Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1999
Commission File No. 000-19495
Embrex, Inc.
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(Exact name of issuer as specified in its charter)
North Carolina 56-1469825
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1035 Swabia Court, Durham, NC 27703
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(Address of principal executive offices) (Zip Code)
Registrant's telephone no. including area code: (919) 941-5185
Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
--- ---
The number of shares of Common Stock, $0.01 par value, outstanding as of October
29, 1999, was 7,949,026.
<PAGE>
EMBREX, INC.
INDEX
Part I Page
----
Financial Information:
Item 1 - Financial Statements:
Balance Sheets.........................................3 of 15
Statements of Operations...............................4 of 15
Statements of Cash Flows...............................5 of 15
Notes to Consolidated Financial Statements.............6 of 15
Item 2:
Management's Discussion and Analysis of
Financial Condition and Results of Operations..........7 of 15
Item 3:
Quantitative and Qualitative Disclosures
About Market Risk.....................................12 of 15
Part II
Other Information:
Item 1: Legal Proceedings...................................12 of 15
Item 2: Changes in Securities...............................13 of 15
Item 3: Defaults Upon Senior Securities.....................13 of 15
Item 4: Submission of Matters to a Vote of Security Holders.13 of 15
Item 5: Other Information...................................13 of 15
Item 6: Exhibits and Reports on Form 8-K....................13 of 15
Signatures..................................................14 of 15
Exhibit Index...............................................15 of 15
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Embrex, Inc.
------------
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1999 1998
------------------------------
(UNAUDITED)
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents.................................. $ 6,248 $ 7,167
Restricted Cash............................................ 275 275
Accounts receivable - trade ............................... 3,645 3,454
Inventories:
Materials and supplies................................... 1,148 925
Product ................................................. 951 1,281
Other current assets....................................... 1,360 738
--------------- --------------
TOTAL CURRENT ASSETS..................................... 13,627 13,840
INOVOJECT(R)SYSTEMS UNDER CONSTRUCTION........................ 705 568
INOVOJECT(R)SYSTEMS........................................... 26,885 24,161
Less accumulated depreciation.............................. (18,966) (16,297)
------------- -------------
7,919 7,864
EQUIPMENT, FURNITURE AND FIXTURES ............................ 6,712 5,060
Less accumulated depreciation and amortization (2,817) (2,468)
---------------------------
3,895 2,592
OTHER ASSETS:
Patents and exclusive licenses of patentable technology (net of
accumulated amortization of $81 in 1999 and $196 in 1998) 105 126
------------ ------------
TOTAL ASSETS................................................... $ 26,251 $ 24,990
========= ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable............................................ $ 442 $ 393
Accrued expenses............................................ 2,440 2,033
Deferred revenue............................................ 0 175
Notes payable - current portion........................... 2,100 0
Product warranty accrual.................................... 381 322
Current portion of capital lease obligations 847 2,618
------------ ----------------
TOTAL CURRENT LIABILITIES................................. 6,210 5,541
CAPITAL LEASE OBLIGATIONS, less current portion 188 619
LONG-TERM DEBT, less current portion........................... 24 25
SHAREHOLDERS' EQUITY Common Stock,$.01 par value:
Authorized - 30,000,000 shares
Issued and outstanding -
7,937,995 and 8,264,490 shares at September 30, 1999 and
December 31, 1998, respectively........................ 91 83
Additional paid-in capital.................................. 55,138 54,894
Accumulated other comprehensive income...................... 103 113
Accumulated deficit......................................... (32,053) 36,072)
Treasury stock.............................................. (3,450) (213)
----------- ----------
TOTAL SHAREHOLDERS' EQUITY................................ 19,829 18,805
------------ -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY..................... $ 26,251 $ 24,990
============ ============
</TABLE>
3
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Embrex, Inc.
