 $25,161
======= =======
</TABLE>
See accompanying notes.
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<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
REVENUES
INOVOJECT(R) revenue......................... $27,426 $23,614 $19,263
Product revenue.............................. 931 1,062 1,217
Other revenue................................ 258 113 152
--- --- ---
Total Revenues.......................... 28,615 24,789 20,632
Cost of Product Sales and INOVOJECT(R) Revenues... 13,341 12,244 11,032
------ ------ ------
15,274 12,545 9,600
OPERATING EXPENSES
General and administrative................... 6,204 5,020 3,265
Sales and marketing.......................... 633 587 510
Research and development..................... 4,995 4,188 4,036
----- ----- -----
Total Operating Expenses................ 11,832 9,795 7,811
------ ----- -----
Operating Income................................. 3,442 2,750 1,789
Other Income (Expense)
Interest income.............................. 402 488 355
Interest expense............................. (645) (1,070) (1,608)
Other........................................ 38 14 -0-
-- -- ---
Total Other Expense.................... (205) (568) (1,253)
----- ----- -------
Income Before Taxes.................... 3,237 2,182 536
Income Taxes (Note 9)............................ 376 422 195
--- --- ---
Net Income....................................... $2,861 $1,760 $341
====== ====== ====
Net Income per share of Common Stock
Basic........................................ $0.35 $0.21 $0.05
Diluted...................................... $0.34 $0.21 $0.06
Number of Shares Used in Per Share Calculation
Basic........................................ 8,255 8,184 7,218
Diluted...................................... 8,339 8,339 7,520
</TABLE>
See accompanying notes.
-19-
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Dollars in thousands) Year ended December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Operating Activities
Net income.......................................... $2,861 $1,760 $341
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization.................. 4,884 4,043 4,021
Changes in operating assets and liabilities:
Accounts receivable, inventories and other
current assets.......................... (1,526) (797) (515)
Accounts payable and accrued expenses...... (537) 1,083 119
----- ----- -----
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,682 6,089 3,966
Investing Activities
Sales of short-term investments -0- 876 1,096
Collateralization of Lease (Note 2) -0- (275) -0-
Purchases of INOVOJECT(R) systems, equipment, furniture
and fixtures (4,850) (3,962) (4,888)
Reductions to patents and other noncurrent assets 248 280 93
--- --- --
NET CASH USED IN INVESTING ACTIVITIES (4,602) (3,081) (3,699)
Financing Activities
Issuance of Common Stock 107 257 3,438
Repayment of long-term debt (286) (119) 476
Proceeds from capital lease obligations 101 102 2,139
Payments on capital lease obligations (2,511) (3,328) (2,818)
Repurchase of Common Stock (213) -0- -0-
----- ------- -----
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (2,802) (3,088) 3,235
------- ------- -----
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,722) (80) 3,502
CURRENCY TRANSLATION ADJUSTMENTS 309 (376) 180
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 8,580 9,036 5,354
----- ----- -----
CASH AND CASH EQUIVALENTS AT END OF PERIOD $7,167 $8,580 $9,036
====== ====== ======
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Total interest paid was $645,000, $1,070,000 and $1,593,000 for the years ended
December 31, 1998, 1997, and 1996, respectively.
Total income taxes paid were $277,000, $70,000 and $170,000 for the years ended
December 31, 1998, 1997, and 1996, respectively.
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITY:
During 1996, $3.3 million of outstanding debentures along with $258,000 of
accrued interest were converted into 612,061 shares of Common Stock net of
unamortized debt issuance costs totaling $111,000.
During 1997, $425,000 of outstanding debentures along with $139,000 of accrued
interest were converted into 98,267 shares of Common Stock net of unamortized
debt issuance costs totaling $1,000. In addition, 419 shares of Embrex Common
Stock were issued pursuant to the non-cash exercise of warrants related to the
initial sale of the debentures in May 1995. As of December 1, 1997, all
debentures had been converted into Common Stock.
On May 27, 1997, 34,320 shares of Common Stock were issued in exchange for
substantially all of the assets of Agrimatic Corporation.
See accompanying notes.
-20-
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Paid-in Comprehensive Accumulated Treasury
Stock Capital Income Deficit Stock Total
----- ------- ------ ------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 (as
restated)............................... $ 46,122 $ 821 $ 0 ($41,034) $ 0 $ 5,909
Stock issued:
Upon exercise of options............... 286 286
Under employee stock purchase plan..... 68 68
Upon conversion of long-term debt
(net of issuance cost of $1)........ 2,947 494 3,441
Upon exercise of warrants.............. 3,084 3,084
Establishment of $.01 par value
(Note 5)......................... (52,427) 52,427 -0-
Other Comprehensive Income, Net of Tax
(Note 1)
Currency translation adjustments.... 180 180
Net income.......................... 341 341
---
Comprehensive income................ 521
---
BALANCE AT DECEMBER 31, 1996................... 80 53,742 180 (40,693) 0 13,309
Stock issued:
Upon exercise of options............... 1 201 202
Under employee stock purchase plan..... 55 55
Upon conversion of long-term debt
(net of issuance cost of $111)..... 1 563 564
Upon issuance of shares for
Agrimatic acquisition............... 227 227
Other Comprehensive Income, Net of Tax
(Note 1)
Currency translation adjustments.... (376) (376)
Net income.......................... 1,760 1,760
-----
Comprehensive income................ 1,384
-----
BALANCE AT DECEMBER 31, 1997................... $82 $54,788 ($196) ($38,933) 0 $15,741
Stock Repurchased (213) (213)
Stock issued:
Upon exercise of options............... 1 1
Under employee stock purchase plan..... 1 105 106
Other Comprehensive Income, Net of Tax
(Note 1)
Currency translation adjustments.... 309 309
Net income.......................... 2,861 2,861
-----
Comprehensive income................ 3,170
-----
BALANCE AT DECEMBER 31, 1998................... $83 $54,894 $113 ($36,072) (213) $18,805
</TABLE>
See accompanying notes.
-21-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Embrex, Inc. has developed and commercialized the INOVOJECT(R) system, a
proprietary, automated, in-the-egg injection system which eliminates the need
for manual, post-hatch injection of certain vaccines for newly hatched broiler
chicks. Embrex also develops and markets proprietary pharmaceutical and
biological products to improve bird health, reduce bird production costs and
provide other economic benefits to the poultry industry.
ACQUISITION
On May 27, 1997, the Company issued 34,320 shares of Common Stock in exchange
for substantially all of the assets of Agrimatic Corporation. In 1998, the book
value of the assets acquired in this acquisition was written off. This
transaction and subsequent write-off had an immaterial effect on the operations
of Embrex.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Embrex, Inc. and
its wholly owned subsidiaries, Embrex Europe Limited and Embrex Sales, Inc. (the
"Company"). All significant intercompany transactions and accounts have been
eliminated. Currently, foreign operations account for approximately 20% of the
Company's revenues.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
INVENTORIES
Items recorded as inventory are generally purchased from others and recorded at
the lower of cost or market using the average cost method. Materials and
supplies inventories include spare parts for the INOVOJECT(R) systems as well as
laboratory and general supplies. Product inventories are comprised of biological
compounds, principally the Company's Viral Neutralizing Factor product (VNF(R)).
INOVOJECT(R) SYSTEMS
INOVOJECT(R) systems are comprised of egg injection and related equipment
available for lease to customers. The equipment is recorded at the lower of cost
or estimated net realizable value. Depreciation is computed principally by using
accelerated and straight-line methods over the estimated useful life of the
equipment and commences after construction is complete and the equipment is
placed in service.
EQUIPMENT, FURNITURE AND FIXTURES
Equipment, furniture and fixtures are recorded at cost. Depreciation is computed
principally by using accelerated and straight-line methods over the estimated
three-to-five years useful lives of the assets placed in service.
PATENTS AND EXCLUSIVE LICENSES OF PATENTABLE TECHNOLOGY
Costs incurred to acquire exclusive licenses of U.S. patentable technology and
to apply for and obtain U.S. patents on internally developed technology are
capitalized and amortized using the straight-line method. Exclusive license
agreements are amortized over the period of the license. Patents are amortized
over the shorter of the useful or legal life of the patent.
-22-
<PAGE>
FOREIGN CURRENCY TRANSLATION
All assets and liabilities in the balance sheets of the Company's foreign
subsidiary, Embrex Europe Limited, and its Asian operations, are translated at
year-end exchange rates except shareholders' equity which is translated at
historical rates. Revenues, costs and expenses are recorded at average rates of
exchange during the year. Translation gains and losses are accumulated as a
component of shareholders' equity. Foreign currency transaction gains and losses
are included in determining net income.
REVENUE RECOGNITION
INOVOJECT(R) system fees are recognized based on eggs processed during the
period. Product sales are recognized when the products are shipped. Contract
research revenue is recognized as services are performed over the term of the
contract. Revenue received, but not yet earned, is classified as deferred
revenue.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs, including costs incurred to complete contract
research, are charged to operations when incurred and are included in operating
expenses.
INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). SFAS 109 requires recognition of deferred tax assets and liabilities for
the expected future tax consequences of temporary basis differences that have
arisen between financial statement and income tax reporting.
NET INCOME PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 128, "Earnings per Share" which established new standards for
computing and presenting net income per share information. As required, the
Company adopted the provisions of Statement No. 128 in its 1997 financial
statements and has restated all prior year net income per share information.
Basic net income per share was determined by dividing net income available for
common shareholders by the weighted average number of common shares outstanding
during each year. Diluted net income per share reflects the potential dilution
that could occur assuming conversion or exercise of all convertible securities
and issued and unexercised stock options. A reconciliation of the net income
available for common shareholders and number of shares used in computing basic
and diluted net income per share is in Note 11.
USE OF ESTIMATES
The presentation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from these estimates.
PRINCIPAL CUSTOMERS
Tyson Foods, Inc. ("Tyson") accounted for approximately 27, 28 and 33 percent of
consolidated 1998, 1997 and 1996 revenues, respectively. Based on the millions
of pounds of ready-to-eat poultry meat produced in 1998, Tyson accounted for
approximately 24 percent of the broilers grown in the U.S. In 1998, Tyson was
the only customer that represented greater than 10 percent of total revenues.
-23-
<PAGE>
CONCENTRATION OF CREDIT RISK
The Company's principal financial instrument, subject to potential concentration
of credit risk, is accounts receivable which are unsecured. As of December 31,
1998, Tyson Foods, Inc. accounted for approximately 16% of consolidated accounts
receivable, and substantially all of the Company's accounts receivable are due
from companies in the poultry industry.
SOURCES OF SUPPLY
The Company has developed a strategic relationship with a single contract
manufacturer to fabricate its INOVOJECT(R) systems. While other machine
fabricators exist and have constructed limited numbers of INOVOJECT(R) systems,
a change in fabricators could cause a delay in manufacturing and a possible
delay in the timing of future INOVOJECT(R) installations and revenues from those
installations.
The Company has granted Merial Select, Inc. ("Select") (a Merck Rhone-Poulenc
company) exclusive rights to manufacture IBD vaccines containing Embrex's
proprietary VNF(R) product for Embrex to market in North America, Latin America
and Asia under the trade name Bursaplex(R). In 1995, Embrex granted Cyanamid
Websters ("Websters"), a unit of Ft. Dodge Animal Health, which is a division of
American Home Products Corp. ("Ft. Dodge"), rights to manufacture and market
bursal disease vaccines containing the Company's VNF(R) product to be marketed
in Europe, the Middle East and Africa under the trade name Bursamune(TM).
Additionally, the Company has one contract supplier of its VNF(R) product. The
manufacture of the bursal disease vaccines being produced by Select and Ft.
Dodge and the Company's VNF(R) product generally must be performed in licensed
facilities and/or under methods approved by regulatory agencies. Although there
are other manufacturers who are capable of manufacturing bursal disease products
and producing products such as VNF(R), a change of suppliers could adversely
effect the Company's future operating results due to the time it would take a
new supplier to obtain regulatory approval of its production process and/or
manufacturing facilities. The Company seeks to minimize this exposure through
multi-year supply agreements and the maintenance of adequate inventories.
RECLASSIFICATION
Certain 1997 and 1996 amounts in the accompanying financial statements have been
reclassified to conform to the 1998 presentation. These reclassifications had no
effect on previously reported net income or shareholders' equity.
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 $3.2 million, $1.4 million and $521,000 for the years ended
December 31, 1998, 1997 and 1996, respectively. Embrex's total comprehensive
income represents net income plus the after-tax effect of foreign currency
translation adjustments for the years presented.
SEGMENTS
Effective January 1, 1998, the Company adopted SFAS 131, "Disclosures about
Segments of an Enterprise and Related Information". This pronouncement
superseded SFAS 14, "Financial Reporting for Segments of a Business Enterprise".
SFAS 131 establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports. SFAS 131 also establishes standards for
related disclosures about products and services, geographic areas and major
customers. The adoption of SFAS 131 did not affect results of operations or
financial position. The Company is considered to have only one operating segment
based on SFAS 131.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments
and for Hedging Activities". This pronouncement is effective for annual periods
beginning after June 15, 1999. SFAS 133 requires all derivatives to be recorded
on the balance sheet and establishes accounting rules for hedging activities.
The effect of the hedge accounting rules is to offset changes in value or cash
flows of both the hedge and hedged item in earnings in the same period. Changes
in the fair value of derivatives that do not qualify for hedge accounting are
reported in earnings in the period of the change. Based on the fact that the
Company does not currently use derivatives, adoption of this pronouncement is
not expected to have a material impact on the Company's financial position or
results of operations.
During 1998, the Company adopted SOP 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use", which requires capitalization
of certain costs incurred in connection with developing or obtaining internal
use software. The impact of adoption was not material.
2. RESTRICTED CASH
On October 13, 1997, the Company executed a ten-year collateralized lease
relative to the facilities housing the Company's new research facility. Such
collateral exists in the form of a certificate of deposit, which is required to
be maintained at least through the end of the seventh year of the lease.
-24-
<PAGE>
3. LEASES
At December 31, 1998 and 1997, the Company had assets totaling $11.6 million and
$14.0 million, respectively, financed by capital lease agreements which expire
through December 2001. Accumulated depreciation and amortization includes $8.0
million and $10.1 million of amortization related to these assets at December
31, 1998 and 1997, respectively. Amortization of assets financed by capital
leases is included with depreciation expense.
The Company leases its facilities under a number of operating leases extending
through November 2007. The Company has the option to cancel one of its operating
lease agreements with the payment of a $180,000 penalty. Total rent expense was
$456,000, $312,000, and $334,000 for the years ended December 31, 1998, 1997,
and 1996, respectively.
At December 31, 1998, the Company's minimum future commitments under capital and
operating leases were as follows:
Operating Capital
Leases Leases
------ ------
1999............................................ $461,000 $2,967,000
2000............................................ 468,000 664,000
2001............................................ 481,000 11,000
2002............................................ 299,000 0
2003............................................ 253,000 0
Beyond.......................................... 696,000 0
------- -
Total........................................... $2,658,000 $3,642,000
==========
Less amounts representing interest.............. (311,000)
---------
Present value of future minimum lease payments $3,331,000
==========
4. LONG-TERM DEBT
During 1997, $425,000 of outstanding debentures along with $66,000 of accrued
interest were converted into 98,267 shares of Common Stock net of unamortized
debt issuance costs totaling $1,000. In addition, 419 shares of Embrex Common
Stock were issued pursuant to the non-cash exercise of warrants related to the
initial sale of such debentures.
5. SHAREHOLDERS' EQUITY
On May 16, 1996, the Company's shareholders approved an increase in the number
of authorized shares of Common Stock from 15,000,000 to 30,000,000 shares and an
increase in the amount of authorized Preferred Stock from 20,000 to 15,000,000
shares. In addition, the Company changed the par value of the Common Stock and
Series A Participating Preferred Stock from no par value to par value stock,
with a par value of $.01 per share.
At December 31, 1998, the Company had reserved a total of 2,296,113 shares of
its Common Stock for future issuance as follows:
For exercise of warrants to purchase Common Stock............... 171,000
For exercise of Common Stock options............................ 2,092,400
For possible future issuance to employees and others
under employee stock purchase plans............................. 32,713
-------
Total reserved.................................................. 2,296,113
==========
-25-
<PAGE>
At December 31, 1998, the Company had issued and outstanding warrants to
purchase Common Stock as follows:
Date through Which
Exercise Price Shares Reserved for Warrants are
Per Share Exercise of Warrants Exercisable
--------- -------------------- -----------
$9.50.............................. 30,000 12/31/00
$9.50.............................. 15,000 6/9/01
$6.00.............................. 96,000 4/30/00
$7.28.............................. 30,000 10/30/01
------
171,000
-------
In October 1998, the Company announced that the Board of Directors authorized a
share repurchase program to purchase up to 10 percent of outstanding shares of
Common Stock, or up to approximately 830,000 shares over 18 months, in open
market or privately negotiated transactions. As of December 31, 1998, the
Company had purchased 40,800 shares for $213,000 at an average price of $5.2215.
6. STOCK OPTION PLANS
The Company has elected to follow Accounting Principles Board Option No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation," requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
The Company's stock option plans provide for option grants designated as either
non-qualified or incentive stock options. The options generally vest over a
four-year period and expire ten years from the date of grant. In general, the
exercise price of stock options is the closing price of the Company's Common
Stock on the date of grant.
Most U.S. employees and certain employees outside the U.S. are eligible to
receive a grant of stock options periodically with the number of shares
generally determined by the employee's salary grade and performance level. In
addition, certain management and professional level employees may receive a
stock option grant upon hire. Non-employee directors of the Company receive
annual grants of stock options in amounts specified in the applicable plan.
Stock option information with respect to all of the Company's stock option plans
follows:
<TABLE>
<CAPTION>
Number Option Price Expiration
of Shares Range per Share Date
--------- --------------- ----
<S> <C> <C> <C>
Balance at December 31, 1995, outstanding
options..................................... 909,121 $2.00 to $8.375 1998-2005
Granted ................................ 111,980 $6.125 to $7.625 2006
Exercised............................... (66,873) $2.00 to $7.00
Canceled................................ (87,814) $6.125 to $2.00
--------
Balance at December 31, 1996, outstanding
options..................................... 866,414 $2.00 to $8.375 1998-2006
Granted ................................ 279,525 $6.063 to $7.125 2007
Exercised............................... (53,773) $2.00 to $7.00
Canceled................................ (53,468) $6.125 to $7.00
--------
Balance at December 31, 1997, outstanding
options..................................... 1,038,698 $2.00 to $8.75 1998-2007
Granted................................. 307,495 $5.00 to $6.375
Exercised............................... (3,900) $2.00
Canceled................................ (47,754) $5.375 to $7.00
--------
Balance at December 31, 1998, outstanding
options..................................... 1,294,539 $2.00 to $8.75 1999-2008
========= ============== =========
</TABLE>
-27-
<PAGE>
The Company's 1998 Amendment to its 1993 Incentive Stock Option Plan increased
the authorized grant of options to company personnel from 1.2 million shares of
common stock up to 1.9 million shares. All options granted have 10 year terms
and a four year vesting schedule.
Pro forma information regarding net income and income per share is required by
SFAS 123, and has been determined as if the Company accounted for its employee
stock options granted subsequent to December 31, 1994 under the fair value
method of SFAS 123. The fair value for these options was estimated at the date
of grant using a Black-Scholes option pricing model with the following weighted
average assumptions:
1998 1997 1996
---- ---- ----
Risk free interest rate.......... 4.92 6.13 6.42
Dividends........................ -- -- --
Volatility factor................ 0.305 0.358 0.421
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
changes in the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:
For the year ended December 31
------------------------------
1998 1997 1996
---- ---- ----
Pro forma net income (in thousands)........ $2,212 $1,272 $ 107
Pro forma basic income per share........... $ 0.27 $ 0.16 $0.01
The weighted average remaining contractual life of those options is 6.70 years.
The weighted average exercisable price of outstanding options at December 31,
1998 is $5.59.
-28-
<PAGE>
7. EMPLOYEE STOCK PURCHASE PLAN
The Company has an Employee Stock Purchase Plan (the "Purchase Plan") to provide
its employees with an additional opportunity to share in the ownership of the
Company. Under terms of the Purchase Plan, all regular full-time employees of
the Company may make voluntary payroll contributions thereby enabling them to
purchase Common Stock. Contributions are limited to 20 percent of an employee's
compensation. Up to 100,000 shares of Common Stock may be issued under the
Purchase Plan. The purchase price of the stock is the lesser of the Fair Market
Value on the first business day of the Purchase Period or 85% of the Fair Market
Value on the date of exercise which can be at any time during the Plan year.
Under the Purchase Plan, during 1998, 1997 and 1996, 20,594, 9,764 and 11,028
shares of Common Stock, respectively, were purchased. To date, 67,287 shares of
Common Stock have been purchased.
8. 401(k) RETIREMENT SAVINGS PLAN
The Company has a 401(k) plan which is available to all employees upon
employment who are at least 18 years of age. Employer contributions are
voluntary at the discretion of the Company.
Company contributions amounted to $62,988 and $44,080 for the years ended
December 31, 1998 and 1997. There were no Company contributions for the year
ended December 31, 1996.
9. INCOME TAXES
The components of income tax expense for the year ended December 31 are as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current:
Federal........................................... $197,000 $59,000 $45,000
State.............................................. 34,000 84,000 30,000
Foreign........................................... 145,000 279,000 120,000
------- ------- -------
$376,000 $422,000 $195,000
======= ======= =======
</TABLE>
The Company's consolidated effective tax rate differed from the statutory rate
as set forth below for the year ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Federal taxes at statutory rate................ $1,101,000 $742,000 $182,000
State and local income taxes, net of Federal
benefit........................................ 162,000 84,000 30,000
Non-deductible expenses........................ 75,000 24,000 220,000
Foreign losses for which no benefit has been
recognized................................ 230,000 346,000 114,000
Change in valuation allowance.................. (1,337,000) (1,112,000) (516,000)
Alternative minimum and foreign withholding
taxes.......................................... 145,000 338,000 165,000
------- ------- -------
$376,000 $422,000 $195,000
======== ======== ========
</TABLE>
-29-
<PAGE>
Deferred income taxes reflect the net effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. The Company has no deferred tax
liabilities. Significant components of the Company's deferred tax assets are as
follows:
<TABLE>
<CAPTION>
At December 31,
---------------
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Book over tax depreciation........................... $278,000 $718,000
Net operating loss carryforwards..................... 9,710,000 11,430,000
Research and experimental tax credit carryforwards... 2,228,000 1,915,000
Charitable contributions carryforward................ 22,000 16,000
Accrued liabilities and reserves..................... 457,000 158,000
Alternative Minimum Tax credit carryforward.......... 205,000 0
------------- -------------
Total deferred tax assets........................ $12,900,000 $14,237,000
Valuation allowance for deferred tax assets..............($12,900,000) ($14,237,000)
------------- -------------
Net deferred tax assets............................ $0 $0
== ==
</TABLE>
During 1998 and 1997, the valuation allowance decreased by ($1,337,000) and
($1,264,000), respectively.
At December 31, 1998, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $25.6 million which are available
to offset future taxable income. These net operating loss carryforwards expire
during the years 2000 through 2010. As a result of the changes in ownership
percentages which occurred with the 1991 Initial Public Offering (IPO), the
future utilization of the net operating loss carryforwards incurred prior to the
1991 IPO is limited to approximately $2.1 million per year. Any loss
carryforward amounts exceeding the limitation can be carried forward to future
years within the carryforward period. The net operating loss carryforwards
incurred subsequent to the 1991 IPO are not subject to these change in ownership
limitations.
In addition, the Company has Research and Experimental Tax Credit carryforwards
totaling approximately $2.2 million which are available to offset future federal
income taxes. These credits expire during the years 2000 through 2013.
10. COMMITMENTS
As of December 31, 1998, the Company had outstanding purchase commitments of
approximately $3.5 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 INOVOJECT(R) egg injection systems.
-30-
<PAGE>
11. NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net income
per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Numerator:
Net Income Available To Common Stockholders............... $2,861 $1,760 $341
Effect of dilutive securities:
Regulation S Debentures........................... 0 9 122
- - ---
Numerator for diluted earnings per share-income
available to common stockholders after assumed
conversions.................................... $2,861 $1,769 $463
====== ====== ====
Denominator:
Denominator for basic net income per share--weighted-average
shares.................................................... 8,255 8,184 7,218
Effect of Dilutive Securities:
Employee Stock Options............................ 84 143 188
Warrants.......................................... 0 8 12
Convertible Debentures............................ 0 4 102
- - ---
Dilutive Potential Shares...................... 84 155 302
Denominator for diluted net income per
share--adjusted weighted-average shares and
assumed conversions............................ 8,339 8,339 7,520
===== ===== =====
Basic net income per share................................ $0.35 $0.21 $0.05
===== ===== =====
Diluted net income per share.............................. $0.34 $0.21 $0.06
===== ===== =====
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
-31-
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information on the executive officers and directors is incorporated by reference
from the Company's Proxy Statement (under the headings "Management" and
"Proposal 1: Election of Directors," respectively), with respect to the Annual
Meeting of Shareholders to be held on May 20, 1999, to be filed with the
Securities and Exchange Commission.
ITEM 11. EXECUTIVE COMPENSATION
This information is incorporated by reference from the Company's Proxy Statement
(under the heading "Executive Compensation"), with respect to the Annual Meeting
of Shareholders to be held on May 20, 1999, to be filed with the Securities and
Exchange Commission.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information is incorporated by reference from the Company's Proxy Statement
(under the heading "Share Ownership of Management and Certain Beneficial
Owners"), with respect to the Annual Meeting of Shareholders to be held on May
20, 1999, to be filed with the Securities and Exchange Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
-32-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1). The financial statements listed below are included in Item 8 of this
report. All financial statement schedules normally required under
Regulation S-X are omitted as the required information is inapplicable.
Report of Independent Auditors
Financial Statements
Consolidated Balance Sheets at December 31, 1998 and 1997
Consolidated Statements of Operations for each of the three fiscal years
ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for each of the three fiscal years
ended December 31, 1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity for each of the three
fiscal years ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
(a)(2). The financial statements of the Company's Employee Stock Purchase Plan
listed below are filed herewith, pursuant to Form 10-K, General
Instruction F.