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CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------ ------------
1999 1998 1999 1998
---- ---- ---- ----
REVENUES
<S> <C> <C> <C> <C>
INOVOJECT(R)SYSTEm revenue............................ $ 7,969 $ 7,198 $23,746 $ 20,351
Product sales......................................... 232 169 777 689
Other revenue......................................... 48 37 153 182
---------- ------- ---------- ----------
TOTAL REVENUES...................................... 8,249 7,404 24,676 21,222
COST OF PRODUCT SALES AND INOVOJECT(R)SYSTEM REVENUES 3,243 3,401 9,682 10,084
-------- ----- ------- ---------
GROSS PROFIT........................................ 5,006 4,003 14,994 11,138
OPERATING EXPENSES
General and administrative............................ 1,721 1,715 5,530 4,829
Sales and marketing................................... 176 104 498 461
Research and development.............................. 1,353 1,360 4,087 3,364
----------- -------- ------- --------
TOTAL OPERATING EXPENSES............................ 3,250 3,179 10,115 8,654
OPERATING INCOME......................................... 1,756 824 4,879 2,484
OTHER INCOME (EXPENSE)
Interest income....................................... 75 150 256 302
Interest expense...................................... (77) (129) (283) (481)
------- ------- --------- ---------
TOTAL OTHER EXPENSE................................. (2) 21 (27) (179)
-------- ------- -------- --------
INCOME BEFORE TAXES...................................... 1,754 845 4,852 2,305
INCOME TAXES............................................. (202) (92) (833) (420)
-------- --------- -------------- ------------
NET INCOME ......................................... $ 1,552 $ 753 $ 4,019 $ 1,885
========== ======== ======= =========
NET INCOME PER SHARE OF COMMON STOCK:
Basic................................................. $ 0.19 $ 0.09 $ 0.49 $ 0.23
Diluted .............................................. $ 0.18 $ 0.09 $ 0.47 $ 0.23
WEIGHTED AVERAGE NUMBER OF SHARES USED IN PER-SHARE CALCULATION:
Basic ................................................ 8,135 8,262 8,226 8,251
Diluted............................................... 8,683 8,339 8,502 8,338
</TABLE>
4
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Embrex, Inc.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
------------------------------
1999 1998
---- ----
OPERATING ACTIVITIES
<S> <C> <C>
Net income ........................................................... $ 4,019 $ 1,885
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization....................................... 3,056 3,716
Changes in operating assets and liabilities:
Accounts receivable, inventories and other current assets (706) (1,105)
Accounts payable and accrued expenses............................ 340 (568)
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES ............................... 6,709 3,928
--------- --------
INVESTING ACTIVITIES
Purchases of INOVOJECT(R)systems, equipment, furniture and fixtures (4,513) (3,529)
Reductions in patents and other noncurrent assets (17) 0
-------- ----------
NET CASH USED IN INVESTING ACTIVITIES.................................... (4,530) (3,529)
-------- --------
FINANCING ACTIVITIES
Issuance of common stock............................................... 252 103
Additions to short-term debt........................................... 2,100 1
Payments on long-term debt ............................................ (1) (280)
Proceeds from capital lease obligations................................ 0 80
Payments on capital lease obligations.................................. (2,202) (1,774)
Repurchase of Common Stock............................................. (3,237) 0
------- -----------
NET CASH USED IN FINANCING ACTIVITIES..................................... (3,088) (1,870)
------- --------
Decrease in Cash and Cash Equivalents..................................... (909) (1,471)
Currency Translation Adjustments ......................................... (10) 323
Cash and cash equivalents at beginning of period.......................... 7,167 8,580
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................................ $ 6,248 $ 7,432
======== ========
</TABLE>
5
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EMBREX, INC.
FORM 10-Q
September 30, 1999
NOTES TO CONSOLIDATED INTERIM CONDENSED FINANCIAL STATEMENTS (Unaudited)
Note 1 -- Basis of Presentation
The accompanying unaudited financial statements include the accounts of Embrex,
Inc. and its wholly owned subsidiaries, Embrex Europe Limited and Embrex BioTech
Trade (Shanghai) Co., Ltd. (collectively referred to as the Company) and have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and notes required by generally accepted accounting principles. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation of financial condition and results
of operations have been included. Operating results for the three-month and
nine-month periods ended September 30, 1999 are not necessarily indicative of
the results that may be attained for the entire year. For further information,
refer to the financial statements and notes thereto included in the Company's
Form 10-K for the year ended December 31, 1998.
Note 2 - Net Income Per Share
Basic net income per share was determined by dividing net income available for
common shareholders by the weighted average number of common shares outstanding
during each year. Diluted net income per share reflects the potential dilution
that could occur assuming conversion or exercise of all issued and unexercised
stock options and warrants.
Note 3 - Comprehensive Income
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income" (SFAS 130). This Statement establishes standards for reporting and
display of comprehensive income and its components in the financial statements.
In accordance with SFAS 130, the Company has determined total comprehensive
income, net of tax, to be $1,735,000 and $821,000 for the three months ended
September 30, 1999 and 1998, respectively, and $4,009,000 and $2,208,000 for the
nine months ended September 30, 1999 and 1998, respectively. Embrex's total
comprehensive income represents net income plus the after-tax effect of foreign
currency translation adjustments for the periods presented.
Note 4 - Reclassification
Certain prior year amounts in Capital Lease Obligations and Long-Term Debt have
been reclassified to conform to the current year presentation. Such
reclassification had no effect on Shareholders' Equity or Net Income previously
reported.
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis should be read in conjunction with the
Company's financial statements and related notes appearing elsewhere in this
report.
RESULTS OF OPERATIONS
- ---------------------
Three Months Ended September 30, 1999 and 1998
- ----------------------------------------------
Consolidated revenues for the third quarter of 1999 totaled $8.2 million,
representing an increase of 11% over 1998 third quarter revenues of $7.4
million.
INOVOJECT(R) system revenues amounted to $8.0 million for the 1999 third
quarter, an increase of 11% over 1998 third quarter revenues of $7.2 million.
Most of the 1999 and 1998 INOVOJECT(R) system revenues were generated from
INOVOJECT(R) system lease fees. The growth in INOVOJECT(R) system revenues was
primarily attributable to increased injection activity in North American
hatcheries as well as additional INOVOJECT(R) systems operating in Europe and
Latin America.
Sales of Bursaplex(R), the Company's proprietary vaccine for the treatment of
avian Infectious Bursal Disease, was the principal source of $232,000 of product
revenue in the 1999 third quarter and $169,000 in the 1998 third quarter. The
Company's ability to generate revenue from product sales has been constrained by
the previously announced delay associated with obtaining British regulatory
approval for the sale of Bursamune(R) in the United Kingdom by Fort Dodge Animal
Health ("Ft. Dodge"), a division of American Home Products Corp., lower levels
of breeder and broiler flock vaccination rates, and fewer reported incidences of
bursal disease in the United States. Product sales nevertheless increased 37%
during the third quarter of 1999 compared to product sales during the third
quarter of 1998 due to demand for Bursaplex(R) in Asian and Latin American
markets where this product has received regulatory approval.
Consolidated revenues grew at a faster rate than the cost of product sales and
cost of INOVOJECT(R) system revenues which actually declined by $158,000 due to
operating improvements and lower depreciation, resulting in an improvement in
gross profit from 54% of total revenues during the third quarter 1998, to 61%
during the comparable 1999 quarter.
Operating expenses increased from $3.2 million during the third quarter of 1998,
to $3.3 million during the third quarter of 1999. This increase is primarily
attributable to programs focused on INOVOJECT(R) system improvements and
enhancements, biological product development and expenses associated with
installation of a new information system, Year 2000 compliance efforts and the
protection of intellectual property rights.
Net interest expense amounted to $2,000 for the third quarter of 1999 compared
to net interest income of $21,000 for the third quarter of 1998. The $23,000
change is attributable to the reduction in interest income due to lower rates
and reduced cash on hand.
INOVOJECT(R) system revenues and improved gross margins resulted in a $799,000
increase in net income, to $1.6 million in the third quarter of 1999 compared to
$753,000 during the comparable period in 1998. Diluted net income per common
share was $0.18 for 1999 third quarter based on 8.7 million average shares
outstanding, compared to diluted net income of $0.09 per share based on 8.3
million average shares outstanding in the third quarter 1998. The change
7
<PAGE>
in diluted average shares outstanding from 1998 to 1999 is attributable to the
increase in the number of in-the-money stock options included in the diluted
average shares outstanding calculation following an appreciation in the price of
the Company's Common Stock during the second and third quarters of 1999 as well
as Common Stock repurchases.
Nine Months Ended September 30, 1999 and 1998
- ---------------------------------------------
Consolidated revenues for the nine months ended September 30, 1999 totaled $24.7
million, representing an increase of 16% over 1998 revenue of $21.2 million for
the comparable period.
INOVOJECT(R) system revenues amounted to $23.7 million for the first nine months
of 1999, an increase of 17% over 1998 nine months' revenues of $20.4 million.
Most of the 1999 and 1998 INOVOJECT(R) system revenues were generated from
INOVOJECT(R) system lease fees. The growth in INOVOJECT (R) system revenues was
primarily attributable to increased injection activities in North American
hatcheries as well as additional INOVOJECT(R) systems operating in Europe and
Latin America.