Report of Independent Auditors
Financial Statements
Statements of Net Assets Available for Plan Benefits at December 31, 1998
and 1997
Statements of Changes in Net Assets Available for Plan Benefits for the
three years ended December 31, 1998, 1997 and 1996
Notes to Financial Statements
<PAGE>
(a)(3). The exhibits listed below are filed as part of this report. Executive
compensation plans and arrangements are listed in Exhibits 10.13 through 10.40.
Exhibits Description
3.1(1) Restated Articles of Incorporation
3.2(2) Articles of Amendment to Restated Articles of Incorporation,
effective March 21, 1996
3.3(3) Articles of Amendment to Restated Articles of Incorporation,
effective May 28, 1996
3.4 Amended and Restated Bylaws, effective May 21, 1998
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4
4.2(4) Specimen of Common Stock Certificate
4.3(5) Warrant to Purchase Common Stock of Embrex issued to Schwartz
Investments, Inc.
4.4(6) Rights Agreement dated as of March 21, 1996 between Embrex and
Branch Banking and Trust Company, as Rights Agent
10.1(7) Exchange Agreement dated May 28, 1991, between Embrex and
American Cyanamid Company, Advent First Limited Partnership A,
Biotechnology Venture Fund S.A., Biotechnology Investments
Limited, Domain Partners, L.P., Elf Technologies, Inc., Prince
Venture Partners III, L.P., 3I Securities Corporation, and
Charles E. Austin
10.2(7) License Agreement dated December 11, 1991, between Embrex and the
National Technical Information Service, a primary operating unit
of the United States Department of Commerce
10.3(7) Collaborative Research Agreement dated January 17, 1989 between
Embrex and the University of Arkansas
10.4(7) License Agreement dated October 1, 1998 between Embrex and the
National Technical Information Service, a primary operating unit
of the United States Department of Commerce
10.5(7) Lease Agreement dated December 9, 1986 between Embrex, as tenant,
and Imperial Center Partnership and Petula Associates, Ltd., as
landlord, as amended by First Amendment dated June 11, 1987,
Second Amendment dated December 1, 1988, and Third Amendment
dated May 2, 1989
10.6(4) Fourth Amendment of Lease dated October 1, 1994 between the
Company and Glaxo Inc. (as successor in interest to Imperial
Center Partnership and Petula Associates, Ltd.)
10.7(4) Fifth Amendment of Lease dated December 13, 1996 between the
Company and Glaxo Wellcome Inc. (as successor in interest to
Glaxo Inc.)
10.8(8) Lease for Royal Center II dated October 13, 1997 between the
Company and Petula Associates, Ltd.
10.9(7) Facility Agreement dated March 1, 1991, between Embrex and
Mississippi Agriculture and Forestry Experiment Station,
Mississippi State University
10.10(7) Unrestricted Grant Agreement dated April 1, 1988, between Embrex
and North Carolina State University, as amended by Amendment
dated September 15, 1989 and Amendment dated April 22, 1991
-34-
<PAGE>
10.11(7) Unrestricted Grant Agreement dated November 1, 1986, between
Embrex and North Carolina State University, as amended by
Amendment dated May 3, 1989, Amendment dated September 15, 1989,
and Amendment dated April 22, 1991
10.12(7) Basic Research Agreement dated October 24, 1989, between Embrex
and University of Arkansas, as amended on October 23, 1990,
February 1, 1991 and July 22, 1991
10.13(7) 1988 Incentive Stock Option Plan and form of Incentive Stock
Option Agreement
10.14(7) 1989 Nonstatutory Stock Option Plan and form of Nonstatutory
Stock Option Agreement
10.15(7) 1991 Nonstatutory Stock Option Plan and form of Nonstatutory
Stock Option Agreement
10.16(9) Incentive Stock Option and Nonstatutory Stock Option Plan and
forms of Stock Option Agreements - June 1993
10.17(3) Amendment dated May 16, 1996 to Incentive Stock Option and
Nonstatutory Stock Option Plan - June 1993
10.18(10) Amended and Restated Incentive Stock Option and Nonstatutory
Stock Option Plan - May 1998
10.19(4) Amended and Restated Employee Stock Purchase Plan
10.20(7) Employment Agreement dated November 15, 1989, between Embrex and
Randall L. Marcuson
10.21(4) Amendment to Employment Agreement dated May 21, 1996 between
Embrex and Randall L. Marcuson
10.22(4) Change In Control Severance Agreement dated May 21, 1996 between
Embrex and Randall L. Marcuson
10.23 Amendment to Change in Control Severance Agreement dated October
1, 1998 between Embrex and Randall L. Marcuson
10.24(7) Employment Agreement dated October 16, 1989, between Embrex and
Catherine A. Ricks
10.25(4) Change In Control Severance Agreement dated May 21, 1996 between
Embrex and Catherine A. Ricks
10.26 Amendment to Change in Control Severance Agreement dated October
1, 1998 between Embrex and Catherine A. Ricks
10.27(2) General Provisions to Employment Agreement between Embrex and
Brian V. Cosgriff dated August 18, 1995
10.28(4) Change In Control Severance Agreement dated May 21, 1996 between
Embrex and Brian V. Cosgriff
10.29 Amendment to Change in Control Severance Agreement dated October
1, 1998 between Embrex and Brian V. Cosgriff
10.30(2) Terms and Conditions of Employment between Embrex Europe Limited
and David M. Baines dated May 12, 1994
-35-
<PAGE>
10.31(4) Change In Control Severance Agreement dated June 9, 1996 between
Embrex and David M. Baines
10.32 Amendment to Change in Control Severance Agreement dated October
1, 1998 between Embrex and David M. Baines
10.33(4) Letter Agreement and General Provisions to Employment Agreement
dated August 20, 1996 between Embrex and Don T. Seaquist and
Amendment to Employment Agreement dated September 9, 1996 between
Embrex and Don T. Seaquist
10.34(4) Change In Control Severance Agreement dated September 9, 1996
between Embrex and Don T. Seaquist
10.35 Amendment to Change in Control Severance Agreement dated October
1, 1998 between Embrex and Don T. Seaquist
10.36 Letter Agreement and General Provisions to Employment Agreement
dated May 31, 1991 between Embrex and V. Hayes Fenstermacher and
Amendment to Employment Agreement dated July 18, 1996 between
Embrex and V. Hayes Fenstermacher
10.37 Change In Control Severance Agreement dated October 16, 1996
between Embrex and V. Hayes Fenstermacher
10.38 Amendment to Change in Control Severance Agreement dated October
1, 1998 between Embrex and V. Hayes Fenstermacher
10.39 Letter Agreement and General Provisions to Employment Agreement
dated February 3, 1999 between Embrex and Brian C. Hrudka
10.40 Change In Control Severance Agreement dated March 24, 1999
between Embrex and Brian C. Hrudka
10.41(7) Shareholders' Agreement dated August 14, 1991 by and among
Embrex, Advent Euroventures Limited Partnership, and Plant
Resource Venture Fund II Limited Partnership
10.42(8) INOVOJECT(R) Egg Injection System Lease, Limited License, Supply
and Service Agreement dated September 1, 1994 between Embrex and
Tyson Foods, Inc. (asterisks located within the exhibit denote
information which has been deleted pursuant to a request for
confidential treatment filed with the Securities and Exchange
Commission)
10.43(8) Amendment dated March 26, 1997 to the INOVOJECT(R) Egg Injection
System Lease, Limited License, Supply and Service Agreement dated
September 1, 1994 between Embrex and Tyson Foods, Inc. (asterisks
located within the exhibit denote information which has been
deleted pursuant to a request for confidential treatment filed
with the Securities and Exchange Commission)
10.44(11) Master Lease Agreement dated December 3, 1993 between Embrex and
Capital Associates International, Inc. with a form of equipment
schedule and collateral assignment of lease attached
10.45(11) Master Lease Agreement dated January 28, 1994 between Embrex and
Aberlyn Capital Management Limited Partnership with a form of
lease schedule and collateral assignment of lease attached
10.46(11) Agreement to Issue Warrant dated January 28, 1994 between Embrex
and Aberlyn Capital Management Limited Partnership
-36-
<PAGE>
10.47(11) Common Stock Purchase Warrant issued to Aberlyn Capital
Management Limited Partnership
10.48(11) Agreement to Issue Warrant dated January 28, 1994 between Embrex
and Aberlyn Holding Company, Inc.
10.49(11) Common Stock Purchase Warrant issued to Aberlyn Holding Company,
Inc.
10.50(12) Master Equipment Lease Agreement dated as of December 7, 1994
between Financing for Science International, Inc. and Embrex with
a Consent to Assignment of Equipment Lease Agreement, Security
Agreement and Rental Schedule attached
10.51(12) License Agreement dated as of December 7, 1994 between Financing
for Science International, Inc. and Embrex with Sublicense
Agreement attached
10.52(12) Common Stock Purchase Warrant dated January 17, 1995 issued to
Financing for Science International, Inc.
10.53(12) Agreement for Sale of Equipment and Rights Under User Agreement
dated as of December 7, 1994 between Financing for Science
International, Inc. and Embrex
10.54(2) Limited License and Supply Agreement dated as of July 20, 1995
between Embrex and Webster
10.55(4) Amendments dated August 1, 1996 and November 11, 1996 to Limited
License and Supply Agreement dated as of July 20, 1995 between
Embrex and Webster
10.56(2) Agreement dated as of January 22, 1996 between Embrex and Select
10.57(2) Letter Agreement dated as of January 22, 1996 between Select and
Embrex
10.58(2) License dated as of January 22, 1996 granted by Select to Embrex
10.59(2) Commitment letter accepted June 14, 1995 between Embrex and
Financing for Science International, Inc. for $2.0 million
capital lease financing facility
10.60(2) Stock Purchase Warrant dated June 9, 1995 issued to Financing for
Science International, Inc.
10.61(2) Financing Agreement (Number 10783) dated as of October 30, 1995
between Lease Management Services, Inc. and Embrex, and Addendum
thereto dated October 30, 1995 attached
10.62(2) License Agreement dated October 30, 1995 between Embrex and Lease
Management Services, Inc.
10.63(2) Sublicense Agreement dated as of October 30, 1995 between Embrex
and Lease Management Services, Inc.
10.64(2) Movable Hypothec on Equipment and Contracts dated as of October
30, 1995 between Embrex and Lease Management Services, Inc.
10.65(2) Warrant to Purchase 30,000 Shares of Common Stock dated October
30, 1995 issued to Lease Management Services, Inc.
10.66(2) Intercreditor Agreement dated as of October 31, 1995 among
Financing for Science International, Inc., Lease Management
Services, Inc., and Embrex.
-37-
<PAGE>
21 Subsidiaries
23 Consent of Ernst & Young LLP to the inclusion of their report
dated March 1, 1999 with respect to the consolidated financial
statements of the Company in this Form 10-K and the incorporation
by reference of such report into the Registration Statement on
Form S-3 (No. 333-18231), as filed with the Securities and
Exchange Commission on December 19, 1996, and into the
Registration Statements under the Securities Act of 1933 on Form
S-8 (Registration Nos. 33-51582, 33-63318, 333-04109, and
333-56279), as filed with the Securities and Exchange Commission
on September 1, 1992, May 25, 1993, May 20, 1996, and June 8,
1998, respectively, and to the incorporation by reference in the
Registration Statement on Form S-8 (Registration No. 33-63318)
pertaining to the Employee Stock Purchase Plan of their report
dated March 30, 1999 with respect to the financial statements of
the Embrex, Inc. Employee Stock Purchase Plan included in this
Form 10-K.
24 Powers of Attorney (included in the signature page for this
report)
27 Financial Data Schedule to the Company's Form 10-K for the year
ended December 31, 1998.
99 Risk Factors relating to the Company
(1) Exhibit to the Company's Form 10-K as filed with the Securities and
Exchange Commission for fiscal year ending December 31, 1991 and
incorporated herein by reference
(2) Exhibit to the Company's Form 10-K as filed with the Securities and
Exchange Commission for the fiscal year ending December 31, 1995 and
incorporated herein by reference
(3) Exhibit to the Company's Form 10-Q as filed with the Securities and
Exchange Commission for the three months ended June 30, 1996 and
incorporated herein by reference
(4) Exhibit to the Company's Form 10-K as filed with the Securities and
Exchange Commission for fiscal year ending December 31, 1996 and
incorporated herein by reference
(5) Exhibit to the Company's Form 10-Q as filed with the Securities and
Exchange Commission for the three months ended June 30, 1995 and
incorporated herein by reference
(6) Exhibit to the Company's Registration Statement on Form 8-A as filed with
the Securities and Exchange Commission on March 22, 1996 and incorporated
herein by reference
(7) Exhibit to the Company's Registration Statement on Form S-1 as filed with
the Securities and Exchange Commission (Registration No. 33-42482)
effective November 7, 1991 and incorporated herein by reference
(8) Exhibit to the Company's Form 10-K as filed with the Securities and
Exchange Commission for the fiscal year ending December 31, 1997 and
incorporated herein by reference.
(9) Exhibit to the Company's Form 10-K as filed with the Securities and
Exchange Commission for the fiscal year ending December 31, 1992 and
incorporated herein by reference
(10) Exhibit to the Company's Registration Statement on Form S-8 as filed with
the Securities and Exchange Commission (Registration No. 333-56279)
effective June 8, 1998 and incorporated herein by reference
(11) Exhibit to the Company's Form 10-KSB, as amended, as filed with the
Securities and Exchange Commission for the fiscal year ending December 31,
1993 and incorporated herein by reference
-38-
<PAGE>
(12) Exhibit to the Company's Form 10-K as filed with the Securities and
Exchange Commission for the fiscal year ending December 31, 1994 and
incorporated herein by reference
(b). No reports on Form 8-K were filed during the last quarter of the fiscal
year ended December 31, 1998.
-39-
<PAGE>
SIGNATURES AND POWER OF ATTORNEY
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
EMBREX, INC.
/s/ Randall L. Marcuson
By:________________________
Date : March 31, 1999 Randall L. Marcuson
President and Chief
Executive Officer
We, the undersigned directors and officers of Embrex, Inc. (the
"Company"), do hereby constitute and appoint Randall L. Marcuson and Don T.
Seaquist or either of them, our true and lawful attorneys-in-fact and agents,
with full power of substitution, to execute and deliver an Annual Report on Form
10-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended (the "Act"), with respect to the year ended December 31, 1998, to be
filed with the Securities and Exchange Commission, and to do any and all acts
and things and to execute any and all instruments for us and in our names in the
capacities indicated below, which said attorneys-in-fact and agents, or either
of them, may deem necessary or advisable to enable the Company to comply with
the Act and any rules, regulations, and requirements of the Securities and
Exchange Commission in connection with such Report, including without limitation
the power and authority to execute and deliver for us or any of us in our names
and in the capacities indicated below any and all amendments to such Report; and
we do hereby ratify and confirm all that the said attorneys-in-fact and agents,
or either of them, shall do or cause to be done by virtue of this power of
attorney.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
Signature Title Date
- --------- ----- ----
/s/ Randall L. Marcuson
____________________ President, Chief Executive Officer March 31, 1999
Randall L. Marcuson and Director
/s/ Don T. Seaquist
____________________ Vice President, Finance and March 31, 1999
Don T. Seaquist Administration (Principal Financial
and Accounting Officer)
/s/ Charles E. Austin
____________________ Chairman of the March 31, 1999
Charles E. Austin Board of Directors
/s/ C. Daniel Blackshear
____________________ Director March 31, 1999
C. Daniel Blackshear
/s/ Lester M. Crawford
____________________ Director March 31, 1999
Lester M. Crawford, D.V.M. Ph.D.
/s/ Peter J. Holzer
____________________ Director March 31, 1999
Peter J. Holzer
/s/ Kenneth N. May
____________________ Director March 31, 1999
Kenneth N. May, Ph.D.
/s/ Arthur M. Pappas
____________________ Director March 31, 1999
Arthur M. Pappas
</TABLE>
-40-
<PAGE>
Report of Independent Auditors
The Board of Directors
Embrex, Inc.
We have audited the accompanying statements of net assets available for plan
benefits of Embrex, Inc. Employee Stock Purchase Plan as of December 31, 1998
and 1997, and the related statements of changes in net assets available for plan
benefits for each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the net assets available for plan benefits of Embrex,
Inc. Employee Stock Purchase Plan at December 31, 1998 and 1997, and the changes
in net assets available for plan benefits for each of the three years in the
period ended December 31, 1998 in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Raleigh, North Carolina
March 30, 1999
-41-
<PAGE>
STATEMENTS OF NET ASSETS AVAILABLE FOR PLAN BENEFITS
EMBREX, INC. EMPLOYEE STOCK PURCHASE PLAN
At December 31,
1998 1997
---- ----
Receivable from Company.......................... $46,243 $38,666
------- -------
Net assets available for Plan benefits........... $46,243 $38,666
======= =======
See accompanying notes.
-42-
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS
EMBREX, INC. EMPLOYEE STOCK PURCHASE PLAN
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Employee contributions................................... $137,454 $87,189 $79,487
Deductions:
Purchases of Common Stock................. 99,354 46,355 59,116
Withdrawals............................... 30,523 28,245 31,394
------ ------ ------
129,877 74,600 90,510
------- ------ ------
Net (decrease) increase.................................. 7,577 12,589 (11,023)
Net assets available for Plan benefits at
beginning of period....................... 38,666 26,077 37,100
------ ------ ------
Net assets available for Plan benefits at
end of period............................. $46,243 $38,666 $26,077
======= ======= =======
Shares of Common Stock purchased
during year 20,594 8,209 11,028
====== ===== ======
</TABLE>
-43-
<PAGE>
EMBREX, INC. EMPLOYEE STOCK PURCHASE PLAN
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
NOTE 1 - BASIS OF PRESENTATION
The accompanying financial statements of the Embrex, Inc. Employee Stock
Purchase Plan ("the Plan") have been prepared on the accrual basis.
NOTE 2 - PLAN DESCRIPTION AND SUMMARY OF SIGNIFICANT PLAN PROVISIONS
The Board of Directors of Embrex, Inc. ("the Company") adopted the Plan on
January 28, 1993, and the Plan was approved by shareholders of the Company at
the Annual Meeting of Shareholders on May 20, 1993. The Plan became effective as
of June 1, 1993.
The purpose of this Plan is to provide the Company's employees with an
additional opportunity to share in the ownership of the Company. Under terms of
the Plan, all regular full-time employees of the Company may make voluntary
payroll contributions thereby enabling them to purchase Common Stock at a price
to be determined by the Compensation Committee of the Board, but not less than
85 percent of the lower of the fair market values as of the beginning or end of
the twelve month offering period.
Contributions are limited to 20 percent of an employee's compensation, and the
aggregate number of shares of Common Stock which may be purchased in total by
all Plan participants may not exceed 100,000 shares.
Contributions to the Plan are maintained in a non-interest bearing account until
such time as the participant exercises the option to purchase shares of Common
Stock from his or her available contributions, or withdraws from the account.
All amounts representing net Plan assets are considered general assets of the
Company and may be subject to the claims of creditors.
In addition to contributions, plan activity consists of voluntary purchases of
shares of Common Stock and withdrawals from participation in the Plan.
Participants may purchase whole shares of Common Stock during a Purchase Period
(generally a twelve month period ending each June 30th). A participant may
withdraw from the Plan and cease making contributions at any time.
The Plan is not subject to the provisions of the Employee Retirement Income
Security Act of 1974 ("ERISA") and is not qualified under Section 401(a) of the
Internal Revenue Code of 1986, as amended which relates to qualification of
certain pension, profit-sharing and stock bonus plans.
All costs to administer the Plan are paid by the Company.
-44-
EXHIBIT 3.4
RESTATED EFFECTIVE MAY 21, 1998
AMENDED AND RESTATED BYLAWS
OF
EMBREX, INC.
ARTICLE I
DEFINITIONS
In these bylaws, unless otherwise provided, the following terms shall
have the following meanings:
(1) "Act" shall mean the North Carolina Business Corporation Act
as codified in Chapter 55 of the North Carolina General Statutes effective July
1, 1990, and as amended from time to time;
(2) "Articles of Incorporation" shall mean the Corporation's
articles of incorporation, including amended and restated articles of
incorporation and articles of merger;
(3) "Corporation" shall mean Embrex, Inc.;
(4) "Distribution" shall mean a direct or indirect transfer of
money or other property (except the Corporation's own shares) or incurrence of
indebtedness by the Corporation to or for the benefit of its shareholders in
respect of any of its shares. A distribution may be in the form of a declaration
or payment of a dividend, a purchase, redemption, or other acquisition of
shares, a distribution of indebtedness, or otherwise;
(5) "Emergency" shall mean a catastrophic event which prevents a
quorum of the board of directors from being readily assembled;
(6) "Shares" shall mean the units into which the proprietary
interests in the Corporation are divided; and
(7) "Voting group" shall mean all shares of one or more classes
or series that under the articles of incorporation or the Act are entitled to
vote and be counted together collectively on a matter at a meeting of
shareholders. All shares entitled by the articles of incorporation or the Act to
vote generally on a matter are for that purpose a single voting group.
ARTICLE II
OFFICES
SECTION 1. PRINCIPAL OFFICE: The principal office of the Corporation
shall be located at 1035 Swabia Court, Durham, Durham County, North Carolina
27703, or at such other place as may be determined from time to time by the
directors.
<PAGE>
SECTION 2. REGISTERED OFFICE: The registered office of the Corporation
shall be located at 1035 Swabia Court, Durham, Durham County, North Carolina
27703.
SECTION 3. OTHER OFFICES: The Corporation may have offices at such other
places, either within or without the State of North Carolina, as the board of
directors may from time to time determine, or as the affairs of the Corporation
may require.
ARTICLE III
MEETINGS OF SHAREHOLDERS
SECTION 1. PLACE OF MEETINGS: All meetings of shareholders shall be held
at the principal office of the Corporation, or at such other place, either
within or without the State of North Carolina, as shall be designated in the
notice of the meeting or as may be agreed upon by a majority of the shareholders
entitled to vote at the meeting.
SECTION 2. ANNUAL MEETING: The annual meeting of shareholders for the
election of directors and the transaction of other business shall be held
annually in any month on any day (except Saturday, Sunday or a legal holiday) as
fixed by the board of directors.
SECTION 3. SUBSTITUTE ANNUAL MEETING: If the annual meeting shall not be
held on the day designated by these bylaws, a substitute annual meeting may be
called by the board of directors, the chairman of the board, the chief executive
officer or the president. A meeting so called shall be designated and treated
for all purposes as the annual meeting.
SECTION 4. SPECIAL MEETINGS: Special meetings of the shareholders may be
called at any time by the board of directors, the chairman of the board, the
chief executive officer or the president. Only business within the purpose or
purposes described in the meeting notice specified in Section 6 of this Article
may be conducted at a special meeting of shareholders.
SECTION 5. CONDUCT OF BUSINESS: The chairman of the meeting of
shareholders shall determine the order of business and the procedure at the
meeting, including such regulation of the manner of voting and the conduct of
discussion as seem to him in order.
SECTION 6. NOTICE OF MEETING: Written or printed notice stating the time
and place of the meeting shall be delivered not less than ten (10) nor more than
sixty (60) days before the date of any shareholders' meeting, either personally,
by mail, by telegraph, by teletype, or by facsimile transmission, by or at the
direction of the chairman of the board, the chief executive officer, the
president, the secretary, or other person calling the meeting to each
shareholder of record entitled to vote at such meeting. If mailed, such notice
shall be deemed to be delivered when deposited in the United States mail,
addressed to the shareholder at his address as it appears on the record of the
shareholders of the Corporation, with postage thereon prepaid.
In the case of a special meeting, the notice of meeting shall
specifically state the purpose or purposes for which the meeting is called. In
the case of an annual or substitute annual meeting, the notice of meeting need
not specifically state the business to be transacted unless such a statement is
required by the Act.
When an annual or special meeting is adjourned to a different date,
time, and place, it is not necessary to give any notice of the adjourned meeting
other than by announcement at the meeting at
2
<PAGE>
which the adjournment is taken; provided, however, that if a new record date for
the adjourned meeting is or must be set, notice of the adjourned meeting must be
given to persons who are shareholders as of the new record date.
The record date for determining the shareholders entitled to notice of
and to vote at an annual or special meeting shall be fixed as provided in
Section 3 of Article VIII.
SECTION 7. WAIVER OF NOTICE: A shareholder may waive notice of any
meeting either before or after such meeting. Such waiver shall be in writing,
signed by the shareholder, and filed with the minutes or corporate records. A
shareholder's attendance at a meeting: (i) waives objection to lack of notice or
defective notice of the meeting, unless the shareholder at the beginning of the
meeting objects to holding the meeting or transacting business at the meeting;
and (ii) waives objection to consideration of a particular matter at the meeting
that is not within the purpose or purposes described in the meeting notice,
unless the shareholder objects to considering the matter before it is voted
upon.
SECTION 8. SHAREHOLDER LIST: Commencing two (2) business days after
notice of a meeting of shareholders is given and continuing through such
meeting, the secretary of the Corporation shall maintain at the principal office
of the Corporation an alphabetical list of the shareholders entitled to vote at
such meeting, arranged by voting group, with the address of and number of shares
held by each. This list shall be subject to inspection by any shareholder or his
agent or attorney at any time during usual business hours and may be copied at
the shareholder's expense.
SECTION 9. QUORUM: A majority of the votes entitled to be cast on a
matter by any voting group, represented in person or by proxy, shall constitute
a quorum of that voting group for action on that matter. The shareholders
present at a duly organized meeting may continue to transact business until
adjournment, notwithstanding the withdrawal of enough shareholders to leave less
than a quorum.
In the absence of a quorum at the opening of any meeting of
shareholders, such meeting may be adjourned from time to time by a majority of
the votes voting on the motion to adjourn; and at any adjourned meeting at which
a quorum is present, any business may be transacted which might have been
transacted at the original meeting.
SECTION 10. PROXIES: Shares may be voted either in person or by one or
more agents authorized by a written proxy executed by the shareholder or by his
duly authorized attorney in fact. A proxy may take the form of a telegram,
telex, facsimile or other form of wire or wireless communication which appears
to have been transmitted by a shareholder. A proxy is effective when received by
the secretary or other officer or agent authorized to tabulate votes. A proxy is
not valid after the expiration of eleven (11) months from the date of its
execution, unless the person executing it specifies therein the length of time
for which it is to continue in force or limits its use to a particular meeting.
SECTION 11. VOTING OF SHARES: Unless otherwise provided in these bylaws,
the articles of incorporation, or the Act, each outstanding share, regardless of
class, shall be entitled to one vote on each matter submitted to a vote at a
meeting of shareholders.
Except for the election of directors, which is governed by the
provisions of Section 4 of Article IV, if a quorum is present, action on a
matter by a voting group is approved if the votes cast within the voting group
favoring the action exceed the votes cast against the action, unless the vote of
a greater number is required by the Act, the articles of incorporation, or these
bylaws.
Shares of the Corporation are not entitled to vote if: (i) they are
owned, directly or indirectly, by the Corporation, unless they are held by it in
a fiduciary capacity; (ii) they are owned, directly or
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indirectly, by a second corporation in which the Corporation owns a majority of
the shares entitled to vote for directors of the second corporation; or (iii)
they are redeemable shares and (x) notice of redemption has been given and (y) a
sum sufficient to redeem the shares has been deposited with a bank, trust
company, or other financial institution under an irrevocable obligation to pay
the holders the redemption price upon surrender of the shares.
Either the board of directors or the chairman of the meeting may appoint
one or more voting inspectors, each of whom shall take an oath to execute his
duties impartially and to the best of his ability. The voting inspector may be
an officer, employee or agent of the Corporation. The voting inspectors shall,
by majority vote, resolve all questions regarding voting of shares, including
the number of shares outstanding, the voting power of each, the shares
represented at the meeting, the qualification of voters, the validity of
proxies, the existence of a quorum as to any voting group, and the acceptance,
rejection and tabulation of votes.
SECTION 12. INFORMAL ACTION BY SHAREHOLDERS: Any action which may be
taken at a meeting of the shareholders may be taken without a meeting if a
consent in writing, setting forth the action so taken, is signed by all of the
persons who would be entitled to vote upon such action at a meeting and is
delivered to the Corporation to be included in the minutes or to be kept as part
of the corporate records.
SECTION 13. SHAREHOLDER PROPOSALS: Any shareholder wishing to bring any
business before a meeting of shareholders must provide notice to the Corporation
not more than ninety (90) and not less than fifty (50) days before the meeting
in writing by registered mail, return receipt requested, of the business to be
presented by such shareholder at the meeting. Any such notice shall set forth
the following as to each matter the shareholder proposes to bring before the
meeting: (i) a brief description of the business desired to be brought before
the meeting and the reasons for conducting such business at the meeting and, if
such business includes a proposal to amend the bylaws of the Corporation, the
language of the proposed amendment; (ii) the name and address, as they appear on
the Corporation's books, of the shareholder proposing such business; (iii) the
class and number of shares of the Corporation which are beneficially owned by
such shareholder; (iv) a representation that the shareholder is a holder of
record of stock of the Corporation entitled to vote at such meeting and intends
to appear in person or by proxy at the meeting to propose such business; and (v)
any material interest of the shareholder in such business. Notwithstanding the
foregoing provisions of this Section, a shareholder shall also comply with all
applicable requirements of the Securities Exchange Act of 1934, as amended, and
the rules and regulations thereunder with respect to the matters set forth in
this Section. In the absence of such notice to the Corporation meeting the above
requirements, a shareholder shall not be entitled to present any business at any
meeting of the shareholders.
SECTION 14. CORPORATION'S ACCEPTANCE OF VOTES: If the name signed on a
vote, consent, waiver, or proxy appointment corresponds to the name of a
shareholder, the Corporation is entitled to accept the vote, consent, waiver, or
proxy appointment and to give it effect as the act of the shareholder.
If the name signed on a vote, consent, waiver, or proxy appointment does
not correspond to the name of its shareholder, the Corporation is nevertheless
entitled to accept the vote, consent, waiver, or proxy appointment and to give
it effect as the act of the shareholder if: (i) the shareholder is an entity and
the name signed purports to be that of an officer or agent of the entity; (ii)
the name signed purports to be that of an administrator, executor, guardian, or
conservator representing the shareholder and, if the Corporation requests,
evidence of fiduciary status acceptable to the Corporation has been presented
with respect to the vote, consent, waiver, or proxy appointment; (iii) the name
signed purports to be that of a receiver or trustee in bankruptcy of the
shareholder and, if the
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Corporation requests, evidence of its status acceptable to the Corporation has
been presented with respect to the vote, consent, waiver, or proxy appointment;
(iv) the name signed purports to be that of a beneficial owner or
attorney-in-fact of the shareholder and, if the Corporation requests, evidence
acceptable to the Corporation of the signatory's authority to sign for the
shareholder has been presented with respect to the vote, consent, waiver, or
proxy appointment; or (v) two or more persons are the shareholder as co-tenants
or fiduciaries and the name signed purports to be the name of at least one of
the co-owners and the person signing appears to be acting on behalf of all the
co-owners.
The Corporation is entitled to reject a vote, consent, waiver, or proxy
appointment if the secretary or other officer or agent authorized to tabulate
votes has a reasonable basis for doubt about the validity of the signature on it
or about the signatory's authority to sign for the shareholder.
SECTION 15. NUMBER OF SHAREHOLDERS: The following persons or entities
identified as a shareholder in the Corporation's current record of shareholders
constitute one shareholder for purposes of these bylaws: (i) all co-owners of
the same shares; (ii) a corporation, partnership, trust, estate, or other
entity; (iii) the trustees, guardians, custodians, or other fiduciaries of a
single trust, estate, or account. Shareholdings registered in substantially
similar names constitute one shareholder if it is reasonable to believe that the
names represent the same person.
ARTICLE IV
BOARD OF DIRECTORS
SECTION 1. GENERAL POWERS: All corporate powers shall be exercised by or
under the authority of, and the business and affairs of the Corporation shall be
managed under the direction of, its board of directors.
SECTION 2. NUMBER, TERM AND QUALIFICATIONS: The number constituting the
board of directors shall be not less than one (1) nor more than twelve (12). The
number of directors within this variable range may be fixed or changed from time
to time by the shareholders or the board of directors. Each director shall hold
office until his death, resignation, retirement, removal, disqualification, or
until his successor is elected and qualified. Directors need not be residents of
the State of North Carolina or shareholders of the Corporation.
SECTION 3. NOMINATION OF DIRECTORS: Nominations for the election of
directors may only be made by the board of directors, by the nominating
committee of the board of directors (or, if none, any other committee serving a
similar function) or by any shareholder entitled to vote generally in elections
of directors where the shareholder complies with the requirements of this
Section. The Chief Executive Officer of the Corporation shall be a nominee for
election to the board of directors. Any shareholder of record entitled to vote
generally in elections of directors may nominate one or more persons for
election as directors at a meeting of shareholders only if written notice of
such shareholder's intent to make such nomination or nominations has been given,
either by personal delivery or by registered mail, return receipt requested, to
the Secretary of the Corporation (i) with respect to an election to be held at
an annual meeting of shareholders, not more than ninety (90) days nor less than
fifty (50) days in advance of such meeting; and (ii) with respect to an election
to be held at a special meeting of shareholders called for the purpose of the
election of directors, not later than the close of business on the tenth
business day following the date on which notice of such meeting is first given
to shareholders. Each such notice of a shareholder's intent to nominate a
director or directors at an annual or special meeting shall set forth the
following: (A) the name and address, as they appear on the Corporation's books,
of the shareholder who intends to make the nomination and
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the name and residence address of the person or persons to be nominated; (B) the
class and number of shares of the Corporation which are beneficially owned by
the shareholder; (C) a representation that the shareholder is a holder of record
of stock of the Corporation entitled to vote at such meeting and intends to
appear in person or by proxy at the meeting to nominate the person or persons
specified in the notice; (D) a description of all arrangements or understandings
between the shareholder and each nominee and any other person or persons (naming
such person or persons) pursuant to which the nomination or nominations are to
be made by the shareholders; (E) such other information regarding each nominee
proposed by such shareholder as would be required to be disclosed in
solicitations of proxies for election of directors, or as would otherwise be
required, in each case pursuant to Regulation 14A under the Securities and
Exchange Act of 1934, as amended, including any information that would be
required to be included in a proxy statement filed pursuant to Regulation 14A
had the nominee been nominated by the board of directors; and (F) the written
consent of each nominee to be named in a proxy statement and to serve as
director of the Corporation if so elected. No person nominated by a shareholder
shall be eligible to serve as a director of the Corporation unless nominated in
accordance with the procedures set forth in this Section. If the chairman of the
shareholders meeting shall determine that a nomination was not made in
accordance with the procedures described by the bylaws of the Corporation, he
shall so declare to the meeting, and the defective nomination shall be
disregarded. Notwithstanding the foregoing provisions of this Section, a
shareholder shall also comply with all applicable requirements of the Securities
Exchange Act of 1934, as amended, and the rules and regulations thereunder with
respect to the matters set forth in this Section.
SECTION 4. ELECTION OF DIRECTORS: Except as provided in Section 6 of
this Article, the directors shall be elected at the annual meeting of
shareholders by plurality vote; and accordingly those persons who receive the
highest number of votes shall be deemed to have been elected. If any shareholder
so demands, the election of directors shall be by ballot.
SECTION 5. REMOVAL: Any director, or the entire board of directors, may
be removed from office at any time, with or without cause, but only if the
number of votes cast to remove him exceeds the number of votes cast not to
remove him. If a director is elected by a voting group of shareholders, only
members of that voting group may participate in the vote to remove him. A
director may not be removed by the shareholders at a meeting unless the notice
of the meeting specifies such removal as one of its purposes. If any directors
are removed, new directors may be elected at the same meeting.
SECTION 6. VACANCIES: Any vacancy occurring in the board of directors,
including, without limitation, a vacancy resulting from an increase in the
number of directors or from the failure by the shareholders to elect the full
authorized number of directors, shall be filled by the shareholders or the board
of directors. If such vacancy is to be filled by the board of directors, and if
the directors remaining in office constitute fewer than a quorum of the board,
such vacancy may be filled by the affirmative vote of a majority of the
remaining directors or by the sole remaining director. If the vacant office was
held by a director elected by a voting group of shareholders, only the remaining
director or directors elected by that voting group or the holders of shares of
that voting group are entitled to fill the vacancy. The term of a director
elected to fill a vacancy shall expire at the next shareholders' meeting at
which directors are elected.
SECTION 7. CHAIRMAN OF THE BOARD: The board of directors from time to
time may appoint from their number a chairman of the board. The chairman of the
board, if one is appointed, shall preside at all meetings of the board of
directors and the shareholders and shall perform such other duties as may be
prescribed from time to time by the board of directors.
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SECTION 8. COMPENSATION: The board of directors may compensate directors
for their services as such and may provide for the payment of all expenses
incurred by directors in attending regular and special meetings of the board.
SECTION 9. COMMITTEES: The board of directors may create one or more
committees of the board, each of which shall have at least two (2) members, all
of whom shall be directors. The creation of a committee and the appointment of
members to it must be approved by a majority of all the directors in office when
the action is taken. Each committee may, as specified by the board of directors,
exercise some or all of the authority of the board except that a committee may
not: (i) authorize distributions; (ii) approve or propose to shareholders action
that the Act requires be approved by shareholders; (iii) fill vacancies on the
board of directors or on any of its committees; (iv) amend the articles of
incorporation pursuant to N.C. Gen. Stat. Section 55-10-02 or its successor; (v)
adopt, amend, or repeal bylaws; (vi) approve a plan of merger not requiring
shareholder approval; (vii) authorize or approve a reacquisition of shares,
except according to a formula or method prescribed by the board of directors; or
(viii) authorize or approve the issuance or sale or contract for sale of shares,
or determine the designation and relative rights, preferences, and limitations
of a class or series of shares, except that the board of directors may authorize
a committee to do so within limits specifically prescribed by the board of
directors to the full extent permitted by applicable law. The provisions of
Article V, which govern meetings of the board of directors, shall likewise apply
to meetings of any committee of the board.
SECTION 10. EXECUTIVE COMMITTEE: In accordance with Section 9 of this
Article, the board of directors may designate an executive committee. Subject to
the provisions of Section 9 of this Article, any executive committee so
designated may exercise all of the power of the board of directors during
intervals between meetings thereof, including but not limited to the power to
authorize the execution of contracts, deeds, leases, and other agreements
respecting real or personal property. The board of directors shall approve,
disapprove, or modify action taken by any such executive committee and shall
record such action in the minutes of the board meeting.
ARTICLE V
MEETINGS OF DIRECTORS
SECTION 1. REGULAR MEETINGS: Regular meetings of the board of directors
shall be held at such place or places, on such date or dates, and at such time
or times as shall have been established by the board of directors and publicized
among all directors.
SECTION 2. SPECIAL MEETINGS: Special meetings of the board of directors
may be called by one-third of the directors then in office or by the chief
executive officer and shall be held at such place, either within or without the
State of North Carolina, on such date, and at such time as they or he shall fix.
SECTION 3. NOTICE OF MEETINGS: Regular meetings of the board of
directors may be held without notice. The person or persons calling a special
meeting of the board of directors shall, at least three (3) days before the
meeting, give notice of the meeting by any usual means of communication,
including by telephone, telegraph, teletype, mail, private carrier, facsimile
transmission, or other form of wire or wireless communication. Such notice may
be oral and need not specify the purpose for which the meeting is called.
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SECTION 4. WAIVER OF NOTICE: Any director may waive notice of any
meeting either before or after such meeting. Such waiver shall be in writing,
signed by the director, and filed with the minutes or corporate records;
provided, however, that a director's attendance at or participation in a meeting
waives any required notice to him unless the director at the beginning of the
meeting (or promptly upon his arrival) objects to holding the meeting or
transacting business at the meeting and does not thereafter vote for or assent
to action taken at the meeting.
SECTION 5. QUORUM: A majority of the directors fixed by or pursuant to
these bylaws shall constitute a quorum for the transaction of business at any
meeting of the board of directors.
SECTION 6. MANNER OF ACTING: The act of a majority of the directors
present at a meeting at which a quorum is present shall be the act of the board
of directors, unless a greater number is required by the articles of
incorporation or these bylaws.
SECTION 7. PRESUMPTION OF ASSENT: A director of the Corporation who is
present at a meeting of the board of directors or a committee of the board of
directors when corporate action is taken is deemed to have assented to the
action taken unless: (i) he objects at the beginning of the meeting (or promptly
upon his arrival) to holding it or transacting business at the meeting; (ii) his
dissent or abstention from the action taken is entered in the minutes of the
meeting; or (iii) he files written notice of his dissent or abstention with the
presiding officer of the meeting before its adjournment or with the Corporation
immediately after adjournment of the meeting. This right of dissent or
abstention is not available to a director who votes in favor of the action
taken.
SECTION 8. PARTICIPATION IN MEETINGS: Any or all of the directors may
participate in a regular or special meeting by, or conduct the meeting through
the use of, any means of communication by which all directors participating may
simultaneously hear each other during the meeting.
SECTION 9. ACTION WITHOUT MEETING: Action which may be taken at a board
of directors meeting may be taken without a meeting if the action is taken by
all members of the board and is evidenced by one or more written consents signed
by each director before or after such action, which describes the action taken
and is included in the minutes or filed with the corporate records. Such action
is effective when the last director signs the consent, unless the consent
specifies a different effective date.
ARTICLE VI
OFFICERS
SECTION 1. OFFICERS OF THE CORPORATION: The officers of the Corporation
shall consist of a chief executive officer, president, secretary, treasurer, and
such vice presidents, assistant secretaries, assistant treasurers, and other
officers as the board of directors may from time to time appoint. Any two or
more offices may be held by the same person, but no officer may act in more than
one capacity where action of two or more officers is required.
SECTION 2. APPOINTMENT AND TERM: The officers of the Corporation shall
be appointed by the board of directors. A duly appointed officer may appoint one
or more officers or assistant officers if authorized by the board of directors.
Each officer shall hold office until his death, resignation, retirement,
removal, disqualification or until his successor is appointed and qualifies. The
appointment of an officer does not itself create contract rights for either the
officer or the Corporation.
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SECTION 3. COMPENSATION OF OFFICERS: The compensation of officers of the
Corporation shall be fixed by the board of directors. No officer shall receive
compensation for serving the Corporation in any other capacity unless such
additional compensation be authorized by the board of directors.
SECTION 4. RESIGNATION AND REMOVAL: An officer may resign at any time by
communicating his resignation to the Corporation. A resignation is effective
when it is communicated unless it specifies in writing a later date. If a
resignation is made effective as of a later date and the Corporation accepts the
future effective date, the board of directors may fill the pending vacancy
before the effective date if the board provides that the successor does not take
office until the effective date. An officer's resignation does not affect the
Corporation's contract rights, if any, with the officer. Any officer or agent
appointed by the board of directors may be removed by the board at any time,
with or without cause, but such removal shall be without prejudice to the
contract rights, if any, of the person so removed.
SECTION 5. BONDS: The board of directors may by resolution require any
officer, agent, or employee of the Corporation to give bond to the Corporation,
with sufficient sureties, conditioned on the faithful performance of the duties
of his respective office or position, and to comply with such other conditions
as may from time to time be required by the board of directors.
SECTION 6. CHIEF EXECUTIVE OFFICER: The chief executive officer shall
have general authority and supervision over the officers and employees of the
Corporation, and shall perform such other duties as may be prescribed from time
to time by the board of directors. All officers shall report to him except to
the extent specifically required by the board of directors. He shall consult
with the president as to matters within the scope of the authority of the
president. He shall have the authority to sign certificates for shares, as well
as any deeds, mortgages, contracts, or other instruments which the board of
directors has authorized to be executed, except in cases where the signing and
execution of such contracts or instruments shall be expressly delegated by the
board of directors or by these bylaws to some other officer or agent of the
Corporation, or shall be required by the Act to be otherwise signed or executed.
SECTION 7. PRESIDENT: The president shall be the chief operating officer
of the Corporation and shall have general charge of the operation of the
business of the Corporation. The president shall perform such duties and have
such powers as the board of directors from time to time may assign. He shall
have the authority to sign certificates for shares, as well as any deeds,
mortgages, contracts, or other instruments which the board of directors has
authorized to be executed, except in cases where the signing and execution of
such contracts or instruments shall be expressly delegated by the board of
directors or by these bylaws to some other officer or agent of the Corporation,
or shall be required by the Act to be otherwise signed or executed.
SECTION 8. VICE PRESIDENTS: In the absence of the president, the vice
presidents in the order of their length of service as vice presidents, unless
otherwise determined by the board of directors, shall perform the duties of the
president, and when so acting shall have all the powers of and be subject to all
the restrictions upon that office. Any vice president may sign certificates for
shares, as well as any deeds, mortgages, contracts, or other instruments which
the board of directors has authorized to be executed, except in cases where the
signing and execution of such documents or instruments shall be expressly
delegated by the board of directors or these bylaws to some other officer or
agent of the Corporation or shall be required by the Act to be otherwise signed
or executed. A vice president shall perform such other duties as from time to
time may be assigned to him by the chief executive officer, the president, or
the board of directors.
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SECTION 9. SECRETARY: The secretary shall: (i) keep the minutes of the
meetings of shareholders, of the board of directors, and of all committees of
the board in one or more books provided for that purpose; (ii) see that all
notices are duly given in accordance with the provisions of these bylaws or as
required by law; (iii) be custodian of the seal of the Corporation and see that
the seal of the Corporation is affixed to all documents the execution of which
on behalf of the Corporation under its seal is duly authorized; (iv) keep a
register of the mailing address of each shareholder which shall be furnished to
the secretary by such shareholder; (v) sign, with the chief executive officer,
the president, or a vice president, certificates for shares, the issuance of
which shall have been authorized by resolution of the board of directors; (vi)
have general charge of the stock transfer books of the Corporation; (vii) keep
or cause to be kept in the State of North Carolina at the Corporation's
principal office a record of the Corporation's shareholders, giving the names
and addresses of all shareholders and the number and class of shares held by
each, and prepare or cause to be prepared a shareholder list prior to each
meeting of shareholders as required by the Act; (viii) maintain and authenticate
the books and records of the Corporation; (ix) with the assistance of the
treasurer and other officers, prepare and deliver to the Corporation's
shareholders such financial statements, notices, and reports as may be required
by N.C. Gen. Stat. Sections 55-16-20 and 55-16-21 (or their successors); (x)
prepare and file with the North Carolina Secretary of Revenue the annual report
required by N.C. Gen. Stat. Section 55-16-22 (or its successor); and (xi) in
general perform all duties incident to the office of secretary and such other
duties as from time to time may be assigned to him by the chief executive
officer, the president or the board of directors.
SECTION 10. ASSISTANT SECRETARIES: In the absence of the secretary, the
assistant secretaries in the order of their length of service as assistant
secretary, unless otherwise determined by the board of directors, shall perform
the duties of the secretary, and when so acting shall have all the powers of and
be subject to all the restrictions upon the secretary. They shall perform such
other duties as may be assigned to them by the secretary, the chief executive
officer, the president, or the board of directors. Any assistant secretary may
sign, with the chief executive officer, the president or a vice president,
certificates for shares.
SECTION 11. TREASURER: The treasurer shall be the chief financial
officer of the Corporation and shall: (i) have charge and custody of and be
responsible for all funds and securities of the Corporation; (ii) receive and
give receipts for monies due and payable to the Corporation from any source
whatsoever, and deposit all such monies in accordance with the provisions of
Section 4 of Article VII; (iii) prepare, or cause to be prepared, an annual
financial statement in accordance with Section 3 of Article IX; and (iv) in
general, perform all of the duties incident to the office of treasurer and such
other duties as from time to time may be assigned to him by the chief executive
officer, the president or the board of directors. The treasurer may sign, with
the chief executive officer, the president or a vice president, certificates for
shares.
SECTION 12. ASSISTANT TREASURERS: In the absence of the treasurer, the
assistant treasurers, in the order of their length of service as assistant
treasurer, unless otherwise determined by the board of directors, shall perform
the duties of the treasurer, and when so acting shall have all the powers of and
be subject to all the restrictions upon the treasurer. They shall perform such
other duties as may be assigned to them by the treasurer, the chief executive
officer, the president, or the board of directors. Any assistant treasurer may
sign, with the chief executive officer, the president or a vice president,
certificates for shares.
SECTION 13. ACTION RE: SECURITIES OF OTHER CORPORATIONS: Unless
otherwise directed by the board of directors, the President shall have power to
vote and otherwise act on behalf of the Corporation, in person or by proxy, at
any meeting of shareholders of or with respect to any action of shareholders of
any other corporation in which this Corporation may hold securities and
otherwise to
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exercise any and all rights and powers which this Corporation may possess by
reason of its ownership of securities in such other corporation.
ARTICLE VII
CONTRACTS, LOANS, CHECKS AND DEPOSITS
SECTION 1. CONTRACTS: The board of directors may authorize any officer
or agent to enter into any contract or to execute and deliver any instrument on
behalf of the Corporation, and such authority may be general or confined to
specific instances.
SECTION 2. LOANS: No loans shall be contracted on behalf of the
Corporation and no evidences of indebtedness shall be issued in its name unless
authorized by a resolution of the board of directors. Such authority may be
general or confined to specific instances.
SECTION 3. CHECKS AND DRAFTS: All checks, drafts or other orders for
payment of money issued in the name of the Corporation shall be signed by such
officers or agents of the Corporation and in such manner as shall from time to
time be determined by resolution of the board of directors.
SECTION 4. DEPOSITS: All funds of the Corporation not otherwise employed
shall be deposited from time to time to the credit of the Corporation in such
depositories as the board of directors shall direct.
ARTICLE VIII
CERTIFICATES FOR SHARES AND THEIR TRANSFER
SECTION 1. CERTIFICATES FOR SHARES: Shares may, but need not, be
represented by certificates. If certificates are issued, they shall be in such
form as the board of directors shall determine; provided that, at a minimum,
each certificate shall state on its face: (i) the name of the Corporation and
that it is organized under the laws of North Carolina; (ii) the name of the
person to whom issued; and (iii) the number and class of shares and the
designation of the series, if any, the certificate represents. If the
Corporation issues certificates for shares of preferred stock, the designations,
relative rights, preferences, and limitations applicable to that class, and the
variations in rights, preferences, and limitations for each series within that
class (and the authority of the board of directors to determine variations for
future series) must be summarized on the front or back of each certificate;
alternatively, each certificate may state conspicuously on its front or back
that the Corporation will furnish the shareholder this information in writing
and without charge. These certificates shall be signed, either manually or in
facsimile, by the chief executive officer, the president, or any vice president,
and the secretary or any assistant secretary, the treasurer or any assistant
treasurer. They shall be consecutively numbered or otherwise identified and the
name and address of the persons to whom they are issued, with the number of
shares and date of issue, shall be entered on the stock transfer books of the
Corporation.
SECTION 2. TRANSFER OF SHARES: Transfer of shares of the Corporation
shall be made only on the stock transfer books of the Corporation by the holder
of record, by his legal representative (who shall furnish proper evidence of
authority to transfer) or by his attorney (whose authority shall be evidenced by
a power of attorney duly executed and filed with the secretary), and only upon
surrender for cancellation of the certificates for such shares.
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SECTION 3. FIXING RECORD DATE: For the purpose of determining
shareholders entitled to receive notice of a meeting of shareholders, to demand
a special meeting, to vote, to take any other action, or to receive payment, or
for any other purpose, the board of directors may fix in advance a date as the
record date for any such determination of shareholders, such record date in any
case to be not more than seventy (70) days, and, in case of a meeting of
shareholders, not less than ten (10) days, before the date on which the
particular action requiring such determination of shareholders is to be taken.
If no record date is fixed for the determination of shareholders entitled to
notice of or to vote at a meeting of shareholders, or of shareholders entitled
to receive a distribution, the day before the first notice of the meeting is
mailed or the day on which the board of directors authorize the distribution, as
the case may be, shall be the record date for such determination of
shareholders.
When a determination of shareholders entitled to notice of or to vote at
any meeting of shareholders has been made as provided in this Section, such
determination shall apply to any adjournment of such meeting unless the board of
directors fixes a new record date, which it must do if the meeting is adjourned
to a date more than 120 days after the date fixed for the original meeting.
SECTION 4. LOST CERTIFICATES: The board of directors may authorize the
issuance of a new share certificate in place of a certificate claimed to have
been lost or destroyed, upon receipt of an affidavit of such fact from the
person claiming the loss or destruction. When authorizing the issuance of a new
certificate, the board of directors may require the claimant to give the
Corporation a bond in such sum as it may direct to indemnify the Corporation
against loss from any claim with respect to the certificate claimed to have been
lost or destroyed; or the board of directors may, by resolution reciting that
the circumstances justify such action, authorize the issuance of the new
certificate without requiring such a bond.