Sales of Bursaplex(R) were the principal source of $777,000 of product revenue
during the first nine months of 1999 and $689,000 during the first nine months
of 1998. Bursaplex(R) sales increased 13% as demand in the Asian and Latin
American markets offset a decline in the North American market for the reasons
previously discussed regarding third quarter results.
Consolidated revenues grew at a faster rate than the cost of product sales and
cost of INOVOJECT(R) system revenues, which actually declined by $402,000 due to
operating improvements and lower depreciation, resulting in an improvement in
gross profit from 52% of total revenues during the first nine months of 1998, to
61% during the comparable 1999 period.
Operating expenses increased from $8.7 million during the first nine months of
1998, to $10.1 million during the first nine months of 1999. This increase is
primarily attributable to programs focused on INOVOJECT(R) system improvements
and enhancements, biological product development, and expenses associated with
installation of a new information system, Year 2000 compliance efforts and the
protection of intellectual property rights. As start-up operations in Asia and
Latin America develop a sustainable revenue base, certain recurring operating
expenses currently reflected in general and administrative expense may be
reclassified to cost of revenue as was done in prior years in North American and
European operations. This could result in a change in gross profit but will not
affect operating income.
Net interest expense amounted to $27,000 for the first nine months of 1999
compared to $179,000 for the first nine months of 1998. The $152,000 decrease is
attributable to the reduction in lease and debt obligations.
INOVOJECT(R) system revenues and improved gross margins resulted in a $2.1
million increase in net income, to $4.0 million in the first nine months of 1999
compared to $1.9 million during the comparable period in 1998. Diluted net
income per common share was $0.47 for the first nine months of 1999 based on 8.5
million average shares outstanding, compared to diluted net income of $0.23 per
share based on 8.3 million average shares outstanding in the first nine months
of 1998. The change in diluted average shares outstanding from 1998 to 1999 is
attributable to the increase in the number of in-the-money stock options
included in the diluted average shares outstanding calculation following an
appreciation in the price of the Company's Common Stock during the second and
third quarters of 1999 as well as Common Stock repurchases.
8
<PAGE>
The Company estimates that as of September 30, 1999, it was vaccinating in
excess of 80% of the broiler birds grown in North America during the first nine
months of 1999. Given its market penetration, the Company expects only moderate
INOVOJECT(R) system revenue growth in this market. Overall, management expects
moderate growth throughout the balance of 1999 relative to levels achieved in
1998. This growth is expected to come primarily from existing INOVOJECT(R)
system operations in the United States, and new INOVOJECT(R) system operations
in other countries, and secondarily from sales of the Company's Bursaplex(R)
product to poultry producers. The Company currently has INOVOJECT(R) systems
either installed or on trial in 29 countries, including the United States and
Canada.
Bursaplex(R), a product which uses the Company's Viral Neutralizing Factor
(VNF(R)) technology to form an antibody-vaccine when combined with an Infectious
Bursal Disease (IBD) virus, was granted approval from the United States
Department of Agriculture (the "USDA") in 1997 for IN OVO (in-the-egg) use,
specifically for administration via the Company's INOVOJECT(R) system. To date,
regulatory approval for Bursaplex(R) has been received in eight countries, and
regulatory approval is temporary or pending in fourteen countries.
Bursamune(R), which also utilizes the Company's VNF(R) technology, is an IBD
vaccine produced by Cyanamid Websters, a unit of Ft. Dodge and which will be
marketed by Ft. Dodge in Europe, the Middle East and Africa under Ft. Dodge's
trade name "Bursamune(R)" upon receipt of regulatory approvals. In June 1997,
Ft. Dodge indicated that its U.K. application for IN OVO regulatory approval of
Bursamune(R) 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(R), 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(R). The Company anticipates that the regulatory review
process will be completed during 1999. To date, Bursamune(R) has received
regulatory approval in South Africa and Spain and, in October 1999, temporary
authorization for the utilization of Bursamune(R) was granted by French
regulatory authorities.