SECTION 5. REACQUIRED SHARES: The Corporation may acquire its own shares
and shares so acquired constitute authorized but unissued shares.
ARTICLE IX
GENERAL PROVISIONS
SECTION 1. DISTRIBUTIONS: The board of directors may from time to time
declare, and the Corporation may make, distributions on its outstanding shares
in the manner and subject to the terms and conditions provided by the Act and by
the articles of incorporation.
SECTION 2. SEAL: The corporate seal of the Corporation shall consist of
two concentric circles between which is the name of the Corporation and in the
center of which is inscribed "CORPORATE SEAL" or "SEAL," and which shall have
such other characteristics as the board of directors may determine.
SECTION 3. RECORDS AND REPORTS: All of the Corporation's records shall
be maintained in written form or in another form capable of conversion into
written form within a reasonable time. The Corporation shall keep as permanent
records minutes of all meetings of its incorporators, shareholders, and board of
directors, a record of all actions taken by the shareholders or board of
directors without a meeting, and a record of all actions taken by a committee of
the board of directors in place of the board of directors.
12
<PAGE>
The Corporation shall keep a copy of the following records at its
principal office: (i) the articles of incorporation and all amendments to them
currently in effect; (ii) these bylaws and all amendments to them currently in
effect; (iii) resolutions adopted by its board of directors creating one or more
classes or series of shares and fixing their relative rights, preferences, and
limitations (if shares issued pursuant to those resolutions are outstanding);
(iv) the minutes of all meetings of shareholders and records of all actions
taken by shareholders without a meeting during the past three years; (v) all
written communications to shareholders generally within the past three years;
(vi) the annual financial statements described below, prepared during the past
three years; (vii) a list of the names and business addresses of its current
directors and officers; and (viii) its most recent annual report delivered to
the North Carolina Secretary of Revenue (or Secretary of State, if applicable).
The Corporation shall prepare and make available to its shareholders
annual financial statements for the Corporation and its subsidiaries that: (i)
include a balance sheet as of the end of the fiscal year, an income statement
for that year, and a statement of cash flows for the year; and (ii) are
accompanied by either (x) a report of a public accountant on the annual
financial statements, or (y) a statement by the treasurer stating his reasonable
belief whether the annual financial statements were prepared on the basis of
generally accepted accounting principles (and, if not, describing the basis of
preparation) and describing any respects in which the statements were not
prepared on a basis of accounting consistent with the statements prepared for
the preceding year. These annual financial statements, or a written notice of
their availability, shall be mailed to each shareholder within 120 days after
the close of each fiscal year of the Corporation. On written request from a
shareholder who was not mailed the annual financial statements, the Corporation
shall mail to him the latest such statements.
The Corporation shall also prepare and file with the North Carolina
Secretary of Revenue an annual report in such form as required by N.C. Gen.
Stat. Section 55-16-22, or its successor.
SECTION 4. INDEMNIFICATION: Any person who at any time serves or has
served as a director or officer of the Corporation, or at the request of the
Corporation is or was serving as an officer, director, agent, partner, trustee,
administrator, or employee for any other foreign or domestic corporation,
partnership, joint venture, trust, employee benefit plan, or other enterprise,
shall be indemnified by the Corporation to the fullest extent from time to time
permitted by law in the event he is made, or is threatened to be made, a party
to any threatened, pending or completed civil, criminal, administrative,
investigative or arbitrative action, suit or proceeding and any appeal therein
(and any inquiry or investigation that could lead to such action, suit or
proceeding), whether or not brought by or on behalf of the Corporation, seeking
to hold him liable by reason of the fact that he is or was acting in such
capacity. In addition, the board may provide such indemnification for the
employees and agents of the Corporation as it deems appropriate.
The rights of those receiving indemnification hereunder shall, to the
fullest extent from time to time permitted by law, cover (i) reasonable
expenses, including without limitation all attorneys' fees actually and
necessarily incurred by him in connection with any such action, suit or
proceeding, (ii) all reasonable payments made by him in satisfaction of any
judgment, money decree, fine (including an excise tax assessed with respect to
an employee benefit plan), penalty, or settlement for which he may have become
liable in such action, suit or proceeding; and (iii) all reasonable expenses
incurred in enforcing the indemnification rights provided herein.
Expenses incurred by anyone entitled to receive indemnification under
this Section in defending a proceeding may be paid by the Corporation in advance
of the final disposition of such proceeding as authorized by the board of
directors in the specific case or as authorized or required under any provisions
in the bylaws or by any applicable resolution or contract upon receipt of an
13
<PAGE>
undertaking by or on behalf of the director to repay such amount unless it shall
ultimately be determined that he is entitled to be indemnified by the
Corporation against such expenses.
The board of directors of the Corporation shall take all such action as
may be necessary and appropriate to authorize the Corporation to pay the
indemnification required by this bylaw, including without limitation, to the
extent needed, making a good faith evaluation of the manner in which the
claimant for indemnity acted and of the reasonable amount of indemnity due him.
Any person who at any time serves or has served in any of the aforesaid
capacities for or on behalf of the Corporation shall be deemed to be doing or to
have done so in reliance upon, and as consideration for, the right of
indemnification provided herein. Any repeal or modification of these
indemnification provisions shall not affect any rights or obligations existing
at the time of such repeal or modification. The rights provided for herein shall
inure to the benefit of the legal representatives of any such person and shall
not be exclusive of any other rights to which such person may be entitled apart
from the provisions of this bylaw.
The rights granted herein shall not be limited by the provisions
contained in N.C. Gen. Stat. Section 55-8-51 (or its successor), provided,
however, that the Corporation shall not indemnify or agree to indemnify a
potential indemnitee against liability or expenses he may incur on account of
his activities which were at the time taken known or believed by the potential
indemnitee to be clearly in conflict with the best interests of the Corporation.
The Corporation may purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee or agent of the Corporation,
or is or was serving at the request of the Corporation as a director, officer,
employee or agent for any other foreign or domestic corporation, partnership,
joint venture, trust, employee benefit plan, or other enterprise, against any
liability asserted against him and incurred by him in any such capacity, or
arising out of his status as such, whether or not the Corporation would have the
power to indemnify him against such liability under the provisions of the Act or
these bylaws.
SECTION 5. FISCAL YEAR: The fiscal year of the Corporation shall be
fixed by the board of directors.
SECTION 6. AMENDMENTS: (a) The board of directors may amend or repeal
these bylaws, except to the extent otherwise provided in the articles of
incorporation, a bylaw adopted by the shareholders, or the Act, and except that
a bylaw adopted, amended or repealed by the shareholders may not be readopted,
amended or repealed by the board of directors if neither of the articles of
incorporation nor a bylaw adopted by the shareholders authorizes the board of
directors to adopt, amend, or repeal that particular bylaw or the bylaws
generally.
(b) The Corporation's shareholders may adopt, amend, alter,
change, or repeal any of these bylaws consistent with the provisions of Section
11 of Article III.
(c) A bylaw that fixes a greater quorum or voting requirement for
the board of directors may be amended or repealed: (i) if originally adopted by
the shareholders, only by the shareholders, unless the bylaw permits amendment
or repeal by the board of directors; or (ii) if originally adopted by the board
of directors, either by the shareholders or by the board of directors.
(d) A bylaw referred to in Subsection (c) above: (i) may not be
adopted by the board of directors by a vote of less than a majority of the
directors then in office; and (ii) may not itself be
14
<PAGE>
amended by a quorum or vote of the directors less than the quorum or vote
therein prescribed or prescribed by a bylaw adopted or amended by the
shareholders.
(e) A bylaw adopted or amended by the shareholders that fixes a
greater voting or quorum requirement for the board of directors may provide that
it may be amended or repealed only by a specified vote of either the
shareholders or the board of directors.
SECTION 7. TIME PERIODS: In applying any provision of these bylaws which
requires an act to be done or not done a specified number of days prior to an
event or that an act be done during a period of a specified number of days prior
to an event, calendar days shall be used, the day of the doing of the act shall
be excluded and the day of the event shall be included.
SECTION 8. OPT-OUT OF NORTH CAROLINA SHAREHOLDER PROTECTION ACT: The
provisions of the North Carolina Shareholder Protection Act, N.C. Gen. Stat.
ss.ss. 55-9-01 - 05, as presently enacted or hereafter amended, shall not be
applicable to the Corporation.
SECTION 9. OPT-OUT OF NORTH CAROLINA CONTROL SHARE ACQUISITION ACT: The
provisions of the North Carolina Control Share Acquisition Act, N.C. Gen. Stat.
ss.ss. 55-9A-01 - 09, as presently enacted or hereafter amended, shall not be
applicable to the Corporation.
SECTION 10. EMERGENCIES: In anticipation of or during an emergency, the
board of directors may: (i) modify lines of succession to accommodate the
incapacity of any director, officer, employee, or agent; and (ii) relocate the
principal office or designate alternative principal or regional offices, or
authorize the officers to do so.
During an emergency: (i) notice of a meeting of the board of directors
need be given only to those directors whom it is practicable to reach and may be
given in any practicable manner, including by publication and radio; and (ii)
one or more officers present at a meeting of the board of directors may be
deemed to be directors for the meeting, in order of rank and within the same
rank in order of seniority, as necessary to achieve a quorum.
SECTION 11. SEVERABILITY: Should any provision of these bylaws become
ineffective or be declared to be invalid for any reason, such provision shall be
severable from the remainder of these bylaws and all other provisions of these
bylaws shall continue to be in full force and effect.
THESE RESTATED BYLAWS CONSIST OF THE AMENDED AND RESTATED BYLAWS ADOPTED
AT A MEETING OF THE BOARD OF DIRECTORS OF THE CORPORATION ON MARCH 27, 1998 WITH
THE ADDITION OF THE AMENDMENT IN ITS ENTIRETY OF SECTION 2 OF ARTICLE IV ADOPTED
AT A MEETING OF THE SHAREHOLDERS ON MAY 21, 1998.
ATTESTED:
/s/ Don T. Seaquist Dated: May 21, 1998
- ---------------------------
Don T. Seaquist
Secretary
15
Exhibit 10.23
AMENDMENT TO CHANGE IN CONTROL SEVERANCE AGREEMENT
This Amendment to Change in Control Severance Agreement ("Amendment"),
is made and entered into this the 1st day of October, 1998, by and between
Embrex, Inc. ("Company"), a North Carolina corporation, and Randall L. Marcuson
("Employee").
WHEREAS the Company and Employee are parties to a Change in Control
Severance Agreement dated May 21, 1996, a copy of which is attached hereto as
Exhibit A (the "Severance Agreement") whereby the Company agrees to provide
Employee with certain payments and benefits in the event that Employee's
employment with the Company is terminated as a result of, or in connection with,
a Change in Control; and
WHEREAS, the Company and Employee desire to amend the Severance
Agreement;
NOW, THEREFORE, in consideration of the mutual agreements herein set
forth, the legal sufficiency and adequacy of which are hereby acknowledged, the
parties agree to amend the Severance Agreement as follows:
1. The Severance Agreement is amended by adding the following
paragraphs:
16. Covenant Not to Compete. Employee acknowledges that by
virtue of his employment with the Company, he shall have access to and
control of confidential and proprietary information concerning the
Company's business and that the Company's business depends, to a
considerable extent, on the individual's skills, efforts, and leadership
of Employee. Accordingly, and in consideration of the Company's
commitments to Employee under this Agreement, Employee expressly
covenants and agrees that for the two (2) year period following the
termination of his employment with the Company (regardless of
circumstances of such termination) Employee will not, without the prior
consent of the Company:
<PAGE>
(a) on Employee's own or another's behalf, whether as an officer,
director, stockholder, partner, associate, owner, employee,
consultant, or otherwise, directly or indirectly:
(i) within the geographical areas set forth below, solicit
or do business which is the same, similar to, or otherwise
in competition with the business engaged in by the Company
from or with persons or entities who are customers of the
Company, who were customers of the Company at any time
during the last year of Employee's employment with the
Company or to whom the Company had made proposals for
business at any time during the last year of Employee's
employment with the Company; or
(ii) offer employment to, or otherwise solicit for
employment, any employee or other person who had been
employed by the Company during the last year of
Employee's employment with the Company.
(b) within the geographical area set forth below, be employed (or
otherwise engaged) in a management capacity, other capacity
providing the same or similar services which Employee provided to
the Company, or any capacity connected with competitive business
activities by any person or entity that engages in the same,
similar, or otherwise competitive business as the Company;
(c) directly or indirectly take action which is primarily intended to
be materially detrimental to the Company's goodwill, name,
business relations, prospects, and operations.
2
<PAGE>
(d) the restrictions set forth in this Paragraph 16 apply to the
following geographical areas:
(i) Research Triangle Park, North Carolina;
(ii) any city, metropolitan area, county (or similar political
subdivisions in foreign countries) in which the Company is
located, or does, or during Employee's employment with the
Company, did business;
(iii) any city, metropolitan area, county (or similar political
subdivisions in foreign countries) in which Employee's
substantial services were provided, or for which Employee
had substantial responsibility, or in which Employee
performed substantial work on the Company's projects while
employed by the Company.
Employee acknowledges that the covenants contained in this
Paragraph 16 are reasonably necessary to protect the legitimate business
interests of the Company and are reasonable with respect to scope, time,
and territory and are described with sufficient accuracy and
definiteness to enable him to understand the scope of the restrictions
imposed upon him. If any of the provisions, clauses, or phrases in this
Paragraph 16 are held unenforceable by a court of competent
jurisdiction, then the parties desire that any such provision, clause or
phrase be "blue-penciled" or rewritten by the court to the extent
necessary to render it enforceable.
17. Income Tax Payment. In the event Employee receives payments
or benefits pursuant to Paragraph 5 of this Agreement and incurs state
or federal personal income tax liability as a result of the receipt of
such payments or benefits, then Employee is entitled to receive an
additional payment (the "Income Tax Payment") in an amount equal to the
state and federal personal income tax
3
<PAGE>
assessed on such payments or benefits. Said Income Tax Payment shall be
made prior to any calculation of the Excise Tax Payment required by
Paragraph 9 of this Agreement. Said Income Tax Payment shall be paid to
Employee by the Company by April 15 of the year following each year in
which such tax liability occurs.
2. Except as herein set forth, the Severance Agreement is not modified
or amended and the parties hereto reaffirm and agree to all of the terms
and provisions of the Severance Agreement, as amended, in all other
respects.
IN WITNESS WHEREOF, the parties have executed this Amendment to Change
in Control Severance Agreement as of the day and year first written above.
EMBREX, INC.
/s/ Randall L. Marcuson
By: ________________________________
President and CEO
Title: _____________________________
ATTEST:
/s/ Don T. Seaquist
- ----------------------
Corporate Secretary
/s/ Randall L. Marcuson
----------------------------
Randall L. Marcuson
Exhibit 10.26
AMENDMENT TO CHANGE IN CONTROL SEVERANCE AGREEMENT
This Amendment to Change in Control Severance Agreement ("Amendment"),
is made and entered into this the 1st day of October, 1998, by and between
Embrex, Inc. ("Company"), a North Carolina corporation, and Catherine A. Ricks
("Employee").
WHEREAS the Company and Employee are parties to a Change in Control
Severance Agreement dated May 21, 1996, a copy of which is attached hereto as
Exhibit A (the "Severance Agreement") whereby the Company agrees to provide
Employee with certain payments and benefits in the event that Employee's
employment with the Company is terminated as a result of, or in connection with,
a Change in Control; and
WHEREAS, the Company and Employee desire to amend the Severance
Agreement;
NOW, THEREFORE, in consideration of the mutual agreements herein set
forth, the legal sufficiency and adequacy of which are hereby acknowledged, the
parties agree to amend the Severance Agreement as follows:
1. The Severance Agreement is amended by adding the following
paragraphs:
16. Covenant Not to Compete. Employee acknowledges that by virtue
of her employment with the Company, she shall have access to and control
of confidential and proprietary information concerning the Company's
business and that the Company's business depends, to a considerable
extent, on the individual's skills, efforts, and leadership of
Employee.Accordingly, and in consideration of the Company's commitments
toEmployee under this Agreement, Employee expressly covenants and agrees
that for the two (2) year period following the termination of her
employment with the Company (regardless of circumstances of such
termination) Employee will not, without the prior consent of the
Company:
<PAGE>
(a) on Employee's own or another's behalf, whether as an officer,
director, stockholder, partner, associate, owner, employee,
consultant, or otherwise, directly or indirectly:
(i) within the geographical areas set forth below, solicit
or do business which is the same, similar to, or otherwise
in competition with the business engaged in by the Company
from or with persons or entities who are customers of the
Company, who were customers of the Company at any time
during the last year of Employee's employment with the
Company or to whom the Company had made proposals for
business at any time during the last year of Employee's
employment with the Company; or (ii) offer employment to,
or otherwise solicit for employment, any employee or other
person who had been employed by the Company during the
last year of Employee's employment with the Company.
(b) within the geographical area set forth below, be employed (or
otherwise engaged) in a management capacity, other capacity
providing the same or similar services which Employee provided to
the Company, or any capacity connected with competitive business
activities by any person or entity that engages in the same,
similar, or otherwise competitive business as the Company;
(c) directly or indirectly take action which is primarily intended to
be materially detrimental to the Company's goodwill, name,
business relations, prospects, and operations.
2
<PAGE>
(d) the restrictions set forth in this Paragraph 16 apply to the
following geographical areas:
(i) Research Triangle Park, North Carolina; (ii) any city,
metropolitan area, county (or similar political
subdivisions in foreign countries) in which the Company is
located, or does, or during Employee's employment with the
Company, did business;
(iii) any city, metropolitan area, county (or similar political
subdivisions in foreign countries) in which Employee's
substantial services were provided, or for which Employee
had substantial responsibility, or in which Employee
performed substantial work on the Company's projects while
employed by the Company.
Employee acknowledges that the covenants contained in this
Paragraph 16 are reasonably necessary to protect the legitimate business
interests of the Company and are reasonable with respect to scope, time,
and territory and are described with sufficient accuracy and
definiteness to enable her to understand the scope of the restrictions
imposed upon her. If any of the provisions, clauses, or phrases in this
Paragraph 16 are held unenforceable by a court of competent
jurisdiction, then the parties desire that any such provision, clause or
phrase be "blue-penciled" or rewritten by the court to the extent
necessary to render it enforceable.
17. Income Tax Payment. In the event Employee receives payments
or benefits pursuant to Paragraph 5 of this Agreement and incurs state
or federal personal income tax liability as a result of the receipt of
such payments or benefits, then Employee is entitled to receive an
additional payment (the "Income Tax Payment") in an amount equal to the
state and federal personal income tax
3
<PAGE>
assessed on such payments or benefits. Said Income Tax Payment shall be
made prior to any calculation of the Excise Tax Payment required by
Paragraph 9 of this Agreement. Said Income Tax Payment shall be paid to
Employee by the Company by April 15 of the year following each year in
which such tax liability occurs.
2. Except as herein set forth, the Severance Agreement is not modified
or amended and the parties hereto reaffirm and agree to all of the terms and
provisions of the Severance Agreement, as amended, in all other respects.
IN WITNESS WHEREOF, the parties have executed this Amendment to Change
in Control Severance Agreement as of the day and year first written above.
EMBREX, INC.
/s/ Randall L. Marcuson
By: _____________________________
President and CEO
Title: __________________________
ATTEST:
/s/ Don T. Seaquist
- --------------------------
Corporate Secretary
/s/ Catherine A. Ricks
----------------------------
Catherine A. Ricks
4
Exhibit 10.29
AMENDMENT TO CHANGE IN CONTROL SEVERANCE AGREEMENT
This Amendment to Change in Control Severance Agreement ("Amendment"),
is made and entered into this the 1st day of October, 1998, by and between
Embrex, Inc. ("Company"), a North Carolina corporation, and Brian V. Cosgriff
("Employee").
WHEREAS the Company and Employee are parties to a Change in Control
Severance Agreement dated May 21, 1996, a copy of which is attached hereto as
Exhibit A (the "Severance Agreement") whereby the Company agrees to provide
Employee with certain payments and benefits in the event that Employee's
employment with the Company is terminated as a result of, or in connection with,
a Change in Control; and
WHEREAS, the Company and Employee desire to amend the Severance
Agreement;
NOW, THEREFORE, in consideration of the mutual agreements herein set
forth, the legal sufficiency and adequacy of which are hereby acknowledged, the
parties agree to amend the Severance Agreement as follows:
1. The Severance Agreement is amended by adding the following
paragraphs:
16. Covenant Not to Compete. Employee acknowledges that by
virtue of his employment with the Company, he shall have access to and
control of confidential and proprietary information concerning the
Company's business and that the Company's business depends, to a
considerable extent, on the individual's skills, efforts, and leadership
of Employee. Accordingly, and in consideration of the Company's
commitments to Employee under this Agreement, Employee expressly
covenants and agrees that for the two (2) year period following the
termination of his employment with the Company (regardless of
circumstances of such termination) Employee will not, without the prior
consent of the Company:
<PAGE>
(a) on Employee's own or another's behalf, whether as an officer,
director, stockholder, partner, associate, owner, employee,
consultant, or otherwise, directly or indirectly:
(i) within the geographical areas set forth below, solicit
or do business which is the same, similar to, or otherwise
in competition with the business engaged in by the Company
from or with persons or entities who are customers of the
Company, who were customers of the Company at any time
during the last year of Employee's employment with the
Company or to whom the Company had made proposals for
business at any time during the last year of Employee's
employment with the Company; or (ii) offer employment to,
or otherwise solicit for employment, any employee or other
person who had been employed by the Company during the
last year of Employee's employment with the Company.
(b) within the geographical area set forth below, be employed (or
otherwise engaged) in a management capacity, other capacity
providing the same or similar services which Employee provided to
the Company, or any capacity connected with competitive business
activities by any person or entity that engages in the same,
similar, or otherwise competitive business as the Company;
(c) directly or indirectly take action which is primarily intended to
be materially detrimental to the Company's goodwill, name,
business relations, prospects, and operations.
2
<PAGE>
(d) the restrictions set forth in this Paragraph 16 apply to the
following geographical areas:
(i) Research Triangle Park, North Carolina; (ii) any city,
metropolitan area, county (or similar political
subdivisions in foreign countries) in which the Company is
located, or does, or during Employee's employment with the
Company, did business;
(iii) any city, metropolitan area, county (or similar political
subdivisions in foreign countries) in which Employee's
substantial services were provided, or for which Employee
had substantial responsibility, or in which Employee
performed substantial work on the Company's projects while
employed by the Company.
Employee acknowledges that the covenants contained in this
Paragraph 16 are reasonably necessary to protect the legitimate business
interests of the Company and are reasonable with respect to scope, time,
and territory and are described with sufficient accuracy and
definiteness to enable him to understand the scope of the restrictions
imposed upon him. If any of the provisions, clauses, or phrases in this
Paragraph 16 are held unenforceable by a court of competent
jurisdiction, then the parties desire that any such provision, clause or
phrase be "blue-penciled" or rewritten by the court to the extent
necessary to render it enforceable.
17. Income Tax Payment. In the event Employee receives payments
or benefits pursuant to Paragraph 5 of this Agreement and incurs state
or federal personal income tax liability as a result of the receipt of
such payments or benefits, then Employee is entitled to receive an
additional payment (the "Income Tax Payment") in an amount equal to the
state and federal personal income tax
3
<PAGE>
assessed on such payments or benefits. Said Income Tax Payment shall be
made prior to any calculation of the Excise Tax Payment required by
Paragraph 9 of this Agreement. Said Income Tax Payment shall be paid to
Employee by the Company by April 15 of the year following each year in
which such tax liability occurs.
2. Except as herein set forth, the Severance Agreement is not modified
or amended and the parties hereto reaffirm and agree to all of the terms and
provisions of the Severance Agreement, as amended, in all other respects.
IN WITNESS WHEREOF, the parties have executed this Amendment to Change
in Control Severance Agreement as of the day and year first written above.
EMBREX, INC.
/s/ Randall L. Marcuson
By: _______________________________
President and CEO
Title: ____________________________
ATTEST:
/s/ Don T. Seaquist
- ----------------------
Corporate Secretary
/s/ Brian V. Cosgriff
----------------------------
Brian V. Cosgriff
4
Exhibit 10.32
AMENDMENT TO CHANGE IN CONTROL SEVERANCE AGREEMENT
This Amendment to Change in Control Severance Agreement ("Amendment"),
is made and entered into this the 1st day of October, 1998, by and between
Embrex, Inc., including its wholly-owned subsidiary, Embrex Europe Limited
(hereinafter Embrex, Inc. and Embrex Europe Limited are collectively referred to
as "Company"), and David M. Baines ("Employee").
WHEREAS the Company and Employee are parties to a Change in Control
Severance Agreement dated June 9, 1996, a copy of which is attached hereto as
Exhibit A (the "Severance Agreement") whereby the Company agrees to provide
Employee with certain payments and benefits in the event that Employee's
employment with the Company is terminated as a result of, or in connection with,
a Change in Control; and
WHEREAS, the Company and Employee desire to amend the Severance
Agreement;
NOW, THEREFORE, in consideration of the mutual agreements herein set
forth, the legal sufficiency and adequacy of which are hereby acknowledged, the
parties agree to amend the Severance Agreement as follows:
1. The Severance Agreement is amended by adding the following
paragraphs:
16. Covenant Not to Compete. Employee acknowledges that by virtue
of his employment with the Company, he shall have access to and control
of confidential and proprietary information concerning the Company's
business and that the Company's business depends, to a considerable
extent, on the individual's skills, efforts, and leadership of Employee.
Accordingly, and in consideration of the Company's commitments to
Employee under this Agreement, Employee expressly covenants and agrees
that for the two (2) year period following the termination of his
employment with the Company (regardless
<PAGE>
of circumstances of such termination) Employee will not, without the
prior consent of the Company:
(a) on Employee's own or another's behalf, whether as an officer,
director, stockholder, partner, associate, owner, employee,
consultant, or otherwise, directly or indirectly:
(i) within the geographical areas set forth below, solicit
or do business which is the same, similar to, or otherwise
in competition with the business engaged in by the Company
from or with persons or entities who are customers of the
Company, who were customers of the Company at any time
during the last year of Employee's employment with the
Company or to whom the Company had made proposals for
business at any time during the last year of Employee's
employment with the Company; or
(ii) offer employment to, or otherwise solicit for
employment, any employee or other person who had been
employed by the Company during the last year of Employee's
employment with the Company.
(b) within the geographical area set forth below, be employed (or
otherwise engaged) in a management capacity, other capacity
providing the same or similar services which Employee provided to
the Company, or any capacity connected with competitive business
activities by any person or entity that engages in the same,
similar, or otherwise competitive business as the Company;
2
<PAGE>
(c) directly or indirectly take action which is primarily intended to
be materially detrimental to the Company's goodwill, name,
business relations, prospects, and operations.
(d) the restrictions set forth in this Paragraph 16 apply to the
following geographical areas:
(i) Research Triangle Park, North Carolina;
(ii) any city, metropolitan area, county (or similar
political subdivisions in foreign countries) in which the
Company is located, or does, or during Employee's employment
with the Company, did business;
(iii) any city, metropolitan area, county (or similar political
subdivisions in foreign countries) in which Employee's
substantial services were provided, or for which Employee
had substantial responsibility, or in which Employee
performed substantial work on the Company's projects while
employed by the Company.
Employee acknowledges that the covenants contained in this
Paragraph 16 are reasonably necessary to protect the legitimate business
interests of the Company and are reasonable with respect to scope, time,
and territory and are described with sufficient accuracy and
definiteness to enable him to understand the scope of the restrictions
imposed upon him. If any of the provisions, clauses, or phrases in this
Paragraph 16 are held unenforceable by a court of competent
jurisdiction, then the parties desire that any such provision, clause or
phrase be "blue-penciled" or rewritten by the court to the extent
necessary to render it enforceable.
17. Income Tax Payment. In the event Employee receives payments
or benefits pursuant to Paragraph 5 of this Agreement and incurs state
or federal
3
<PAGE>
personal income tax liability as a result of the receipt of
such payments or benefits, then Employee is entitled to receive an
additional payment (the "Income Tax Payment") in an amount equal to the
state and federal personal income tax assessed on such payments or
benefits. Said Income Tax Payment shall be made prior to any calculation
of the Excise Tax Payment required by Paragraph 9 of this Agreement.
Said Income Tax Payment shall be paid to Employee by the Company by
April 15 of the year following each year in which such tax liability
occurs.
2. Except as herein set forth, the Severance Agreement is not
modified or amended and the parties hereto reaffirm and agree to all of the
terms and provisions of the Severance Agreement, as amended, in all other
respects.
IN WITNESS WHEREOF, the parties have executed this Amendment to Change
in Control Severance Agreement as of the day and year first written above.
EMBREX, INC.
/s/ Randall L. Marcuson
By: _______________________________
President and CEO
Title: ____________________________
ATTEST:
/s/ Don T. Seaquist
- ----------------------
Corporate Secretary
/s/ David M. Baines
----------------------------
David M. Baines
4
Exhibit 10.35
AMENDMENT TO CHANGE IN CONTROL SEVERANCE AGREEMENT
This Amendment to Change in Control Severance Agreement ("Amendment"),
is made and entered into this the 1st day of October, 1998, by and between
Embrex, Inc. ("Company"), a North Carolina corporation, and Don T. Seaquist
("Employee").
WHEREAS the Company and Employee are parties to a Change in Control
Severance Agreement dated September 9, 1996, a copy of which is attached hereto
as Exhibit A (the "Severance Agreement") whereby the Company agrees to provide
Employee with certain payments and benefits in the event that Employee's
employment with the Company is terminated as a result of, or in connection with,
a Change in Control; and
WHEREAS, the Company and Employee desire to amend the Severance
Agreement;
NOW, THEREFORE, in consideration of the mutual agreements herein set
forth, the legal sufficiency and adequacy of which are hereby acknowledged, the
parties agree to amend the Severance Agreement as follows:
1. The Severance Agreement is amended by adding the following
paragraphs:
16. Covenant Not to Compete. Employee acknowledges that by
virtue of his employment with the Company, he shall have access to and
control of confidential and proprietary information concerning the
Company's business and that the Company's business depends, to a
considerable extent, on the individual's skills, efforts, and leadership
of Employee. Accordingly, and in consideration of the Company's
commitments to Employee under this Agreement, Employee expressly
covenants and agrees that for the two (2) year period following the
termination of his employment with the Company (regardless of
circumstances of such termination) Employee will not, without the prior
consent of the Company:
<PAGE>
(a) on Employee's own or another's behalf, whether as an officer,
director, stockholder, partner, associate, owner, employee,
consultant, or otherwise, directly or indirectly:
(i) within the geographical areas set forth below, solicit
or do business which is the same, similar to, or otherwise
in competition with the business engaged in by the Company
from or with persons or entities who are customers of the
Company, who were customers of the Company at any time
during the last year of Employee's employment with the
Company or to whom the Company had made proposals for
business at any time during the last year of Employee's
employment with the Company; or (ii) offer employment to,
or otherwise solicit for employment, any employee or other
person who had been employed by the Company during the
last year of Employee's employment with the Company.
(b) within the geographical area set forth below, be employed (or
otherwise engaged) in a management capacity, other capacity
providing the same or similar services which Employee provided to
the Company, or any capacity connected with competitive business
activities by any person or entity that engages in the same,
similar, or otherwise competitive business as the Company;
(c) directly or indirectly take action which is primarily intended to
be materially detrimental to the Company's goodwill, name,
business relations, prospects, and operations.
2
<PAGE>
(d) the restrictions set forth in this Paragraph 16 apply to the
following geographical areas: (i) Research Triangle Park, North
Carolina; (ii) any city, metropolitan area, county (or similar
political
subdivisions in foreign countries) in which the Company is
located, or does, or during Employee's employment with the
Company, did business;
(iii) any city, metropolitan area, county (or similar political
subdivisions in foreign countries) in which Employee's
substantial services were provided, or for which Employee
had substantial responsibility, or in which Employee
performed substantial work on the Company's projects while
employed by the Company.
Employee acknowledges that the covenants contained in this
Paragraph 16 are reasonably necessary to protect the legitimate business
interests of the Company and are reasonable with respect to scope, time,
and territory and are described with sufficient accuracy and
definiteness to enable him to understand the scope of the restrictions
imposed upon him. If any of the provisions, clauses, or phrases in this
Paragraph 16 are held unenforceable by a court of competent
jurisdiction, then the parties desire that any such provision, clause or
phrase be "blue-penciled" or rewritten by the court to the extent
necessary to render it enforceable.
17. Income Tax Payment. In the event Employee receives payments
or benefits pursuant to Paragraph 5 of this Agreement and incurs state
or federal personal income tax liability as a result of the receipt of
such payments or benefits, then Employee is entitled to receive an
additional payment (the "Income Tax Payment") in an amount equal to the
state and federal personal income tax
3
<PAGE>
assessed on such payments or benefits. Said Income Tax Payment shall be
made prior to any calculation of the Excise Tax Payment required by
Paragraph 9 of this Agreement. Said Income Tax Payment shall be paid to
Employee by the Company by April 15 of the year following each year in
which such tax liability occurs.
2. Except as herein set forth, the Severance Agreement is not modified
or amended and the parties hereto reaffirm and agree to all of the terms and
provisions of the Severance Agreement, as amended, in all other respects.
IN WITNESS WHEREOF, the parties have executed this Amendment to Change
in Control Severance Agreement as of the day and year first written above.
EMBREX, INC.
/s/ Randall L. Marcuson
By: _______________________________
President and CEO
Title: ____________________________
ATTEST:
/s/ Don T. Seaquist
- ----------------------
Corporate Secretary
/s/ Don T. Seaquist
----------------------------
Don T. Seaquist
4
EXHIBIT 10.36
May 24, 1991
Mr. Hayes Fenstermacher
2809 Croix Place
Raleigh, NC 27614
Dear Hayes:
It is my pleasure to make you an offer of employment with EMBREX as
Director, Engineering, effective no later than July 1, 1991. Your starting
salary will be at the rate of $72,500 per year, payable monthly ($6,041.67).
Upon accepting employment at EMBREX, you are entitled to receive an
Incentive Stock Option for 20,000 shares of EMBREX Common Stock at an option
price of fifty cents ($.50) per share and has a 4-year vesting schedule.
Annually, you will also participate in additional stock option awards, based on
performance.
As a full-time employee of EMBREX, you are entitled to participate in
all EMBREX benefits. Each plan has terms and conditions regarding eligibility,
which you should discuss with our personnel office. A booklet describing our
current employee benefit plans is enclosed for your information.
Other benefits include:
o Eleven annual holidays
o Three weeks of paid vacation annually after your first year of
employment (four weeks in your fourth year)
o A company sponsored medical benefit package, including dental,
for you and a partial company sponsored package for family
members
o Life insurance coverage for you equal to your annual salary
o Short and long term disability programs
o Employee funded 401(k) and cafeteria benefits plans
Enclosed is a standard employment agreement, which describes your
relationship with the Company as an employee. Item 4.3 regards the matter of
your compensation, which we consider (in all its forms) a very personal matter
between yourself and the Company. It should be discussed only with individuals
at the company who have responsibility for recommending or approving
compensation adjustments.
This letter and its enclosures constitute our initial employment
agreement. I ask that you read it thoroughly and obtain answers to any remaining
questions you may have. To accept our offer, you should sign both copies of this
letter, retain the original for your personal files and return the copy to the
Company for your personnel records.
We look forward to your affirmative response and the opportunity to work
with you.
Sincerely yours,
/s/ Randall L. Marcuson
Randall L. Marcuson
President and CEO
Agreed and accepted:
/s/ Hayes Fenstermacher May 31, 1991
___________________________ Date _____________________________
<PAGE>
GENERAL PROVISIONS TO
EMPLOYMENT AGREEMENT BETWEEN
EMBREX, INC. AND
Hayes Fenstermacher ("EMPLOYEE")
PERSONAL AND CONFIDENTIAL
1. EMPLOYMENT
EMBREX hereby employs Employee and Employee accepts such employment and
agrees to perform for EMBREX the duties described herein, faithfully and to the
best of his ability.
2. TERM OF EMPLOYMENT
Employee's employment hereunder shall commence on the date noted on the
cover letter and shall continue at the pleasure of the Company. A probationary
period of 90 days shall be observed, so long as Employee is performing at a
satisfactory level. At the conclusion of probationary period, Employee shall be
given a performance evaluation.
3. DUTIES
Employee agrees to devote his full time and attention to the business and
affairs of EMBREX, to use his best efforts to promote the interests of EMBREX,
to hold such offices in EMBREX to which he may be elected or appointed, and to
perform such tasks, commensurate with his position, as are assigned to him by
the President and CEO or other individuals designated by him.
4. COMPENSATION
4.1 EMBREX will pay Employee, for services rendered hereunder, a salary at
the rate of not less than the minimum salary per annum stated in the offer
letter, payable in equal monthly installments. The Company will review this base
salary on an annual basis and will determine in its sole discretion whether to
provide a merit increase to the base salary.
4.2 The parties hereto agree that Employee shall be entitled to participate
in all retirement, profit-sharing, compensation, insurance or other benefit
plans presently in effect or which may be generally established during the term
hereof for employees at EMBREX.
4.3 The terms and conditions of employment (salary, equity and/or other
forms of compensation) are strictly a personal matter between Employee and the
Company and will be shared only with Employee's supervisors having salary
administration responsibility.
5. EXPENSES
EMBREX will reimburse Employee for all expenses which are reasonably
incurred by him in the performance of his duties in furtherance of or in
connection with the business of EMBREX or its subsidiaries.
6. INCAPACITY, RETIREMENT, OR DEATH
In the event that Employee shall become incapacitated from performing the
duties of his employment hereunder (other than by death) for a continuous period
of 60 days or an aggregate of four months during the term hereof (both periods
hereinafter referred to as the "Disability Period"), Employee nevertheless shall
be entitled to all compensation and other payments provided for hereunder during
the Disability Period and until his employment shall be terminated pursuant to
this paragraph. After the completion of either Disability Period provided for in
this paragraph, and Employee continues to be, or is again incapacitated, EMBREX
may, if it so elects, declare Employee's employment terminated on 30 days'
notice given in accordance with the provisions
<PAGE>
hereof. Employee shall be considered to be incapacitated when he is
substantially unable to perform the normal duties required of him hereunder on a
continuous daily basis.
7. EMPLOYEE NOT TO WORK FOR OTHERS
7.1 During the term of this Agreement, Employee agrees that he will not work
for any other business firm, whether competitive with EMBREX or not, and that
Employee shall devote his full time and attention solely to the business and
interests of EMBREX.
7.2 Until the second anniversary of the date of termination of the
employment of Employee by EMBREX, Employee agrees that, regardless of the date
or cause of termination of his employment or if it shall be with or without
cause, he will not, directly or indirectly, either as principal, agent, officer,
director, employee, or in any similar capacity, engage in or perform consulting
or any other services for, or have a financial interest in, through sales,
consultant status, manufacture, research or development or similar interest at
the time of termination of Employee's employment, nor will he be, for the same
time period, the owner of record or beneficially of five percent or more of any
class of equity security (or any class of securities convertible to an equity
security), in an entity which so competes with a product of EMBREX.
8. TECHNIQUES, DISCOVERIES, AND INVENTIONS
8.1 Employee agrees that any and all sales of manufacturing techniques,
inventions, discoveries or improvements in the products or processes or the
merchandising thereof, of EMBREX, which Employee may create, devise, make,
discover, introduce, or invent while employed by EMBREX shall belong to and be
the sole property of EMBREX. Employee agrees promptly and fully to disclose the
same to EMBREX.
8.2 It is recognized between EMBREX and Employee that EMBREX has acquired
and developed, and will continue to develop formulae, techniques, plans,
processes, procedures, devices and materials, and lists of customers and their
particular requirements which may pertain to many and varied products and
equipment, which are secret and confidential in character and are, and will
continue to be, of great and unique value to it, which are now and will continue
to be, used in its business (hereinafter referred to as "secret information").
Much of such secret information existing on the date hereof is known to
Employee, by reason of his position, and future secret information on EMBREX
will be disclosed to Employee, as required for proper performance of duties
hereunder and other duties as he may have to EMBREX.
8.3 Employee agrees that all such secret information heretofore or hereafter
received by him will be kept and maintained by him as confidential and in
complete secrecy, and Employee shall not disclose at any time, either orally or
in writing, or otherwise, in any manner, directly or indirectly, any knowledge
or information Employee has acquired or any trade secret relating to EMBREX or
its subsidiaries, with the exception of disclosure of such information: (i) to
employees of EMBREX who have a need to know it to properly carry out their
duties on behalf of EMBREX and (ii) in the ordinary course of EMBREX business to
customers, suppliers, subcontractors and parties similarly situated.
8.4 Employee agrees that, while an employee of EMBREX and for two years
thereafter, at least fifteen days before release of publication of any
scientific paper or contributions to periodicals dealing with or making
reference to a subject of interest to EMBREX, Employee will make available to
EMBREX a copy of what is to be published.
9. DELIVERY OF DATA
Employee agrees to deliver to EMBREX promptly at the termination of his
employment or at any other time EMBREX may request, all memoranda, notes,
records, sketches, plans, or other documents which are in Employee's possession
or under his control concerning costs, uses, application or purchases of
products made for or by EMBREX (or any subsidiary, affiliate, or licensee of
EMBREX) or any product, process, formula, or manufacturing method used,
developed, produced, or investigated by EMBREX (or any subsidiary, affiliate or
licensee of EMBREX), during his employment hereunder.
<PAGE>
10. INJUNCTIVE RELIEF
Employee agrees that the remedy at law for any breach of the provisions of
paragraphs 7, 8, and/or 9 of this Agreement will be inadequate and that EMBREX
shall be entitled to injunctive relief in addition to any other remedy they
might have as so ordered by a Court.
11. SEVERABILITY
The provisions of paragraphs 7, 8, 9, and 10 are severable, and in the event
any portion or portions thereof are held to be invalid, such invalidity shall
not affect the validity of the remaining portion or portions.
12. SEVERANCE
If EMBREX shall terminate the employment of Employee without cause, except
pursuant to 6.1 hereof, or because of death, then Employee shall be liable to
Employee for salary payable pursuant to 4.1 for one month. No sums shall be due
pursuant to any other portion of 4 in the event of termination. The parties
agree that this sum is a reasonable approximation of the actual damages which
they presently anticipate would result from a termination of Employee's
employment, and further agree that this clause is inserted herein not as a
penalty but for the sole purpose of avoiding the difficulty of proof of the
actual damages.
13. NOTICES
All notices, requests, demands, and other communication hereunder shall be
in writing and shall be deemed to have been duly given if mailed by certified or
registered mail, return receipt requested, to the respective parties at their
addresses appearing above or their last known addresses.
14. ASSIGNMENT
The Agreement shall not be assignable by either party except pursuant to a
merger, consolidation or other reorganization of EMBREX.
15. SUCCESSORS IN INTEREST
This Agreement shall be binding on the parties hereto, their heirs,
executors, administrators, successors (whether by merger, consolidation, or
otherwise), and assigns. The parties hereby agree for themselves, their heirs,
executors, administrators, successors, and assigns, to execute any instruments
and to perform any acts which may be necessary or proper to carry out the
purposes of the Agreement, but the failure to execute such instruments will not
affect the rights of any party hereto or the obligations of any estate, as
provided in this Agreement.
16. LAW OF THE AGREEMENT
This Agreement shall be subject to and governed by the laws of the State of
North Carolina. The provisions of this Agreement are severable, and in the event
any portion or portions hereof are held to be invalid, such invalidity shall not
affect the validity of the remaining portion or portions. If any court or other
competent authority shall hold a portion of this Agreement invalid, unless
modified in a manner described by the court or competent authority, that portion
shall be deemed modified accordingly.
<PAGE>
AMENDMENT TO EMPLOYMENT AGREEMENT
This amendment to Employment Agreement is made and entered into by
EMBREX, INC., a North Carolina corporation, ("Employer") and V. Hayes
Fenstermacher ("Employee"). Employer and Employee may be collectively referred
to as "the parties".
WHEREAS, the parties entered into an Employment Agreement dated 5/31/91
(the "Agreement");
WHEREAS, Employee continues to be employed by Employer; and
WHEREAS, the parties both desire to amend the prior Employment
Agreement as set forth below.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties agree to amend their
prior Agreement as follows:
The Agreement is hereby amended by deleting Paragraph 12, Termination
and Liquidated Damages and inserting in lieu thereof the following:
12. SEVERANCE. If Employer terminates Employee's employment under this
Agreement without cause, then Employee shall be entitled to receive
from Employer an amount equal to 12 months of Employee's then current
salary, payable in 12 equal monthly installments, without interest,
commencing one month after termination.
IN WITNESS WHEREOF, the parties have executed this Amendment to
Employment Agreement this the 18th day of July,1996.
/s/ V. Hayes Fenstermacher
------------------------------------
Employee
EMBREX, INC.
/s/ Randall L. Marcuson
By:_________________________________
EXHIBIT 10.37
CHANGE IN CONTROL SEVERANCE AGREEMENT
THIS CHANGE IN CONTROL SEVERANCE AGREEMENT ("Agreement"), is made and
entered into this 16th day of October, 1996 by and between Embrex, Inc.
("Company"), a North Carolina corporation, and V. Hayes Fenstermacher
("Employee").
WHEREAS, the Board of Directors ("Board") of the Company considers the
maintenance of a vital management group to be essential in protecting and
enhancing the best interests of the Company and its shareholders;
WHEREAS, the Board recognizes that the possibility of a Change in
Control (as hereinafter defined) exists and that the threat of or the occurrence
of a Change in Control can result in significant distractions of its key
management personnel because of the uncertainties inherent in such a situation;
WHEREAS, the Board has determined that it is in the best interest of
the Company and its shareholders to ensure the Employee's continued dedication
and efforts on behalf of the Company; and
WHEREAS, in order to induce the Employee to remain in the employ of the
Company, particularly in the event of a threat of or the occurrence of a Change
in Control and to dispel any concerns that the Employee may have about taking an
active part in the defense against an inappropriate attempt to bring about a
Change in Control of the Company, the Company desires to enter into this
Agreement with the Employee to provide the Employee with certain payments and
benefits in the event that his employment with the Company is terminated as a
result of, or in connection with, a Change in Control.
NOW, THEREFORE, in consideration of the mutual agreements herein set
forth, the legal sufficiency and adequacy of which are hereby acknowledged, the
parties agree as follows:
<PAGE>
1. Employment. Employee acknowledges that he is employed with the
Company pursuant to an Employment Agreement dated June 1, 1991 and hereby agrees
that to the extent any provision of this Agreement should be contrary to any
provision of the Employment Agreement, the terms of this Agreement shall
control.
2. Definitions. For purposes of this Agreement, the following terms have
the meanings indicated:
(A) "Acquiring Person" shall mean any Person (as such term is hereinafter
defined) who or which, together with all Affiliates (as such term is hereinafter
defined) and Associates (as such term is hereinafter defined) of such Person,
shall be the Beneficial Owner (as such term is hereinafter defined) of
thirty-three percent (33%) or more of the shares of Common Stock then
outstanding, but shall not include (i) the Company, (ii) any Subsidiary of the
Company, (iii) any employee benefit plan or employee stock plan of the Company
or of any Subsidiary of the Company, (iv) any dividend reinvestment plan of the
Company, or (v) any Person or entity organized, appointed, or established by the
Company for or pursuant to the terms of such plan. Notwithstanding the
foregoing, no Person shall become an "Acquiring Person" as the result of an
acquisition of Common Stock by the Company which, by reducing the number of
shares outstanding, increases the proportionate number of shares beneficially
owned by such Person to thirty-three percent (33%) or more of the Common Stock
of the Company then outstanding; provided, however, that if a Person shall
become the Beneficial Owner of thirty-three (33%) or more of the Common Stock of
the Company, then outstanding by reason of such an acquisition and shall, after
such acquisition, become the Beneficial Owner of any additional shares of Common
Stock, then such Person shall be deemed to be an "Acquiring Person." In
addition, notwithstanding the foregoing, if the Board of Directors of the
Company determines in good faith that a Person who would otherwise be an
"Acquiring Person," as defined pursuant to the foregoing provisions of this
Paragraph (A), has become such inadvertently, and such Person divests as
promptly as practicable a sufficient number of shares of Common
2
<PAGE>
Stock so that such Person would no longer be an "Acquiring Person" as defined
pursuant to the foregoing provisions of this Paragraph (A), then such Person
shall not be deemed to be an "Acquiring Person" for any purposes of this
Agreement.
(B) "Affiliate" and "Associate" shall have the respective
meanings ascribed to such terms in Rule 12b-2 of the General Rules and
Regulations under the Securities Exchange Act of 1934, as amended (the "Exchange
Act").
(C) A Person shall be deemed the "Beneficial Owner" of and shall
be deemed to "beneficially own," any securities:
(i) which such Person or any of such Person's Affiliates
or Associates, directly or indirectly, has the right or
obligation to acquire (whether such right is exercisable
immediately or only after the passage of time) pursuant to any
agreement, arrangement or understanding (whether or not in
writing) or upon the exercise of conversion rights, exchange
rights, rights, warrants or options, or otherwise; provided,
however, that a Person shall not be deemed the "Beneficial Owner"
of, or to "beneficially own," (a) securities tendered pursuant to
a tender or exchange offer made by such Person or any of such
Person's Affiliates or Associates until such tendered securities
are accepted for purchase or exchange, or (b) at any time prior
to the occurrence of a Triggering Event, securities issuable upon
exercise of the Rights ("Triggering Event" and "Rights" shall
have the respective meanings ascribed to such terms as set forth
in the Rights Agreement between Embrex, Inc. and Branch Banking &
Trust Company as Rights Agent, dated as of March 21, 1996 and as
in effect on the date hereof ("Rights Agreement")), or (c) from
and after the occurrence of a Triggering Event, securities
issuable upon exercise of Rights which were acquired by such
Person or any of such Person's Affiliates or Associates prior to
the Distribution Date (as defined in the Rights Agreement) or
pursuant to Section 3(a) or Section 22 of the
3
<PAGE>
Rights Agreement (the "Original Rights") or pursuant to Section
11(i) of the Rights Agreement in connection with an adjustment
made with respect to any Original Rights;
(ii) which such Person or any of such Person's Affiliates
or Associates, directly or indirectly, has the right to vote or
dispose of or has "beneficial ownership" of (as determined
pursuant to Rule 13d-3 of the General Rules and Regulations under
the Exchange Act and any successor provision thereof), including
pursuant to any agreement, arrangement or understanding, whether
or not in writing; provided, however, that a Person shall not be
deemed the "Beneficial Owner" of, or to "beneficially own," any
security under this subparagraph (ii) as a result of an
agreement, arrangement or understanding to vote such security if
such agreement, arrangement or understanding: (a) arises solely
from a revocable proxy given in response to a public proxy or
consent solicitation made pursuant to, and in accordance with,
the applicable provisions of the General Rules and Regulations
under the Exchange Act, and (b) is not also then reportable by
such Person on Schedule 13D under the Exchange Act (or any
comparable or successor report); or
(iii) which are beneficially owned, directly or
indirectly, by any other Person (or any Affiliate or Associate
thereof) with which such Person (or any of such Person's
Affiliates or Associates) has any agreement, arrangement or
understanding (whether or not in writing), but excluding
customary agreements with and between underwriters and selling
group members with respect to a bona fide public offering of
securities until the expiration of forty days after the date of
such acquisition, for the purpose of acquiring, holding, voting
(except pursuant to a revocable proxy as described in the
provision to subparagraph (ii) of this paragraph (C)) or
disposing of any voting securities of the Company.
4
<PAGE>
(D) "Continuing Director" shall mean (i) any member of the Board
of Directors of the Company, while such Person is a member of the Board of
Directors, who is not an Acquiring Person, or an Affiliate or Associate of an
Acquiring Person, or a representative of an Acquiring Person or of any such
Affiliate or Associate, and was a member of the Board of Directors prior to the
date of this Agreement, or (ii) any Person who subsequently becomes a member of
the Board of Directors, while such Person is a member of the Board of Directors,
who is not an Acquiring Person, or an Affiliate or Associate of an Acquiring
Person, or a representative of an Acquiring Person or of any such Affiliate or
Associate, if such Person's nomination for election or election to the Board of
Directors is recommended or approved by a majority of the Continuing Directors.