For the rest of 1999, the goals of management are to maintain revenue growth and
profitability, to continue efforts to achieve worldwide placements of the
INOVOJECT(R) system, to obtain regulatory approvals and initiate marketing of
Bursaplex(R) in selected markets, to continue development of proprietary IN OVO
vaccines and to develop enhancements to the INOVOJECT(R) system. Growth in
INOVOJECT(R) systems and product revenues during 1999 will be dependent on the
rate at which markets outside the United States accept INOVOJECT(R) system
technology, and the timing of regulatory approvals for Bursaplex(R) and
Bursamune(R) as well as regulatory approval and market acceptance of other
vaccines for IN OVO delivery. In addition, normal fluctuations in the market
price of grain, domestic and international consumption levels of chicken, the
supply of broiler chicken eggs, country-specific regulations and economic
conditions, and export opportunities for the Company's U.S. customers may impact
the timing and quantity of egg injections and the corresponding IN OVO delivery
of vaccines. Moreover, further delay in obtaining U.K. regulatory approval for
the sale of Bursamune(R) would negatively impact the Company's ability to
generate revenue from both the use of INOVOJECT(R) systems for thE IN Ovo
delivery of Bursamune(R) and the sale of its VNF(R) compound for the production
of Bursamune(R) in the U.K. market.
9
<PAGE>
CHANGES IN FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
- ----------------------------------------------------------------
At September 30, 1999, the Company's cash and cash equivalents amounted to $6.2
million, down $1.0 million from $7.2 million on hand at year-end 1998.
Operating activities generated $6.7 million in cash during the first nine months
of 1999. Cash was provided by net income of $4.0 million, adjusted by
depreciation of $3.1 million, by increases in accounts payable and accrued
expenses of $0.3 million, and offset by increases in accounts receivable and
other current assets of $0.7 million.
During the first nine months of 1999, investing activities used $4.5 million of
cash, principally for additional INOVOJECT(R) systems as well as hardware and
software for the Company's new information system.
Financing activities used $3.1 million, primarily for the repayment of capital
lease obligations and repurchases of the Company's common stock. In September
1999, the Company borrowed $2.1 million under the terms of a secured revolving
line of credit agreement (see below), principally to fund the repurchase of its
Common Stock, most of which was a privately negotiated transaction. This balance
was repaid in October with funds that became available as various short-term
investments matured.
As of September 30, 1999, the Company had outstanding purchase commitments of
approximately $3.9 million related to the production of the Company's
Bursaplex(R) product, VNF(R) for the manufacture of Bursaplex(R) and
Bursamune(R) and materials and supplies for the construction and maintenance of
its INOVOJECT(R) systems.
In April 1999, the Company obtained a $6.0 million secured revolving line of
credit from its bank. This line of credit may be used for working capital
purposes and has a term of eighteen months.
Based on its current operations, management believes that available cash and
cash equivalents, together with cash flow from operations and its bank line of
credit, will be sufficient to meet its foreseeable cash requirements in support
of its operations, including necessary capital investments, continued global
expansion, funding new product development and repurchases of its Common Stock.
During the third quarter of 1999 the Company acquired 283,400 shares of its
Common Stock for $2.5 million, including a privately negotiated acquisition of
175,000 shares, at an average price of $8.80 per share. Since the share
repurchase program began in the fourth quarter of 1998, the Company has
repurchased 481,200 shares of its Common Stock for $3.8 million at an average
price of $7.90 per share. Management has been authorized by the Board of
Directors to purchase up to 10 percent of outstanding shares, or up to
approximately 830,000 shares over 18 months in open market or privately
negotiated transactions.
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 has developed remediation, testing,
and implementation plans for imbedded systems, including the INOVOJECT(R)
10
<PAGE>
system. The Company expects to complete all remediation, testing and
implementation not later than November 1999.
The Company engaged an outside consulting firm to conduct an independent
verification and validation of the controls and software that operate the
INOVOJECT(R) system. The independent verification and validation determined that
the INOVOJECT(R) system does not access or use date information and the
independent verification and validation determined that INOVOJECT(R) system
operation is not affected by Year 2000 considerations. Both mechanical and
electronic systems that record egg volumes by counting the number of trays of
eggs injected by the INOVOJECT(R) system were also determined to be date
insensitive.
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 in the process of replacing
this application with a Year 2000-compliant Windows-based system by year end;
however, the Company had planned to make this upgrade irrespective of the Year
2000 issue in order to meet the demands of its business. The Company is in the
process of upgrading its computer software and hardware systems as necessary to
address both its increased internal needs and the impact of the year 2000 on its
systems. The inability of the Company or its software and hardware vendors to
upgrade the Company's systems in a manner that fully addresses the Company's
needs and the Year 2000 issue could adversely impact the Company's ability to
produce the information necessary to manage its business, communicate with its
customers and suppliers, and prepare financial statements.