(E) "Person" shall mean any individual, firm, corporation,
partnership, limited liability company or other entity.
(F) "Subsidiary" shall mean, with reference to any other Person,
any corporation or other entity of which securities or other ownership
interests having ordinary voting power, in the absence of contingencies, to
elect at least a majority of the directors or other persons performing similar
functions is beneficially owned, directly or indirectly, by such Person, or
which is otherwise controlled by such Person.
(G) "Termination Date" shall mean the date on which the
Employee's employment with the Company is terminated by the Employee for Good
Reason or by the Company for reasons other than Cause, Disability, or death.
3. Change in Control. For purposes of this Agreement, a "Change in
Control" shall mean the occurrence of any one of the following events:
(A) Any Person (other than the Company, any Subsidiary of the
Company, any employee benefit plan or employee stock plan of the Company or of
any Subsidiary of the Company, any dividend reinvestment plan of the Company, or
any
5
<PAGE>
Person or entity organized, appointed, or established by the Company for or
pursuant to the terms of any such plan) alone or together with its Affiliates or
Associates, shall, at any time after the date hereof, become an Acquiring
Person; or
(B) The Continuing Directors cease for any reason to constitute a
majority of the Board of Directors of the Company; or
(C) Directly or indirectly:
(i) the Company shall consolidate with, or merge with and
into, any other Person (other than a Subsidiary of the Company),
and the Company shall not be the continuing or surviving
corporation of such consolidation or merger; or
(ii) any Person (other than Subsidiary of the Company)
shall consolidate with, or merge with or into, the Company, and
the Company shall be the continuing or surviving corporation of
such consolidation or merger, and in connection with such
consolidation or merger, all or part of the outstanding shares of
Common Stock shall be changed into or exchanged for stock or
other securities of any other Person or cash or any other
property; or
(iii) the Company shall sell or otherwise transfer (or one
or more of its Subsidiaries shall sell or otherwise transfer) in
one transaction or a series of related transactions, assets or
earning power aggregating more than fifty percent (50%) of the
assets or earning power of the Company and its Subsidiaries
(taken as a whole) to any Person or Persons (other than the
Company or any Subsidiary of the Company).
4. Termination Following Change in Control. After the occurrence of a
Change in Control, Employee shall be entitled to receive payments and benefits
pursuant to this Agreement if, within two (2) years after the occurrence of a
Change in Control, his employment with the Company is terminated under any of
the following circumstances:
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(A) The Company terminates Employee's employment for reasons
other than "Cause," "Disability," or death. For purposes of this Agreement,
"Cause" shall be defined as:
(i) the willful and continued failure by Employee to
perform substantially his duties with the Company (other than any
such failure resulting from his Disability) for a significant
period of time, after a demand for substantial performance is
delivered to Employee by the Board or a committee thereof, which
specifically identifies the manner in which the Board believes
that Employee has not substantially performed his duties; or
(ii) the willful engaging by Employee in gross misconduct
materially and demonstrably injurious to the Company. No act, or
failure to act, on Employee's part shall be considered "willful"
unless done, or omitted to be done, by Employee in the absence of
good faith and without a reasonable belief that his action or
failure to act was in the best interest of the Company.
For purposes of this Agreement, "Disability" shall mean a physical or
mentaI infirmity which impairs the Employee's ability substantially to perform
his employment duties for the Company and which continues for a period of at
least one hundred and eighty (180) consecutive days.
(B) The Employee terminates his employment with the Company for
"Good Reason." For purposes of this Agreement, "Good Reason" shall mean the
occurrence after a Change in Control of any of the following events or
conditions:
(i) a change in the Employee's status, title, position or
responsibilities (including reporting responsibilities) which, in
the Employee's reasonable judgment, represents an adverse change
from his status, title, position or responsibilities in effect
immediately prior thereto; the assignment to Employee of any
duties or responsibilities
7
<PAGE>
which in the Employee's reasonable judgment, are inconsistent
with his status, title, position or responsibilities; or any
removal of Employee from or failure to reappoint or reelect him
to any of such positions, status, or title except in connection
with the termination of his employment for Disability, Cause, or
death, or by the Employee other than for Good Reason;
(ii) a reduction in the Employee's base salary;
(iii) the Company's requiring the Employee to be based at
any place outside a 30 mile radius from Durham, North Carolina,
except for reasonably required travel on the Company's business
which is not greater than such travel requirements prior to the
Change in Control;
(iv) the failure by the Company to continue in effect any
compensation, welfare or benefit plan in which Employee is
participating at the time of a Change in Control without
substituting plans providing Employee with substantially similar
or greater benefits, or the taking of any action by the Company
which would adversely affect Employee's participation in or
materially reduce Employee's benefits under any of such plans or
deprive Employee of any material fringe benefit enjoyed by
Employee at the time of the Change in Control;
(v) any purported termination of Employee's employment for
Cause or Disability without grounds therefore;
(vi) the insolvency or the filing (by any party including
the Company) of a petition for bankruptcy of the Company;
(vii) any material breach by the Company of any provision
of this Agreement; or
(viii) the failure of the Company to obtain an agreement,
satisfactory to the Employee, from any successor or assign of the
Company to assume and agree to perform this Agreement.
8
<PAGE>
5. Severance Pay and Benefits. In the event that Employee's employment
with the Company terminates under any of the circumstances described in
Paragraph 4 above, Employee shall be entitled to receive all of the following:
(A) all accrued compensation and any pro-rata bonuses Employee
may have earned up to the Termination Date;
(B) a severance payment equal to two and nine-tenths (2.9) times
the amount of the Employee's most recent annual compensation, including the
amount of his most recent annual bonus. The severance payment shall be paid in
thirty-four (34) equal monthly installments without interest, commencing one
month after the Termination Date;
(C) a continuation of benefits. The Company shall maintain in
full force and effect, for two (2) years after the Termination Date, all life
insurance, health, accidental death and dismemberment, and disability plans and
other benefit programs in which Employee is entitled to participate immediately
prior to the Termination Date provided that Employee's continued participation
is possible under the general terms and provisions of such plans and programs.
Employee's continued participation in such plans and programs shall be at no
greater cost to Employee than the cost he bore for such participation
immediately prior to the Termination Date. If Employee's participation in any
such plan or program is barred, the Company shall arrange upon comparable terms,
and at no greater cost to Employee than the cost he bore for such plans and
programs prior to the Termination Date, to provide Employee with benefits
substantially similar to, or greater than, those which he is entitled to receive
under any such plan or program; and
(D) a lump sum payment (or otherwise as specified by Employee to
the extent permitted by the applicable plan) of any and all amounts contributed
to a Company pension or retirement plan which Employee is entitled to under the
terms of any such plan.
6. No Duty to Mitigate. Employee shall not be required to mitigate the
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<PAGE>
amount of any payment provided for in this Agreement by seeking other employment
or otherwise, and no such payment shall be offset or reduced by the amount of
any compensation or benefits provided to the Employee in any subsequent
employment. The severance pay and benefits under this Agreement shall be in lieu
of any other severance pay to which Employee may be entitled from the Company.
7. Stock Options. Upon the occurrence of a Change in Control, all stock
options shall immediately vest and, except as may be required by the nature of
the transaction constituting the Change in Control, the options shall remain
exercisable for the duration of the original option term. If plans or agreements
to which outstanding options have been issued do not provide for immediate
vesting, the Company shall use its best efforts to effect amendments permitting
the acceleration of vesting so long as no material adverse accounting treatment
results to the Company.
8. Fees and Expenses. The Company agrees that if Employee is entitled to
any severance pay or benefits under this Agreement, and the Company or its
survivor disputes the obligation to pay such severance pay or benefits and the
Employee prevails, in whole or in part, the Company or its survivor shall
promptly pay or reimburse Employee for all expense incurred by Employee in such
dispute, including, but not limited to, attorneys fees and associated expenses.
9. Excise Tax Payments.
(A) In the event that any payment or benefit (within the meaning
of Section 280G(b)(2) of the Internal Revenue Code of 1986, as amended (the
"Code")), to the Employee or for his benefit paid or payable or distributed or
distributable pursuant to the terms of this Agreement or otherwise in connection
with, or arising out of, his employment with the Company or a change in
ownership or effective control of the Company or of a substantial portion of its
assets (a "Payment" or "Payments"), would be subject to the excise tax imposed
by Section 4999 of the Code or any interest or penalties are incurred by the
Employee with respect to such excise tax (such excise tax, together with any
such interest and penalties, are hereinafter collectively referred
10
<PAGE>
to as the "Excise Tax"), then the Employee will be entitled to receive an
additional payment (a "Gross-Up Payment") in an amount such that after payment
by the Employee of all taxes (including any interest or penalties, other than
interest and penalties imposed by reason of the Employee's failure to file
timely a tax return or pay taxes shown due on his return, imposed with respect
to such taxes and the Excise Tax), including any Excise Tax imposed upon the
Gross-Up Payment, the Employee retains an amount of the Gross-Up Payment equal
to the Excise Tax imposed upon the Payments.
(B) An initial determination as to whether a Gross-Up Payment is
required pursuant to this Agreement and the amount of such Gross-Up Payment
shall be made at the Company's expense by an accounting firm selected by the
Company and reasonably acceptable to the Employee which is designated as one of
the five largest accounting firms in the United States (the "Accounting Firm").
The Accounting Firm shall provide its determination (the "Determination"),
together with detailed supporting calculations and documentation to the Company
and the Employee within ten days of the Termination Date if applicable, or such
other time as requested by the Company or by the Employee (provided the Employee
reasonably believes that any of the Payments may be subject to the Excise Tax)
and if the Accounting Firm determines that no Excise Tax is payable by the
Employee with respect to a Payment or Payments, it shall furnish the Employee
with an opinion reasonably acceptable to the Employee that no Excise Tax will be
imposed with respect to any such Payment or Payments. Within ten days of the
delivery of the Determination to the Employee, the Employee shall have the right
to dispute the Determination (the "Dispute"). The Gross-Up Payment, if any, as
determined pursuant to this Paragraph 9(B) shall be paid by the Company to the
Employee within five days of the receipt of the Accounting Firm's determination.
The existence of the Dispute shall not in any way affect the Employee's right to
receive the Gross-Up Payment in accordance with the Determination. Upon the
final resolution of a Dispute, the Company shall promptly pay to the Employee
any
11
<PAGE>
additional amount required by such resolution. If there is no Dispute, the
Determination shall be binding, final and conclusive upon the Company and the
Employee subject to the application of Paragraph 9(C) below.
(C) Notwithstanding anything in this Agreement to the contrary,
in the event that, according to the Determination, an Excise Tax will be imposed
on any Payment or Payments, the Company shall pay to the applicable government
taxing authorities as Excise Tax withholding, the amount of the Excise Tax that
the Company has actually withheld from the Payment or Payments.
10. Successors and Assigns.
(A) This Agreement shall be binding upon and shall inure to the
benefit of the Company, its successors, and assigns, and the Company shall
require any successor or assign to expressly assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform it if no such succession or assignment had taken place.
(B) Neither this Agreement nor any right or interest hereunder
shall be assignable or transferable by the Employee, his beneficiaries, or legal
representatives except by will or by the laws of dissent and distribution. This
Agreement shall inure to the benefit of and be enforceable by the Employee's
legal personal representative.
11. Notice. Notice as provided for in this Agreement shall be in writing
and shall be deemed to have been duly given when delivered in person or mailed
by United States Registered Mail, Return Receipt Requested, Postage Pre-Paid,
addressed to the respective addresses last given by each party to the other,
provided that all notices to the Company shall be directed to the attention of
the Board with a copy to Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan,
Attn. Gerald F. Roach, Post Office Box 2611, Raleigh, North Carolina 27602-2611,
counsel for the Company. All notices and communications shall be deemed to have
been received on the date of delivery thereof or on the third business day of
the mailing thereof, except that notice of change of address shall be effective
only upon receipt.
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12. Modifications. No provision of this Agreement may be modified,
waived, or discharged unless such modification, waiver, or discharge is agreed
to in writing signed by the Employee and the Company. No waiver by either party
hereto at any time of any breach by the other party hereto of, or compliance
with, any conditional provision of this Agreement to be performed by such other
party shall be deemed a waiver of similar or dissimilar provisions or conditions
of the same at any prior or subsequent time.
13. Entire Agreement. No agreement or representations, oral or
otherwise, express or implied, with respect to the subject matter hereof have
been made by either party which are not expressly set forth in this Agreement.
14. Governing Law. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of North Carolina.
15. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first written above.
EMBREX, INC.
/s/ Randall L. Marcuson
By:___________________________
President and CEO
ATTEST: Title:________________________
/s/ V. Hayes Fenstermacher
EMPLOYEE:___________________________
/s/ Don T. Seaquist
_____________________
Corporate Secretary
13
Exhibit 10.38
AMENDMENT TO CHANGE IN CONTROL SEVERANCE AGREEMENT
This Amendment to Change in Control Severance Agreement ("Amendment"),
is made and entered into this the 1st day of October, 1998, by and
between Embrex, Inc., including its wholly-owned subsidiary, Embrex Europe
Limited (hereinafter Embrex, Inc. and Embrex Europe Limited are collectively
referred to as "Company"), and V. Hayes Fenstermacher.
WHEREAS the Company and Employee are parties to a Change in Control
Severance Agreement dated May 21, 1996, a copy of which is attached hereto as
Exhibit A (the "Severance Agreement") whereby the Company agrees to provide
Employee with certain payments and benefits in the event that Employee's
employment with the Company is terminated as a result of, or in connection with,
a Change in Control; and
WHEREAS, the Company and Employee desire to amend the Severance
Agreement;
NOW, THEREFORE, in consideration of the mutual agreements herein set
forth, the legal sufficiency and adequacy of which are hereby acknowledged, the
parties agree to amend the Severance Agreement as follows:
1. The Severance Agreement is amended by adding the following
paragraphs:
16. Covenant Not to Compete. Employee acknowledges that by
virtue of his employment with the Company, he shall have access to and
control of confidential and proprietary information concerning the
Company's business and that the Company's business depends, to a
considerable extent, on the individual's skills, efforts, and leadership
of Employee. Accordingly, and in consideration of the Company's
commitments to Employee under this Agreement, Employee expressly
covenants and agrees that for the two (2) year period following the
termination of his employment with the Company (regardless
<PAGE>
of circumstances of such termination) Employee will not, without the
prior consent of the Company:
(a) on Employee's own or another's behalf, whether as an officer,
director, stockholder, partner, associate, owner, employee,
consultant, or otherwise, directly or indirectly:
(i) within the geographical areas set forth below, solicit
or do business which is the same, similar to, or otherwise
in competition with the business engaged in by the Company
from or with persons or entities who are customers of the
Company, who were customers of the Company at any time
during the last year of Employee's employment with the
Company or to whom the Company had made proposals for
business at any time during the last year of Employee's
employment with the Company; or
(ii) offer employment to, or otherwise solicit for
employment, any employee or other person who had been
employed by the Company during the last year of Employee's
employment with the Company.
(b) within the geographical area set forth below, be employed (or
otherwise engaged) in a management capacity, other capacity
providing the same or similar services which Employee provided to
the Company, or any capacity connected with competitive business
activities by any person or entity that engages in the same,
similar, or otherwise competitive business as the Company;
2
<PAGE>
(c) directly or indirectly take action which is primarily intended to
be materially detrimental to the Company's goodwill, name,
business relations, prospects, and operations.
(d) the restrictions set forth in this Paragraph 16 apply to the
following geographical areas:
(i) Research Triangle Park, North Carolina;
(ii) any city, metropolitan area, county (or similar political
subdivisions in foreign countries) in which the Company is
located, or does, or during Employee's employment with the
Company, did business;
(iii) any city, metropolitan area, county (or similar political
subdivisions in foreign countries) in which Employee's
substantial services were provided, or for which Employee
had substantial responsibility, or in which Employee
performed substantial work on the Company's projects while
employed by the Company.
Employee acknowledges that the covenants contained in this
Paragraph 16 are reasonably necessary to protect the legitimate business
interests of the Company and are reasonable with respect to scope, time,
and territory and are described with sufficient accuracy and
definiteness to enable him to understand the scope of the restrictions
imposed upon him. If any of the provisions, clauses, or phrases in this
Paragraph 16 are held unenforceable by a court of competent
jurisdiction, then the parties desire that any such provision, clause or
phrase be "blue-penciled" or rewritten by the court to the extent
necessary to render it enforceable.
17. Income Tax Payment. In the event Employee receives payments
or benefits pursuant to Paragraph 5 of this Agreement and incurs state
or federal
3
<PAGE>
personal income tax liability as a result of the receipt of such
payments or benefits, then Employee is entitled to receive an
additional payment (the "Income Tax Payment") in an amount equal to the
state and federal personal income tax assessed on such payments or
benefits. Said Income Tax Payment shall be made prior to any calculation
of the Excise Tax Payment required by Paragraph 9 of this Agreement.
Said Income Tax Payment shall be paid to Employee by the Company by
April 15 of the year following each year in which such tax liability
occurs.
2. Except as herein set forth, the Severance Agreement is not
modified or amended and the parties hereto reaffirm and agree to all of
the terms and provisions of the Severance Agreement, as amended, in all
other respects.
IN WITNESS WHEREOF, the parties have executed this Amendment to Change
in Control Severance Agreement as of the day and year first written above.
EMBREX, INC.
/s/ Randall L. Marcuson
By: _______________________________
President and CEO
Title: ____________________________
ATTEST:
/s/ Don T. Seaquist
- ----------------------
Corporate Secretary
/s/ V. Hayes Fenstermacher
----------------------------------
V. Hayes Fenstermacher
4
EXHIBIT 10.39
January 21, 1999
Mr. Brian Hrudka
214 E. Avondale Drive
Greensboro, NC 27403-1046
Dear Brian:
It is our pleasure to offer you employment with EMBREX as Vice
President, Global Commercial Development, effective on March 15, 1999,
contingent upon your submitting to and obtaining a negative result from a
chemical screening for drugs and alcohol. Please call Cathy Brown in Human
Resources to schedule your sample collection. Your starting compensation will be
at the rate of $12,500.00 per month. You will be entitled to a sign on bonus of
$15,000.00 should you choose to accept this position.
Upon commencing employment at EMBREX, you will be entitled to receive an
Incentive Stock Option for Thirty five thousand (35,000) shares of EMBREX Common
Stock at an option price per share at fair market value on date of grant. These
options will vest equally over four years from the date of grant. This stock
option is subject to the approval and grant by the Compensation Committee of the
EMBREX Board of Directors at their next scheduled meeting.
Regular, full-time employees of EMBREX are entitled to participate in
all company-sponsored benefit plans. Each plan has terms and conditions
regarding enrollment, which you will discuss with our Human Resources office on
your first day of employment. A booklet describing our current employee benefits
and plan highlights is enclosed for your information. Please review the medical,
dental, LTD and supplemental life plans and make your decision about which plans
you would desire to participate in. Also enclosed is an information package
about our 401(k) retirement savings plan. You are eligible to enroll on your
first day of employment and will need to make several decisions about your
employee and employer investment options, even if you elect not to participate.
Please review the information, complete the enrollment form and beneficiary
designation (even if you elect not to contribute) and bring to your orientation.
As a relocating employee, and upon presentation of receipts, we will
reimburse you or a third party for actual and reasonable relocation expenses
including: relocation of household effects and temporary living expenses up to
30 days. We will reimburse you or a third party for expenses associated with the
home sale/purchase as follows: real estate and other fees (except discount
points, association fees, prepaid items (escrow), memberships). You are also
entitled to a direct incidental cash allowance of $2,000, which is fully
taxable. You may submit a check request at any time during the relocation
process, to receive this payment. Since the Company's relocation policy is a
personal arrangement between you and the Company, you should not discuss it with
or make copies of this agreement available to anyone outside your immediate
family. This relocation offer has an expiration date of one year from date of
hire.
Your orientation is scheduled at 9:00 a.m. on March 16, 1999. For your
orientation, you will need your authorization to work in the U.S. (driver's
license and social security card or passport), the full names, birth dates, and
social security numbers of any dependents, and a clean copy of your current
resume. You should also bring a copy of your current optical prescription (if
any), if you want prescription safety glasses.
Enclosed is a standard employment agreement, which describes an
employee's relationship with the Company. This letter and its enclosures
constitute our initial employment offer. After you have read them, you should
obtain answers to any remaining questions you may have. Please sign both copies
of this letter, retain one for your personal files and return one to the Company
for our records.
We hope you find our offer attractive. We would like to have your
response by February 5, 1999.
Sincerely yours,
/s/ Randall L. Marcuson
Randall L. Marcuson
President and CEO
Agreed and accepted:
/s/ Brian C. Hrudka February 3, 1999
__________________________ Date _________________________
<PAGE>
GENERAL PROVISIONS TO
EMPLOYMENT AGREEMENT BETWEEN
EMBREX, INC. AND
Brian Hrudka
PERSONAL AND CONFIDENTIAL
1. EMPLOYMENT
EMBREX hereby employs Employee and Employee accepts such employment and
agrees to perform for EMBREX the duties described herein, faithfully and to the
best of his/her ability.
2. TERM OF EMPLOYMENT
Employee's employment hereunder shall commence on the date noted on the
cover letter and shall continue at the pleasure of the Company. A probationary
period of 180 days shall be observed, so long as Employee is performing at a
satisfactory level. At the conclusion of probationary period, Employee shall be
given a performance evaluation.
3. DUTIES
Employee agrees to devote full time and attention to the business and
affairs of EMBREX, to use his/her best efforts to promote the interests of
EMBREX, to hold such offices in EMBREX to which elected or appointed, and to
perform such tasks, commensurate with the position, as are assigned by your
manager or other designated individuals.
4. COMPENSATION
4.1 EMBREX will pay Employee, for services rendered hereunder, a salary
separately agreed to, payable in equal monthly installments. The Company will
review this base salary on an annual basis and will determine in its sole
discretion whether to provide a merit increase to the base salary.
4.2 The parties hereto agree that Employee shall be entitled to participate
in all retirement, profit-sharing, compensation, insurance or other benefit
plans generally available to EMBREX employees which are presently in effect or
which may be established during the term hereof.
4.3 The terms and conditions of employment (salary, equity and/or other
forms of compensation) are strictly a personal matter between Employee and the
Company and will be shared only with Employee's supervisors having salary
administration responsibility.
5. EXPENSES
Upon commencement of employment, Employee will be reimbursed by EMBREX for
all approved expenses which are reasonably incurred thereafter during the
performance of duties in furtherance of or in connection with the business of
EMBREX or its subsidiaries.
6. FAMILY AND MEDICAL LEAVE
Employee shall be entitled to the benefits provided by the Family and
Medical Leave Act of 1993, as amended (the "Act"), upon completing one year of
service as a regular, full-time employee. During any period in which Employee
does not qualify as an eligible employee or Employee exceeds the period of leave
authorized in the Act, EMBREX may, if it so elects, declare the Employee's
employment terminated on thirty (30) days notice given in accordance with the
provisions hereof.
7. EMPLOYEE NOT TO WORK FOR OTHERS
<PAGE>
7.1 During the term of this Agreement, Employee agrees not to work for any
other business firm, whether competitive with EMBREX or not, without written
consent of the ranking Administrative officer.
7.2 Upon termination of Employee's employment, until the second anniversary
of the date of such termination, Employee agrees that, regardless of the date or
cause of termination of employment or whether the termination shall be with or
without cause, (s)he will not, directly or indirectly, either as principal,
agent, officer, director, employee, or in any similar capacity, engage in or
perform consulting or any other services for, or have a financial interest in,
or own of record or beneficially five percent (5%) or more of any class of
equity security (or any class of securities convertible to an equity security),
in an entity which competes with any actual or planned product or service of
EMBREX or is engaged in a research and/or development program intended to result
in a product or service competitive with an actual or planned product or service
of EMBREX.
8. TECHNIQUES, DISCOVERIES, AND INVENTIONS
8.1 Employee agrees that any and all manufacturing techniques, inventions,
discoveries or improvements in the products or processes or the merchandising
thereof, of EMBREX, which Employee may create, devise, make, discover,
introduce, or invent while employed by EMBREX shall belong to and be the sole
property of EMBREX. Employee agrees promptly and fully to disclose the same to
EMBREX.
8.2 It is recognized between EMBREX and Employee that EMBREX has acquired
and developed, and will continue to develop formulae, techniques, plans,
processes, procedures, devices and materials, and lists of customers and their
particular requirements which may pertain to many and varied products and
equipment, which are secret and confidential in character and are, and will
continue to be, of great and unique value to it, which are now and will continue
to be, used in its business (hereinafter referred to as "secret information").
Much of such secret information existing on the date hereof is known to
Employee, by reason of his/her position, and future secret information on EMBREX
will be disclosed to Employee, as required for proper performance of duties
hereunder and other duties as (s)he may have to EMBREX.
8.3 Employee agrees that all such secret information hertofore or hereafter
received will be kept and maintained as confidential and in complete secrecy,
and Employee shall not disclose at any time, either orally or in writing, or
otherwise, in any manner, directly or indirectly, any knowledge or information
Employee has acquired or any trade secret relating to EMBREX or its
subsidiaries, with the exception of disclosure of such information: (i) to
employees of EMBREX who have a need to know it to properly carry out their
duties on behalf of EMBREX and (ii) in the ordinary course of EMBREX business to
customers, suppliers, subcontractors and parties similarly situated.
8.4 Employee agrees that, while an employee of EMBREX and for two years
thereafter, at least fifteen days before release of publication of any
scientific paper or contributions to periodicals dealing with or making
reference to a subject of interest to EMBREX, Employee will make available to
EMBREX a copy of what is to be published.
9. DELIVERY OF DATA
Employee agrees to deliver to EMBREX promptly at the termination of
employment or at any other time EMBREX may request, all memoranda, notes,
records, sketches, plans, or other documents which are in Employee's possession
or under his/her control concerning costs, uses, application or purchases of
products made for or by EMBREX (or any subsidiary, affiliate, or licensee of
EMBREX) or any product, process, formula, or manufacturing method used,
developed, produced, or investigated by EMBREX (or any subsidiary, affiliate or
licensee of EMBREX), during his/her employment hereunder.
10. INJUNCTIVE RELIEF
Employee agrees that the remedy at law for any breach of the provisions of
paragraphs 7, 8, and/or 9 of this Agreement will be inadequate and that EMBREX
shall be entitled to injunctive relief in addition to any other remedy they
might have as so ordered by a Court.
<PAGE>
11. SEVERABILITY
The provisions of paragraphs 7, 8, 9, and 10 are severable, and in the event
any portion or portions thereof are held to be invalid, such invalidity shall
not affect the validity of the remaining portion or portions.
12. SEVERANCE
If Employer terminates Employee's employment under this Agreement without
cause, then Employee shall be entitled to receive from Employer an amount equal
to twelve months of Employee's then current salary, payable in twelve equal
monthly installments, without interest, commencing one month after termination.
13. NOTICES
All notices, requests, demands, and other communication hereunder shall be
in writing and shall be deemed to have been duly given if mailed by certified or
registered mail, return receipt requested, to the respective parties at their
addresses appearing above or their last known addresses.
14. ASSIGNMENT
The Agreement shall not be assignable by either party except pursuant to a
merger, consolidation or other reorganization of EMBREX.
15. SUCCESSORS IN INTEREST
This Agreement shall be binding on the parties hereto, their heirs,
executors, administrators, successors (whether by merger, consolidation, or
otherwise), and assigns. The parties hereby agree for themselves, their heirs,
executors, administrators, successors, and assigns, to execute any instruments
and to perform any acts which may be necessary or proper to carry out the
purposes of the Agreement, but the failure to execute such instruments will not
affect the rights of any party hereto or the obligations of any estate, as
provided in this Agreement.
16. LAW OF THE AGREEMENT
This Agreement shall be subject to and governed by the laws of the State of
North Carolina. The provisions of this Agreement are severable, and in the event
any portion or portions hereof are held to be invalid, such invalidity shall not
affect the validity of the remaining portion or portions. If any court or other
competent authority shall hold a portion of this Agreement invalid, unless
modified in a manner described by the court or competent authority, that portion
shall be deemed modified accordingly.
CHANGE IN CONTROL SEVERANCE AGREEMENT
THIS CHANGE IN CONTROL SEVERANCE AGREEMENT ("Agreement") is made and
entered into this 24th day of March, 1999 by and between Embrex, Inc.
("Company"), a North Carolina corporation, and BRIAN C. HRUDKA ("Employee").
WHEREAS, the Board of Directors ("Board") of the Company considers the
maintenance of a vital management group to be essential in protecting and
enhancing the best interests of the Company and its shareholders;
WHEREAS, the Board recognizes that the possibility of a Change in
Control (as hereinafter defined) exists and that the threat of or the occurrence
of a Change in Control can result in significant distractions of its key
management personnel because of the uncertainties inherent in such a situation;
WHEREAS, the Board has determined that it is in the best interest of the
Company and its shareholders to ensure the Employee's continued dedication and
efforts on behalf of the Company; and
WHEREAS, in order to induce the Employee to remain in the employ of the
Company, particularly in the event of a threat of or the occurrence of a Change
in Control and to dispel any concerns that the Employee may have about taking an
active part in the defense against an inappropriate attempt to bring about a
Change in Control of the Company, the Company desires to enter into this
Agreement with the Employee to provide the Employee with certain payments and
benefits in the event that his employment with the Company is terminated as a
result of, or in connection with, a Change in Control.
NOW, THEREFORE, in consideration of the mutual agreements herein set
forth, the legal sufficiency and adequacy of which are hereby acknowledged, the
parties agree as follows:
1. Employment. Employee acknowledges that he is employed with the
Company pursuant to an Employment Agreement dated March 15, 1999 and hereby
agrees that to the extent any provision of this Agreement should be contrary to
any provision of the Employment Agreement, the terms of this Agreement shall
control.
2. Definitions. For purposes of this Agreement, the following terms have
the meanings indicated:
(A) "Acquiring Person," shall mean any Person (as such term is
hereinafter defined) who or which, together with all Affiliates (as such term is
hereinafter defined) and Associates (as such term is hereinafter defined) of
such Person, shall be the Beneficial Owner (as such term is hereinafter defined)
of thirty-three percent (33%) or more of the shares of Common Stock then
outstanding, but shall not include (i) the Company, (ii) any Subsidiary of the
Company, (iii) any employee benefit plan or employee stock plan of the Company
or of any Subsidiary of the Company, (iv) any dividend reinvestment plan of the
Company, or (v) any Person or entity organized, appointed, or established by the
Company for or pursuant to the terms of such plan. Notwithstanding the
foregoing, no Person shall become an "Acquiring Person" as the result of an
acquisition of Common Stock by the Company which, by reducing the number of
shares outstanding, increases the proportionate number of shares beneficially
owned by such Person to thirty-three percent (33%) or more of the Common Stock
of the Company then outstanding; provided, however, that if a Person shall
become the Beneficial Owner of thirty-three (33%) or more of the Common Stock of
the
<PAGE>
Company, then outstanding by reason of such an acquisition and shall, after
such acquisition, become the Beneficial Owner of any additional shares of Common
Stock, then such Person shall be deemed to be an "Acquiring Person." In
addition, notwithstanding the foregoing, if the Board of Directors of the
Company determines in good faith that a Person who would otherwise be an
"Acquiring Person," as defined pursuant to the foregoing provisions of this
Paragraph (A), has become such inadvertently, and such Person divests as
promptly as practicable a sufficient number of shares of Common Stock so that
such Person would no longer be an "Acquiring Person" as defined pursuant to the
foregoing provisions of this Paragraph (A), then such Person shall not be deemed
to be an "Acquiring Person" for any purposes of this Agreement.
(B) "Affiliate" and "Associate" shall have the respective
meanings ascribed to such terms in Rule 12b-2 of the General Rules and
Regulations under the Securities Exchange Act of 1934, as amended (the "Exchange
Act").
(C) A Person shall be deemed the "Beneficial Owner" of and shall
be deemed to "beneficially own," any securities:
(i) which such Person or any of such Person's Affiliates
or Associates, directly or indirectly, has the right or
obligation to acquire (whether such right is exercisable
immediately or only after the passage of time) pursuant to any
agreement, arrangement or understanding (whether or not in
writing) or upon the exercise of conversion rights, exchange
rights, rights, warrants or options, or otherwise; provided,
however, that a Person shall not be deemed the "Beneficial Owner"
of, or to "beneficially own," (a) securities tendered pursuant to
a tender or exchange offer made by such Person or any of such
Person's Affiliates or Associates until such tendered securities
are accepted for purchase or exchange, or (b) at any time prior
to the occurrence of a Triggering Event, securities issuable upon
exercise of the Rights ("Triggering Event" and "Rights" shall
have the respective meanings ascribed to such terms as set forth
in the Rights Agreement between Embrex, Inc. and Branch Banking &
Trust Company as Rights Agent, dated as of March 21, 1996 and as
in effect on the date hereof ("Rights Agreement")), or (c) from
and after the occurrence of a Triggering Event, securities
issuable upon exercise of Rights which were acquired by such
Person or any of such Person's Affiliates or Associates prior to
the Distribution Date (as defined in the Rights Agreement) or
pursuant to Section 3(a) or Section 22 of the Rights Agreement
(the "Original Rights") or pursuant to Section 11(i) of the
Rights Agreement in connection with an adjustment made with
respect to any Original Rights;
(ii) which such Person or any of such Person's Affiliates
or Associates, directly or indirectly, has the right to vote or
dispose of or has "beneficial ownership" of (as determined
pursuant to Rule 13d-3 of the General Rules and Regulations under
the Exchange Act and any successor provision thereof), including
pursuant to any agreement, arrangement or understanding, whether
or not in writing; provided, however, that a Person shall not be
deemed the "Beneficial Owner" of, or to "beneficially own," any
security under this subparagraph (ii) as a result of an
agreement, arrangement or understanding to vote such security if
such agreement, arrangement or understanding; (a) arises
2
<PAGE>
solely from a revocable proxy given in response to a public proxy
or consent solicitation made pursuant to, and in accordance with,
the applicable provisions of the General Rules and Regulations
under the Exchange Act, and (b) is not also then reportable by
such Person on Schedule 13D under the Exchange Act (or any
comparable or successor report); or
(iii) which are beneficially owned, directly or
indirectly, by any other Person (or any Affiliate or Associate
thereof) with which such Person (or any of such Person's
Affiliates or Associates) has any agreement, arrangement or
understanding (whether or not in writing), but excluding
customary agreements with and between underwriters and selling
group members with respect to a bona fide public offering of
securities until the expiration of forty days after the date of
such acquisition, for the purpose of acquiring, holding, voting
(except pursuant to a revocable proxy as described in the
provision to subparagraph (ii) of this paragraph (C)) or
disposing of any voting securities of the Company.
(D) "Continuing Director" shall mean (i) any member of the Board
of Directors of the Company, while such Person is a member of the Board of
Directors, who is not an Acquiring Person, or an Affiliate or Associate of an
Acquiring Person, or a representative of an Acquiring Person or of any such
Affiliate or Associate, and was a member of the Board of Directors prior to the
date of this Agreement, or (ii) any Person who subsequently becomes a member of
the Board of Directors, while such Person is a member of the Board of Directors,
who is not an Acquiring Person, or an Affiliate or Associate of an Acquiring
Person, or a representative of an Acquiring Person or of any such Affiliate or
Associate, if such Person's nomination for election or election to the Board of
Directors is recommended or approved by a majority of the Continuing Directors.
(E) "Person" shall mean any individual, firm, corporation,
partnership, limited liability company or other entity.
(F) "Subsidiary" shall mean, with reference to any other Person,
any corporation or other entity of which securities or other ownership interests
having ordinary voting power, in the absence of contingencies, to elect at least
a majority of the directors or other persons performing similar functions is
beneficially owned, directly or indirectly, by such Person, or which is
otherwise controlled by such Person.
(G) "Termination Date" shall mean the date on which the
Employee's employment with the Company is terminated by the Employee for Good
Reason or by the Company for reasons other than Cause, Disability, or death.
3. Change in Control. For purposes of this Agreement, a "Change in
Control" shall mean the occurrence of any one of the following events:
(A) Any Person (other than the Company, any Subsidiary of the
Company, any employee benefit plan or employee stock plan of the Company or of
any Subsidiary of the Company, any dividend reinvestment plan of the Company, or
any Person or entity organized, appointed, or established by the Company for or
pursuant to the terms of any such plan) alone or together with its Affiliates or
Associates, shall, at any time after the date hereof, become an Acquiring
Person; or
3
<PAGE>
(B) The Continuing Directors cease for any reason to constitute a
majority of the Board of Directors of the Company; or
(C) Directly or indirectly:
(i) the Company shall consolidate with, or merge with and
into, any other Person (other than a Subsidiary of the Company),
and the Company shall not be the continuing or surviving
corporation of such consolidation or merger; or
(ii) any Person (other than Subsidiary of the Company)
shall consolidate with, or merge with or into, the Company, and
the Company shall be the continuing or surviving corporation of
such consolidation or merger, and in connection with such
consolidation or merger, all or part of the outstanding shares of
Common Stock shall be changed into or exchanged for stock or
other securities of any other Person or cash or any other
property; or
(iii) the Company shall sell or otherwise transfer (or one
or more of its Subsidiaries shall sell or otherwise transfer) in
one transaction or a series of related transactions, assets or
earning power aggregating more than fifty percent (50%) of the
assets or earning power of the Company and its Subsidiaries
(taken as a whole) to any Person or Persons (other than the
Company or any Subsidiary of the Company).
4. Termination Following Change in Control. After the occurrence of a
Change in Control, Employee shall be entitled to receive payments and benefits
pursuant to this Agreement if, within two (2) years after the occurrence of a
Change in Control, his employment with the Company is terminated under any of
the following circumstances:
(A) The Company terminates Employee's employment for reasons
other than "Cause," "Disability," or death. For purposes of this Agreement,
"Cause" shall be defined as:
(i) the willful and continued failure by Employee to
perform substantially his duties with the Company (other than any
such failure resulting from his Disability) for a significant
period of time, after a demand for substantial performance is
delivered to Employee by the Board or a committee thereof, which
specifically identifies the manner in which the Board believes
that Employee has not substantially performed his duties; or
(ii) the willful engaging by Employee in gross misconduct
materially and demonstrably injurious to the Company. No act, or
failure to act, on Employee's part shall be considered "willful"
unless done, or omitted to be done, by Employee in the absence of
good faith and without a reasonable belief that his action or
failure to act was in the best interest of the Company.
For purposes of this Agreement, "Disability" shall mean a physical or
mental infirmity which impairs the Employee's ability substantially to perform
his employment duties for the Company and which continues for a period of at
least one hundred and eighty (180) consecutive days.
4
<PAGE>
(B) The Employee terminates his employment with the Company for
"Good Reason." For purposes of this Agreement, "Good Reason" shall mean the
occurrence after a Change in Control of any of the following events or
conditions:
(i) a change in the Employee's status, title, position or
responsibilities (including reporting responsibilities) which, in
the Employee's reasonable judgment, represents an adverse change
from his status, title, position or responsibilities in effect
immediately prior thereto; the assignment to Employee of any
duties or responsibilities which in the Employee's reasonable
judgment, are inconsistent with his status, title, position or
responsibilities; or any removal of Employee from or failure to
reappoint or reelect him to any of such positions, status, or
title except in connection with the termination of his employment
for Disability, Cause, or death, or by the Employee other than
for Good Reason,
(ii) a reduction in the Employee's base salary;
(iii) the Company's requiring the Employee to be based at
any place outside a 30 mile radius from Durham, North Carolina,
except for reasonably required travel on the Company's business
which is not greater than such travel requirements prior to the
Change in Control;
(iv) the failure by the Company to continue in effect any
compensation, welfare or benefit plan in which Employee is
participating at the time of a Change in Control without
substituting plans providing Employee with substantially similar
or greater benefits, or the taking of any action by the Company
which would adversely affect Employee's participation in or
materially reduce Employee's benefits under any of such plans or
deprive Employee of any material fringe benefit enjoyed by
Employee at the time of the Change in Control;
(v) any purported termination of Employee's employment for
Cause or Disability without grounds therefore;
(vi) the insolvency or the filing (by any party including
the Company) of a petition for bankruptcy of the Company;
(vii) any material breach by the Company of any provision
of this Agreement; or
(viii) the failure of the Company to obtain an agreement,
satisfactory to the Employee, from any successor or assign of the
Company to assume and agree to perform this Agreement.
5. Severance Pay and Benefits. In the event that Employee's employment
with the Company terminates under any of the circumstances described in
Paragraph 4 above, Employee shall be entitled to receive all of the following:
(A) all accrued compensation and any pro-rata bonuses Employee
may have earned up to the Termination Date;
5
<PAGE>
(B) a severance payment equal to two and nine-tenths (2.9) times
the amount of the Employee's most recent annual compensation, including the
amount of his most recent annual bonus. The severance payment shall be paid in
thirty-four (34) equal monthly installments without interest, commencing one
month after the Termination Date;
(C) a continuation of benefits. The Company shall maintain in
full force and effect, for two (2) years after the Termination Date, all life
insurance, health, accidental death and dismemberment, and disability plans and
other benefit programs in which Employee is entitled to participate immediately
prior to the Termination Date provided that Employee's continued participation
is possible under the general terms and provisions of such plans and programs.
Employee's continued participation in such plans and programs shall be at no
greater cost to Employee than the cost he bore for such participation
immediately prior to the Termination Date. If Employee's participation in any
such plan or program is barred, the Company shall arrange upon comparable terms,
and at no greater cost to Employee than the cost he bore for such plans and
programs prior to the Termination Date, to provide Employee with benefits
substantially similar to, or greater than, those which he is entitled to receive
under any such plan or program; and
(D) a lump sum payment (or otherwise as specified by Employee to
the extent permitted by the applicable plan) of any and all amounts contributed
to a Company pension or retirement plan which Employee is entitled to under the
terms of any such plan.
6. No Duty to Mitigate. Employee shall not be required to mitigate the
amount of any payment provided for in this Agreement by seeking other employment
or otherwise, and no such payment shall be offset or reduced by the amount of
any compensation or benefits provided to the Employee in any subsequent
employment. The severance pay and benefits under this Agreement shall be in lieu
of any other severance pay to which Employee may be entitled from the Company.
7. Stock Options. Upon the occurrence of a Change in Control, all stock
options shall immediately vest and, except as may be required by the nature of
the transaction constituting the Change in Control, the options shall remain
exercisable for the duration of the original option term. If plans or agreements
to which outstanding options have been issued do not provide for immediate
vesting, the Company shall use its best efforts to effect amendments permitting
the acceleration of vesting so long as no material adverse accounting treatment
results to the Company.
8. Fees and Expenses. The Company agrees that if Employee is entitled to
any severance pay or benefits under this Agreement, and the Company or its
survivor disputes the obligation to pay such severance pay or benefits and the
Employee prevails, in whole or in part, the Company or its survivor shall
promptly pay or reimburse Employee for all expense incurred by Employee in such
dispute, including, but not limited to, attorneys fees and associated expenses.
9. Excise Tax Payments.
(A) In the event that any payment or benefit (within the meaning
of Section 28OG(b)(2) of the Internal Revenue Code of 1986, as amended (the
"Code")), to the Employee or for his benefit paid or payable or distributed or
distributable pursuant to the terms of this Agreement or otherwise in connection
with, or arising out of, his employment with the Company
6
<PAGE>
or a change in ownership or effective control of the Company or of a substantial
portion of its assets (a "Payment" or "Payments"), would be subject to the
excise tax imposed by Section 4999 of the Code or any interest or penalties are
incurred by the Employee with respect to such excise tax (such excise tax,
together with any such interest and penalties, are hereinafter collectively
referred to as the "Excise Tax"), then the Employee will be entitled to receive
an additional payment (a "Gross-Up Payment") in an amount such that after
payment by the Employee of all taxes (including any interest or penalties, other
than interest and penalties imposed by reason of the Employee's failure to file
timely a tax return or pay taxes shown due on his return, imposed with respect
to such taxes and the Excise Tax), including any Excise Tax imposed upon the
Gross-Up Payment, the Employee retains an amount of the Gross-Up Payment equal
to the Excise Tax imposed upon the Payments.
(B) An initial determination as to whether a Gross-Up Payment is
required pursuant to this Agreement and the amount of such Gross-Up Payment
shall be made at the Company's expense by an accounting firm selected by the
Company and reasonably acceptable to the Employee which is designated as one of
the five largest accounting firms in the United States (the "Accounting Firm").
The Accounting Firm shall provide its determination (the "Determination"),
together with detailed supporting calculations and documentation to the Company
and the Employee within ten days of the Termination Date if applicable, or such
other time as requested by the Company or by the Employee (provided the Employee
reasonably believes that any of the Payments may be subject to the Excise Tax)
and if the Accounting Firm determines that no Excise Tax is payable by the
Employee with respect to a Payment or Payments, it shall furnish the Employee
with an opinion reasonably acceptable to the Employee that no Excise Tax will be
imposed with respect to any such Payment or Payments. Within ten days of the
delivery of the Determination to the Employee, the Employee shall have the right
to dispute the Determination (the "Dispute"). The Gross-Up Payment, if any, as
determined pursuant to this Paragraph 9(B) shall be paid by the Company to the
Employee within five days of the receipt of the Accounting Firm's determination.
The existence of the Dispute shall not in any way affect the Employee's right to
receive the Gross-Up Payment in accordance with the Determination. Upon the
final resolution of a Dispute, the Company shall promptly pay to the Employee
any additional amount required by such resolution. If there is no Dispute, the
Determination shall be binding, final and conclusive upon the Company and the
Employee subject to the application of Paragraph 9(C) below.
(C) Notwithstanding anything in this Agreement to the contrary,
in the event that, according to the Determination, an Excise Tax will be imposed
on any Payment or Payments, the Company shall pay to the applicable government
taxing authorities as Excise Tax withholding, the amount of the Excise Tax that
the Company has actually withheld from the Payment or Payments.
10. Successors and Assigns.
(A) This Agreement shall be binding upon and shall inure to the
benefit of the Company, its successors, and assigns, and the Company shall
require any successor or assign to expressly assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform it if no such succession or assignment had taken place.
(B) Neither this Agreement nor any right or interest hereunder
shall be assignable or transferable by the Employee, his beneficiaries, or legal
representatives except
7
<PAGE>
by will or by the laws of dissent and distribution. This Agreement shall inure
to the benefit of and be enforceable by the Employee's legal personal
representative.
11. Notice. Notice as provided for in this Agreement shall be in writing
and shall be deemed to have been duly given when delivered in person or mailed
by United States Registered Mail, Return Receipt Requested, Postage Pre-Paid,
addressed to the respective addresses last given by each party to the other,
provided that all notices to the Company shall be directed to the attention of
the Board with a copy to Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan,
Attn. Gerald F. Roach, Post Office Box 2611, Raleigh, North Carolina 27602-2611,
counsel for the Company. All notices and communications shall be deemed to have
been received on the date of delivery thereof or on the third business day of
the mailing thereof, except that notice of change of address shall be effective
only upon receipt.
12. Modifications. No provision of this Agreement may be modified,
waived, or discharged unless such modification, waiver, or discharge is agreed
to in writing signed by the Employee and the Company. No waiver by either party
hereto at any time of any breach by the other party hereto of, or compliance
with, any conditional provision of this Agreement to be performed by such other
party shall be deemed a waiver of similar or dissimilar provisions or conditions
of the same at any prior or subsequent time.
13. Entire Agreement. No agreement or representations, oral or
otherwise, express or implied, with respect to the subject matter hereof have
been made by either party which are not expressly set forth in this Agreement.
14. Governing Law. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of North Carolina.
15. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
16. Covenant Not to Compete. Employee acknowledges that by virtue of his
employment with the Company, he shall have access to and control of confidential
and proprietary information concerning the Company's business and that the
Company's business depends, to a considerable extent, on the individual's
skills, efforts, and leadership of Employee. Accordingly, and in consideration
of the Company's commitments to Employee under this Agreement, Employee
expressly covenants and agrees that for the two (2) year period following the
termination of his employment with the Company (regardless of circumstances of
such termination) Employee will not, without the prior consent of the Company:
(A) on Employee's own or another's behalf, whether as an officer,
director, stockholder, partner, associate, owner, employee, consultant, or
otherwise, directly or indirectly:
(i) within the geographical areas set forth below, solicit
or do business which is the same, similar to, or otherwise in competition with
the business engaged in by the Company from or with persons or entities who are
customers of the Company, who were customers of the Company at any time during
the last year of Employee's employment with the Company or to whom the Company
had made proposals for business at any time during the last year of Employee's
employment with the Company; or
8
<PAGE>
(ii) offer employment to, or otherwise solicit for
employment, any employee or other person who had been employed by the Company
during the last year of Employee's employment with the Company.
(B) within the geographical area set forth below, be employed (or
otherwise engaged) in a management capacity, other capacity providing the same
or similar services which Employee provided to the Company, or any capacity
connected with competitive business activities by any person or entity that
engages in the same, similar, or otherwise competitive business as the Company;
(C) directly or indirectly take action which is primarily
intended to be materially detrimental to the Company's goodwill, name, business
relations, prospects, and operations.
(D) the restrictions set forth in this Paragraph 16 apply to the
following geographical areas:
(i) Research Triangle Park, North Carolina;
(ii) any city, metropolitan area, county (or similar
political subdivisions in foreign countries) in which the Company is located, or
does, or during Employee's employment with the Company, did business;
(iii) any city, metropolitan area, county (or similar
political subdivisions in foreign countries) in which Employee's substantial
services were provided, or for which Employee had substantial responsibility, or
in which Employee performed substantial work on the Company's projects while
employed by the Company.
Employee acknowledges that the covenants contained in this Paragraph 16
are reasonably necessary to protect the legitimate business interests of the
Company and are reasonable with respect to scope, time, and territory and are
described with sufficient accuracy and definiteness to enable him to understand
the scope of the restrictions imposed upon him. If any of the provisions,
clauses, or phrases in this Paragraph 16 are held unenforceable by a court of
competent jurisdiction, then the parties desire that any such provision, clause
or phrase be "blue-penciled" or rewritten by the court to the extent necessary
to render it enforceable.
17. Income Tax Payment. In the event Employee receives payments or
benefits pursuant to Paragraph 5 of this Agreement and incurs state or federal
personal income tax liability as a result of the receipt of such payments or
benefits, then Employee is entitled to receive an additional payment (the
"Income Tax Payment") in an amount equal to the state and federal personal
income tax assessed on such payments or benefits. Said Income Tax Payment shall
be made prior to any calculation of the Excise Tax Payment required by Paragraph
9 of this Agreement. Said Income Tax Payment shall be paid to Employee by the
Company by April 15 of the year following each year in which such tax liability
occurs.
9
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first written above.
EMBREX, INC.
By: /s/ Don T. Seaquist
-----------------------------------
ATTEST: Title: V.P. Finance and Administration
EMPLOYEE:
/s/ Don T. Seaquist /s/ Brian C. Hrudka
- ---------------------------- --------------------------------------
Corporate Secretary BRIAN C. HRUDKA
10
EXHIBIT 21
EMBREX, INC.
SUBSIDIARIES
Name Jurisdiction of Incorporation
- ---- ------------------------------
Embrex Europe Limited United Kingdom
Embrex Sales, Inc. North Carolina
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion in the Annual Report (Form 10-K) of Embrex, Inc. of
our report dated March 1, 1999 with respect to the consolidated financial
statements of Embrex, Inc. and subsidiaries and of our report dated March 30,
1999 with respect to the financial statements of Embrex, Inc. Employee Stock
Purchase Plan.
We also consent to the incorporation by reference in the Registration Statement
on Form S-3 (No. 333-18231) and the Registration Statements on Form S-8 (Nos.
33-51582, 33-63318, 333-04109, and 333-56279) of our report dated March 1, 1999
with respect to the consolidated financial statements of Embrex, Inc. and
subsidiaries included in the Annual Report (Form 10-K) for the year ended
December 31, 1998.
We also consent to the incorporation by reference in the Registration Statement
on Form S-8 (No. 33-63318) of our report dated March 30, 1999 with respect to
the consolidated financial statements of Embrex, Inc. Employee Stock Purchase
Plan included in the Annual Report (Form 10-K) for the year ended December 31,
1998.
/s/ Ernst & Young LLP
Raleigh, North Carolina
March 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 7,442
<SECURITIES> 0
<RECEIVABLES> 3,454
<ALLOWANCES> 0
<INVENTORY> 2,944
<CURRENT-ASSETS> 13,840
<PP&E> 29,915
<DEPRECIATION> (18,765)
<TOTAL-ASSETS> 24,990
<CURRENT-LIABILITIES> 5,541
<BONDS> 644
0
0
<COMMON> 83
<OTHER-SE> 18,722
<TOTAL-LIABILITY-AND-EQUITY> 24,990
<SALES> 28,615
<TOTAL-REVENUES> 28,615
<CGS> 13,341
<TOTAL-COSTS> 13,341
<OTHER-EXPENSES> 11,794
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 243
<INCOME-PRETAX> 3,237
<INCOME-TAX> 376
<INCOME-CONTINUING> 2,861
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,861
<EPS-PRIMARY> 0.35
<EPS-DILUTED> 0.34
</TABLE>
EXHIBIT 99
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN
THIS REPORT, YOU SHOULD CONSIDER THE FOLLOWING FACTORS CAREFULLY IN EVALUATING
US AND OUR BUSINESS BEFORE MAKING AN INVESTMENT DECISION. ADDITIONAL RISKS AND
UNCERTAINTIES NOT PRESENTLY KNOWN TO US, THAT WE CURRENTLY DEEM IMMATERIAL OR
THAT ARE SIMILAR TO THOSE FACED BY OTHER COMPANIES IN OUR INDUSTRY OR BUSINESS
IN GENERAL, SUCH AS COMPETITIVE CONDITIONS, MAY ALSO IMPAIR OUR BUSINESS
OPERATIONS. IF ANY OF THE FOLLOWING RISKS OCCUR, OUR BUSINESS, FINANCIAL
CONDITION, OR RESULTS OF OPERATIONS COULD BE MATERIALLY ADVERSELY AFFECTED. IN
THAT EVENT, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, IN WHICH CASE
THE VALUE OF YOUR INVESTMENT MAY DECLINE AS WELL. YOU SHOULD ALSO REFER TO
"FORWARD-LOOKING STATEMENTS" IN THIS REPORT AND OUR OTHER REPORTS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION.
OUR FUTURE GROWTH DEPENDS ON EXPANSION OF INTERNATIONAL REVENUES
We estimate that our INOVOJECT(R) system inoculates over 80% of all eggs
produced for the North American broiler poultry market. Given this market
penetration, we expect diminished growth in the number of system installations
and only modest system revenue growth in this market. For this reason, we must
expand our INOVOJECT(R) system installations and product sales in markets
outside the U.S. and Canada in order to realize significant overall revenue
growth. In 1998, sales outside of North America accounted for 20% of our
consolidated revenues, up from 15% in 1997 and 14% in 1996. Lack of market
acceptance of our INOVOJECT(R) system and in ovo ("in the egg") products in
these markets would adversely affect our revenue growth. Revenue growth outside
the U.S. and Canada depends on a number of factors, including the following:
o gaining market acceptance of the INOVOJECT(R) system and in ovo
administration of biological products in markets outside the U.S. and
Canada to treat prevailing poultry diseases in those markets;
o obtaining regulatory approval of the INOVOJECT(R) system and products in
those markets and the timing of such approval; and
o the extent of start-up costs required to enter new markets.
International sales are also subject to a variety of risks, including risks
arising from the following:
o currency fluctuations, trading restrictions, tariffs, trade barriers and
taxes; and
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o economic and political conditions beyond our control, including
country-specific conditions.
OUR FUTURE GROWTH ALSO DEPENDS ON THE DEVELOPMENT AND MARKET ACCEPTANCE OF NEW
PRODUCTS
In addition to international expansion, we need to develop and market
new products in order to continue to generate increased revenues and growth of
our business. We currently are developing, both independently and in
collaboration with others, various products which address poultry health and
performance needs. Some of these products are being designed to be delivered in
ovo through the INOVOJECT(R) system, and some may also be administered via
injection after hatching. These products are in various stages of development.
There is no guarantee that any new products will be successfully developed and
marketed. In addition, we have not initiated the regulatory approval process for
any of these potential products, and we cannot assure you that regulatory
approval will be obtained. Our inability to develop new products or any delay in
our development of them may adversely affect our revenue growth. Because of a
number of factors, a new product may not reach the market without lengthy
delays, if at all. Some of the factors which may affect our development and
marketing of new products include the following:
o our research and evaluations of compounds and new technologies may not
yield product opportunities;
o potential products may involve extensive clinical trials and the results
of such trials are uncertain;
o potential products may require collaborative partners and we may be
unable to identify partners or enter into arrangements on terms
acceptable to us;
o regulatory approval of these products may not be obtained or may be
obtained only with lengthy delays; and
o marketing products developed jointly with other parties may require
royalty payments or other payments by us to our co-developers, which may
adversely affect our profitability.
We have developed and commercialized a technology using our proprietary viral
neutralizing factor ("VNF(R)") which permits a single-dose immunization of an
egg embryo effective for the life of the bird. Our Bursaplex(R) product uses
this technology. The United States Department of Agriculture ("USDA") has
approved the Bursaplex(R) vaccine for in ovo and post-hatch use. However,
Bursaplex(R) has only recently been sold in commercial quantities, and there is
no assurance that the product will continue to be sold in commercial quantities
even if it is shown to be effective.
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ECONOMIC FACTORS AFFECTING OUR CUSTOMERS MAY ADVERSELY AFFECT OUR FINANCIAL
RESULTS
Our revenues come from purchases by the poultry producing industry. If there is
a general economic decline in that industry, our operations and financial
condition could be materially and adversely affected. Also, domestic and global
economic factors beyond our control may adversely impact our customers and, as a
result, our revenues and earnings. Examples of these factors include the
following:
o fluctuations in the price of poultry feed;
o export demand for U.S. poultry products; and
o the extent to which our cost of products and operating expenses increase
faster than contractual price adjustments with our customers.
For example, if rising poultry feed prices increase the production costs of
commercial poultry producers, these producers may reduce production. This
decreased production could adversely impact our revenues, since a principal
component of our revenues is fees charged to customers for the number of eggs
injected with the INOVOJECT(R) system.
IF WE LOSE THE PROTECTION OF OUR PATENTS AND PROPRIETARY RIGHTS, OUR FINANCIAL
RESULTS COULD SUFFER
Some of our products and processes used to produce our products involve
proprietary rights, including patents. Some of the technologies employed in
these processes are owned by us, and some are owned by others and exclusively
licensed to us. The INOVOJECT(R) system utilizes a process that was patented by
the USDA. We hold an exclusive license to this primary patent which expires in
2002. We have supplemented the USDA patent with additional U.S. and foreign
patents covering specific design features of the INOVOJECT(R) system.
We believe that patent protection of materials or processes we develop and any
products that may result from the research and development efforts of us and our
licensors are important to the possible commercialization of our products. The
loss of the protection of these patents and proprietary rights could adversely
affect our business and our competitive position in the market.
The patent position of companies such as ours generally is highly uncertain and
involves complex legal and factual questions. Some of the reasons for this
uncertainty include the following:
o To date no consistent regulatory policy has emerged regarding the
breadth of claims allowed in biotechnology patents. So, there can be no
assurance that patent applications relating to our products or
technology will result in patents being issued
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or that, if issued, the patents will afford protection against
competitors with similar technology;
o Some patent licenses held by us may be terminated upon the occurrence of
specified events or become non-exclusive after a specified period;
o Companies that obtain patents claiming products or processes that are
necessary for or useful to the development of our products could bring
legal actions against us claiming infringement, though we currently are
not the subject of any patent infringement claim;
o We may not have the financial resources necessary to enforce any patent
rights we may hold;
o We may be required to obtain licenses from others to develop,
manufacture or market our products. We may not be able to obtain these
licenses on commercially reasonable terms, and the patents underlying
the licenses may not be valid and enforceable; and
o We rely upon unpatented, proprietary technology, which we may not be
able to protect fully if others independently develop substantially
equivalent proprietary information or techniques, properly gain access
to our proprietary technology, or disclose this technology to others.
We attempt to protect our proprietary materials and processes by relying on
trade secret laws and non-disclosure and confidentiality agreements with our
employees and other persons with access to our proprietary materials or
processes or who have licensing or research arrangements with us. We plan to
continue to use these protections in the future. Despite these protections,
others may independently develop or obtain access to these materials or
processes that may adversely affect our competitive position.
We have been involved in the patent litigation summarized below:
Embrex v. Service Engineering Corporation and Edward G. Bounds, Jr.
In September 1996, we filed a patent infringement suit against Service
Engineering Corporation and Edward G. Bounds, Jr. in the United States District
Court for the Eastern District of North Carolina. We made the following claims
against the defendants:
o Their development of an in ovo injection device, designed to compete
with our patented INOVOJECT(R) injection method, infringes at least one
claim of the U.S. Patent No. 4,458,630 exclusively licensed to us for
the in ovo injection of vaccines into an avian embryo (the "Sharma
Patent"); and
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o They violated the terms of a Consent Judgment and Settlement Agreement
entered into with us in November 1995 in which prior litigation was
concluded with Service Engineering Corporation and Edward G. Bounds, Jr.
agreeing not to engage in future activities violating the Sharma Patent.
o We sought injunctive relief to prevent infringement of the Sharma Patent
as well as monetary damages.
In November 1996, Service Engineering Corporation and Edward G. Bounds, Jr.
responded to our suit by asserting various affirmative defenses and denying the
substantive claims in our complaint.
This suit concluded on July 30, 1998 with a jury verdict in favor of us, which
verdict:
o fully upheld the validity of all claims of the Sharma Patent, finding
that the defendants had willingly infringed all asserted claims of the
patent;
o found that the defendants had breached the 1995 Consent Judgment and
Settlement Agreement and that the breach was not in good faith; and
o awarded us damages of $500,000 plus litigation expenses and court costs.
The Court entered a Judgment in favor of us on September 28, 1998, which
included a monetary award of $2,612,885 and an injunction prohibiting the
defendants from practicing methods claimed in, or otherwise infringing, the
Sharma Patent. On October 28, 1998, Service Engineering Corporation and Edward
G. Bounds, Jr. filed a notice of appeal in the United States Court of Appeals
for the Federal Circuit seeking a reversal of the Judgment. We plan to oppose
the appeal, but there is no assurance that we will collect any or all of the
monetary award.
Embrex v. IGI, Inc.
In November 1996, we filed a patent infringement suit against IGI, Inc. in the
United States District Court for the Eastern District of North Carolina, where
we:
o Alleged that IGI, Inc., through its activities with Service Engineering
Corporation and Edward G. Bounds, Jr., was engaging in activities that
constitute infringement of the Sharma Patent; and
o Sought injunctive relief to prevent infringement of the Sharma Patent
and sought monetary damages.
In January 1997, IGI, Inc. responded to our patent infringement suit by
asserting various affirmative defenses and denying the substantive allegations
in our complaint. This suit concluded in January 1998 by agreement between us
and IGI, Inc. Pursuant to this agreement,
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we and IGI, Inc. dismissed all pending claims against each other, and IGI, Inc.
agreed to abide by the terms of a royalty-bearing sublicense to the Sharma
Patent for avian vaccination.
Service Engineering Corporation and Edward G. Bounds, Jr. v. United States
Department of Agriculture
In March 1997, Service Engineering Corporation and Edward G. Bounds, Jr. filed
suit against the United States Department of Agriculture in the United States
District Court for the District of Maryland with respect to its grant to us of
an exclusive license for the Sharma Patent.
The complaint made the following claims:
o The USDA did not adequately comply with statutory and regulatory
requirements in making the grant to us of an exclusive license to the
Sharma Patent, the revision of the exclusive license in 1991 and again
in 1994, which extended the period of exclusivity, originally set to
terminate on December 31, 1996, through the patent expiration date;
o The USDA wrongly refused to grant Plaintiffs a license of the Sharma
Patent. The Plaintiffs claim this refusal occurred in December 1996
(after we filed the suit described above), and that the USDA refused to
do so because the USDA said that the license was not available and that
the Plaintiffs had no basis for relief; and
o The USDA wrongfully consented to our bringing suit against the
Plaintiffs.
Plaintiffs have asked the Court for the following relief:
o To set aside the extension of the exclusive license, the USDA's grant of
permission for us to sue Service Engineering Corporation, Edward G.
Bounds, Jr. and IGI, Inc. for patent infringement, the USDA's refusal to
grant to Service Engineering Corporation a non-exclusive license to the
Sharma Patent and the USDA's refusal to act favorably upon Service
Engineering Corporation's appeal from the refusal to grant it a
non-exclusive license;
o To issue an order requiring the USDA, prior to granting any exclusive
license under the Sharma Patent, including by extending the term of a
pre-existing exclusive license, to observe the procedures set forth
under laws and regulations governing the grant of licenses to patents
owned by the USDA, and to remand the matter to the USDA to take action
in accordance with the order; and
o To recover attorneys' fees and costs from the USDA.
The USDA has filed motions to dismiss plaintiffs' complaint, and plaintiffs have
filed motions for summary judgment. Those motions are pending before the Court.
The outcome of this litigation is uncertain and there is no assurance that its
resolution will be favorable to us.
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Machining Technologies, Inc. v. Embrex
On February 5, 1999, we learned that Machining Technologies, Inc. of Hebron,
Maryland had filed a Complaint for Declaratory Judgment against us in the United
States District Court for the District of Maryland. Machining Technologies, Inc.
seeks a declaration that the Sharma Patent is not infringed, invalid and/or not
enforceable. Machining Technologies, Inc. was a manufacturer of egg injection
machine parts to Edward G. Bounds, Jr. and Service Engineering Corporation. We
believe that this action is without legal basis. We plan to file a motion to
dismiss this action if and when Machining Technologies, Inc. serves the
Complaint on us, though there is no assurance that this action will be dismissed
by the Court.
THE LOSS OF KEY CUSTOMERS COULD ADVERSELY AFFECT OUR FINANCIAL RESULTS
Historically, a significant portion of our revenues has come from a relatively
small number of customers. Tyson Foods, Inc. ("Tyson") accounted for
approximately 27% of our consolidated 1998 revenues. Our top three customers,
including Tyson, accounted for approximately 42% of our consolidated 1998
revenues. We expect this customer concentration to continue in future years. The
poultry market is highly concentrated, with the largest poultry producers
dominating the market. For example, in 1998, Tyson supplied approximately 24% of
all broilers grown in the U.S.
The concentration of our revenues with these large customers makes us
particularly dependent on factors affecting those customers. If we lose a large
customer and fail to add new customers to replace lost revenues, our operating
results will be materially and adversely affected. Also, if these customers
reduce the number of eggs they produce at hatcheries, we will receive lower
INOVOJECT(R) revenues since our fees our based on the number of eggs injected.
THE LOSS OF KEY SUPPLIERS AND OTHER KEY PARTIES COULD ADVERSELY AFFECT OUR
FINANCIAL RESULTS
We currently conduct our operations with various third party collaborators,
licensors or licensees. We plan to continue developing these relationships and
believe our present and future collaborators, licensors and licensees will
perform their obligations under their agreements with us, based on an economic
motivation to succeed. However, financial or other difficulties facing these
parties may affect the amount and timing of funds and other resources devoted by
the parties under these agreements. Thus, there is no assurance that we will
generate any revenues from these agreements.
We currently do not have large scale facilities for the production of our
INOVOJECT(R) system and biological products and do not plan to develop these
facilities in the foreseeable future. Therefore, we will rely principally upon
relationships with contract manufacturers. There can be
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no assurance that we can maintain manufacture and supply agreements on terms and
at costs acceptable to us.
We have various relationships with manufacturers and suppliers, including those
described below. The loss of any of these relationships could adversely affect
our operating results, as described below:
INOVOJECT(R) System
o A manufacturer of INOVOJECT(R) systems, which is the sole contract
manufacturer of INOVOJECT(R) systems, with which we have a relationship.
While other machine fabricators exist and have constructed limited
numbers of INOVOJECT(R) systems, a change in manufacturers could cause a
delay in manufacturing and a possible delay in the timing of future
INOVOJECT(R) installations and revenues from those installations.
VNF(R) Product -- Bursaplex(R)
o Merial Select, Inc., which has exclusive rights to manufacture
Infectious Bursal Disease vaccines containing our proprietary VNF(R)
product marketed by us in North America, Latin America and Asia under
the trade name Bursaplex(R); and
o SPAFAS, Inc., the sole contract supplier of our VNF(R) product, which is
the only supplier that was included in the USDA's approval for in ovo
use of Bursaplex(R) .
Infectious Bursal Disease vaccines, including the Bursaplex(R) product
and the Bursamune(TM) product described below, and our VNF(R) product
generally must be manufactured in licensed facilities or under approved
regulatory methods. Although we believe that other manufacturers are
capable of manufacturing Infectious Bursal Disease vaccines and
producing products such as VNF(R), a change of suppliers could adversely
affect our future operating results due to the time it would take a new
supplier to obtain regulatory approval of our production process and/or
manufacturing facilities.
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VNF(R) Product -- Bursamune(TM)
o Fort Dodge Animal Health ("Ft. Dodge"), a division of American Home
Products Corp., has rights to manufacture and market Infectious Bursal
Disease vaccines containing our VNF(R) product to be marketed in Europe,
the Middle East and Africa under the trade name Bursamune(TM).
The Bursamune(TM) product has not yet received regulatory approval. In
June 1997, Ft. Dodge announced that our application for U.K. in ovo
regulatory approval of Bursamune(TM) had been provisionally refused, and
that the U.K. regulatory authority requested that further data be
supplied. We have 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 request for data with respect to Bursamune(TM). While we
anticipate that the regulatory review process will be completed during
the first half of 1999, there can be no assurances that this review will
occur by this time.
WE MAY NEED ADDITIONAL FINANCING AND, IF THE FINANCING IS UNAVAILABLE, OUR
OPERATING RESULTS COULD SUFFER
From our inception in May 1985 through December 31, 1998, we had cumulative
operating losses (accumulated deficit) of $36.1 million. Until the first quarter
of 1996, we had incurred operating losses since our inception. Although we have
been profitable since 1996, we cannot assure you that we will continue to
operate profitably.
Our ability to attain revenues sufficient to meet our cash requirements for
operations depends upon several factors, including the following:
o continued market acceptance of the INOVOJECT(R) system;
o our leasing of INOVOJECT(R) systems on lease terms acceptable to us; and
o the successful development and commercialization of additional products
by us and other suppliers of in ovo products that will be delivered
through the INOVOJECT(R) system.
The extent of our future revenues derived from INOVOJECT(R) system fees is
subject to many variables, including the following:
o whether additional lease agreements for INOVOJECT(R) systems are reached
with customers;
o the timing of any lease agreements;
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o whether existing or new installation schedules are met;
o the extent to which customers use the INOVOJECT(R) system; and
o the market acceptance and regulatory approval of in ovo products.
Although we anticipate that our existing funds, as well as revenues from
operations, will sustain our existing operations for the foreseeable future,
there are no assurances that these funds will be sufficient. If additional funds
become necessary to sustain existing operations or anticipated growth, we will
need to seek additional financing. There can be no assurance that any financing
will be obtainable or that, if available, the financing will be on terms
favorable or acceptable to us.
GOVERNMENT REGULATION AND THE NEED FOR REGULATORY APPROVAL MAY ADVERSELY AFFECT
OUR BUSINESS
Regulatory approval required in various areas of our business may adversely
affect our operations. While the use of the INOVOJECT(R) system is not subject
to regulatory approval in the U.S., it may require regulatory approval by
foreign agencies. Also, research and development activities and the
investigation, manufacture and sale of poultry health and performance
enhancement products are subject to regulatory approval in the U.S. by either
the USDA or the United States Food & Drug Administration ("FDA") and state
agencies, as well as by foreign agencies.
Obtaining regulatory approval is a lengthy and costly process. Approval by the
USDA generally takes 1 to 3 years, while approval by the FDA generally takes 5
or more years. Various problems may arise during the regulatory approval process
and may have an adverse impact on our operations. Delays in obtaining approval
may adversely affect the marketing of, and the ability to receive revenues and
royalties from, products developed by us. There is no assurance that any future
products developed by us will receive regulatory approval without lengthy
delays, if at all.
Pursuant to some of our licensing or joint development agreements, the licensees
or joint developers bear the costs associated with the regulatory approval
process for some products. We plan to continue to enter into these types of
agreements in the future. If we cannot generate sufficient funds from operations
or enter into licensing or joint development agreements to develop products, we
may not have the financial resources to complete the regulatory approval process
with respect to all or any of the products currently under development. Products
developed by us may not be marketed commercially in any jurisdiction in which
required approvals have not been obtained.
Other regulations apply or may apply to research and manufacturing activities,
including federal, state and local laws, regulations and recommendations
relating to the following:
o safe working conditions;
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o laboratory and manufacturing practices; and
o use and disposal of hazardous substances used in conjunction with
research activities. It is difficult to predict the extent to which
these or other government regulations may adversely impact the
production and marketing of our products.
OUR INABILITY TO ATTRACT AND RETAIN KEY PERSONNEL COULD ADVERSELY AFFECT OUR
BUSINESS
We must continue to attract and retain experienced and highly educated
scientific and management personnel and advisors to be able to develop
marketable products and maintain a competitive research and technological
position. Competition for qualified employees among biotechnology companies is
intense, and the loss of key scientific or management personnel would adversely
affect us. There can be no assurance that we will be able to continue to attract
and retain qualified staff. Our inability to recruit and retain key personnel
could have an adverse affect on our business, results of operations or financial
condition. We have obtained insurance in the amount of $1,000,000 on the life of
Randall L. Marcuson, our President and Chief Executive Officer, of which we are
the sole beneficiary.
WE FACE RISKS CONCERNING YEAR 2000 ISSUES
We established a team to address the Year 2000 issue in June 1998. The team has
conducted an inventory and assessment of our computer hardware and software
systems, as well as embedded systems in our 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. We
anticipate completing our test plans no later than May 1999. We expect to
complete all remediation, testing and implementation no later than October 1999.
To date, we have determined that our general ledger and primary financial
accounting software, a DOS-based application, uses only two digits to identify a
year in the date field. We are currently on schedule to replace this application
with a Year 2000-compliant Windows-based system by October 1999; however, we had
planned to make this upgrade irrespective of the Year 2000 problem in order to
meet the demands of our business. We are in the process of upgrading our
computer software and hardware systems as necessary to address both our
increased internal needs and the impact of the Year 2000 on our systems. Our
inability or the inability of our software or hardware vendors to upgrade our
systems in a manner that fully addresses our needs and the Year 2000 issue could
adversely impact our ability to produce the information necessary to manage our
business, communicate with our customers and prepare our financial statements.
We have surveyed nearly all of our customers and vendors through a Year 2000
questionnaire regarding the strategies, activities and contingency plans
undertaken by those parties to achieve
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Year 2000 compliance. The information being received in response to the
questionnaire will assist us in assessing our readiness for the Year 2000 issue
and identify any potential negative impact to us from possible disruptions in
other parties' ability to do business with us after December 31, 1999. There is
no assurance that the systems of other parties on which we rely will be
compliant on a timely basis. The inability of our vendors and customers to fully
address the Year 2000 issue could have an adverse impact on our ability to
operate and manage the INOVOJECT(R) system at our customers' hatcheries, to
manage our business and to communicate with our customers and suppliers, any of
which could have a material adverse effect on our financial results.
We are in the process of developing contingency plans to address what would
happen if our 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 our customers, and the
preservation of perishable biological products in the event of electrical power
interruptions at our facilities.
We expect to incur no more than $500,000 in addressing Year 2000 issues,
including an estimated $20,000 spent to date. Our estimates regarding the cost
and timing of addressing the Year 2000 issue are based upon presently available
information and assumptions about future events. We cannot guarantee that our
assumptions will be correct or that our estimates will be achieved. Actual
results could differ materially from our expectations as a result of numerous
factors, including the continued availability of resources, the cooperation of
third parties, the ability to locate and correct all relevant computer codes,
unforeseen circumstances that would cause us to allocate our resources
elsewhere, and similar uncertainties.
IF WE CANNOT CONTINUE TO PROVIDE TIMELY SUPPORT AND MAINTENANCE TO OUR
CUSTOMERS, OUR BUSINESS MAY SUFFER
We are required to supply, support, and maintain large numbers of INOVOJECT(R)
systems at our customers' hatcheries on a timely basis at a reasonable cost to
us. There can be no assurance that we will be able to continue to provide these
services on a cost-effective basis. If we are unable to do so, our customers may
reduce their use of our products, which could adversely affect operating
results.
WE FACE RISKS OF RAPIDLY CHANGING TECHNOLOGY AND COMPETITION
We are involved in areas of technology which are subject to rapid and
significant technological change. Competitors include independent companies that
specialize in biotechnology as well as major chemical and pharmaceutical
companies, universities, and public and private research organizations. Many of
our competitors are well established and have substantially greater marketing,
financial, technological and other resources than us. A competitive delivery
method, either within or outside the United States, may be developed and gain
commercial acceptance.
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Also, competitors may succeed in developing technologies and products that are
more effective than any which have been or are being developed by us or which
would render our technology and products obsolete or non-competitive.
THE ISSUANCE OF PREFERRED STOCK AND OUR SHAREHOLDER RIGHTS PLAN MAY DISCOURAGE A
TAKEOVER
The Board of Directors has the authority to issue up to 15,000,000 shares of
Preferred Stock in one or more series and to determine the designations,
preferences and relative rights and qualifications, limitations or restrictions
of the shares constituting any series of Preferred Stock, without any further
vote or action by the shareholders. The issuance of Preferred Stock by the Board
of Directors could affect the rights of the holders of Common Stock. For
example, an issuance could result in a class of securities outstanding that
would have preferences with respect to voting rights and dividends and in
liquidation over the Common Stock, and could (upon conversion or otherwise)
enjoy all of the rights applicable to Common Stock.
The authority of the Board of Directors to issue Preferred Stock potentially
could be used to discourage attempts by others to obtain control of us through
merger, tender offer, proxy contest or otherwise by making these attempts more
difficult to achieve or more costly. The Board of Directors may issue the
Preferred Stock without shareholder approval and with voting and conversion
rights which could adversely affect the voting power of the holders of Common
Stock. No agreements or understandings currently exist for the issuance of
Preferred Stock, and the Board of Directors has no present intention to issue
any Preferred Stock.
We adopted a shareholder rights plan which could have the effect of discouraging
a takeover of us. The rights plan, if triggered, would make it more difficult to
acquire us by, among other things, allowing existing shareholders to acquire
additional shares at a substantial discount, thus substantially inhibiting an
acquiror's ability to obtain control of us.
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