The Company has surveyed nearly all of its customers and vendors through a Year
2000 questionnaire regarding the strategies, activities, and contingency plans
undertaken by those parties to achieve Year 2000 compliance. While not all
customers and vendors fully respond, the information being received in response
to the questionnaire assists the Company in assessing its readiness for the Year
2000 issue and identifying 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 has developed 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 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 presently expects to incur no more than $200,000 in addressing Year
2000 issues, including an estimated $170,000 spent during the first nine months
of 1999. 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
11
<PAGE>
correct all relevant computer codes, unforeseen circumstances that would cause
the Company to allocate its resources elsewhere, and similar uncertainties.
FORWARD-LOOKING STATEMENTS
- --------------------------
This report contains forward-looking statements, including statements with
respect to future products, services, markets and financial results. These
statements involve risks and uncertainties that could cause actual results to
differ materially, including without limitation the ability of the Company to
penetrate new markets, place INOVOJECT(R) systems worldwide, establish a degree
of market acceptance for new products such as but not limited to Bursaplex(R)
and Bursamune(R), prevail in the outcome of its patent litigation appeal,
complete commercial development of potential future products or obtain
regulatory approval of its products, which approval is dependent upon a number
of factors, such as results of trials, the discretion of regulatory officials,
and potential changes in regulations, and the Company's dependence on certain
customers. These statements are also contingent upon continued growth and
production levels of the global poultry industry and the economic viability of
certain markets. Additional information on these risks and other factors which
could affect the Company's financial results is included in the Company's Form
10-K filed with the Securities and Exchange Commission and other filings with
the SEC, including the Company's Forms 10-Q and 8-K.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- ------------------------------------------------------------------
A portion of the Company's operations are in jurisdictions outside North
America. The Company leases INOVOJECT(R) systems and sells products in Europe,
Asia and Latin America. As a result, the Company's financial results could be
affected by factors such as changes in foreign currency exchange rates or weak
economic conditions in the foreign markets in which the Company distributes its
products. At September 30, 1999, the Company's operations outside North America
were not material to the Company's consolidated results as a whole, and a
significant change in currency exchange rates or economic conditions in the
jurisdictions outside North America in which the Company operates should not
have a material effect on the Company's consolidated financial results.
12
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
- -----------------------------
For a description of certain patent infringement proceedings initiated by the
registrant and related legal proceedings, see the registrant's Form 10-K for the
year ended December 31, 1998 filed with the Securities and Exchange Commission
on March 31, 1999 and the registrant's Form 10-Q for the quarter ending June 30,
1999 filed with the Securities and Exchange Commission on August 12, 1999.
Item 2. Changes in Securities. Not applicable.
- ------- ----------------------
Item 3. Defaults Upon Senior Securities. Not applicable.
- ------- --------------------------------
Item 4. Submission of Matters to a Vote of Security Holders. Not applicable.
- ------- ----------------------------------------------------
Item 5. Other Information. Not applicable.
- ------- ------------------
Item 6. Exhibits and Reports on Form 8-K.
- ------- ---------------------------------
(a) Exhibits
27. Financial Data Schedule.
(b) Reports on Form 8-K. Not applicable.
13
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 11, 1999
EMBREX, INC.
By: /s/ Randall L. Marcuson
-----------------------
Randall L. Marcuson
President and Chief Executive Officer
By: /s/ Don T. Seaquist
-------------------
Don T. Seaquist
Vice President, Finance and Administration
14
<PAGE>
Embrex, Inc.
File No. 000-19495
Form 10-Q
For the Quarterly Period
Ended September 30, 1999
EXHIBIT INDEX
Exhibit
- -------
27. Financial Data Schedule
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains financial information extracted from form 10-Q and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 6,523
<SECURITIES> 0
<RECEIVABLES> 3,645
<ALLOWANCES> 0
<INVENTORY> 2,099
<CURRENT-ASSETS> 1,360
<PP&E> 34,407
<DEPRECIATION> (21,783)
<TOTAL-ASSETS> 26,251
<CURRENT-LIABILITIES> 6,210
<BONDS> 0
0
0
<COMMON> 91
<OTHER-SE> 19,829
<TOTAL-LIABILITY-AND-EQUITY> 26,251
<SALES> 24,676
<TOTAL-REVENUES> 24,676
<CGS> (9,682)
<TOTAL-COSTS> (9,682)
<OTHER-EXPENSES> 10,115
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27
<INCOME-PRETAX> 4,852
<INCOME-TAX> 833
<INCOME-CONTINUING> 4,019
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,019
<EPS-BASIC> 0.49
<EPS-DILUTED> 0.47
</TABLE>
