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 June 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 July
31, 1999, was 8,231,260.
<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)
June 30 December 31
1999 1998
------------- -----------
(unaudited)
ASSETS
Current Assets
Cash and cash equivalents.................. $ 7,141 $ 7,167
Restricted Cash............................ 275 275
Accounts receivable - trade ............... 3,746 3,454
Inventories:
Materials and supplies................... 943 925
Product.................................. 800 1,281
Other current assets....................... 1,091 738
---------- ---------
Total Current Assets..................... 13,996 13,840
INOVOJECT(R)Systems Under Construction........ 725 568
INOVOJECT(R)Systems........................... 25,584 24,161
Less accumulated depreciation................. (17,894) (16,297)
---------- ---------
7,690 7,864
Equipment, Furniture and Fixtures ............ 6,183 5,060
Less accumulated depreciation and amortization (2,771) (2,468)
---------- ---------
3,412 2,592
Other Assets:
Patents and exclusive licenses of patentable
technology (net of accumulated amortization
of $196 in 1998)............................ 103 126
---------- ---------
$ 25,926 $ 24,990
Total Assets................................... ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable.......................... $ 754 $ 393
Accrued expenses.......................... 2,397 2,033
Deferred revenue......................... 56 175
Product warranty accrual................. 366 322
Current portion of capital lease obligations 1,350 2,618
---------- ---------
Total Current Liabilities............... 4,923 5,541
Capital Lease Obligations, less current portion 238 634
Long-Term Debt, less current portion...... 0 10
Shareholders' Equity
Common Stock,$.01 par value:
Authorized - 30,000,000 shares
Issued and outstanding -
8,222,190 and 8,264,490 shares at
June 30, 1999 and December 31, 1998,
respectively....................... 91 83
Additional paid-in capital................ 55,094 54,894
Accumulated other comprehensive income.... (80) 113
Accumulated deficit....................... (33,605) (36,072)
Treasury stock............................ (735) (213)
---------- ---------
Total Shareholders' Equity.............. 20,765 18,805
---------- ---------
Total Liabilities and Shareholders' Equity... $ 25,926 $ 24,990
========== ==========
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 Six Months Ended
June 30 June 30
------------------ ----------------
1999 1998 1999 1998
---- ---- ---- ----
Revenues
<S> <C> <C> <C> <C>
INOVOJECT(R)System revenue.......... $ 8,087 $ 6,574 $15,777 $ 13,152
Product sales..................... 299 266 545 521
Other revenue.................... 25 121 105 145
------- ------- ------- --------
Total Revenues.................. 8,411 6,961 16,427 13,818
Cost of Product Sales and
INOVOJECT(R)System Revenues.......... 3,213 3,474 6,439 6,683
------- ------- ------- --------
Gross Profit.................... 5,198 3,487 9.988 7,135
Operating Expenses
General and administrative........ 1,985 1,552 3,809 3,352
Sales and marketing.............. 156 126 322 323
Research and development.......... 1,410 940 2,734 1,800
------- ------- ------- --------
Total Operating Expenses........ 3,551 2,618 6,865 5,475
Operating Income..................... 1,647 869 3,123 1,660
Other Income (Expense)
Interest income.................. 101 73 181 152
Interest expense................ (71) (137) (206) (352)
------- ------- ------- --------
Total Other Expense............ 30 (64) (25) (200)
------- ------- ------- --------
Income Before Taxes................... 1,677 805 3,098 1,460
Income Taxes.......................... (347) (200) (631) (328)
------- ------- ------- --------
Net Income ....................... $ 1,330 $ 605 $ 2,467 $ 1,132
======== ======= ======= =========
Net Income Per Share of Common Stock:
Basic............................. $ 0.16 $ 0.07 $ 0.30 $ 0.14
Diluted........................... $ 0.16 $ 0.07 $ 0.29 $ 0.14
Weighted Average Number of Shares Used in Per-Share Calculation:
Basic............................. 8,250 8,249 8,272 8,246
Diluted........................... 8,456 8,340 8,412 8,337
</TABLE>
4
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Embrex, Inc.
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Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
Six Months Ended June 30
----------------------
1999 1998
---- ----
OPERATING ACTIVITIES
Net income .................................... $ 2,467 $ 1,132
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization.............. 1,940 2,486
Changes in operating assets and liabilities:
Accounts receivable, inventories and
other current assets..................... (182) (998)
Accounts payable and accrued expenses.... 650 (254)
--------- --------
Net Cash Provided By Operating Activities ...... 4,875 2,366
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INVESTING ACTIVITIES
Purchases of INOVOJECT(R) systems, equipment,
furniture and fixtures....................... (2,703) (2,600)
Investments in patents and other noncurrent
assets....................................... (17) 0
--------- --------
Net Cash Used in Investing Activities........... (2,720) (2,600)
--------- --------
FINANCING ACTIVITIES
Issuance of common stock..................... 208 42
Additions to long-term debt.................. 0 2
Payments on long-term debt .................. (10) (55)
Proceeds from capital lease obligations...... 0 70
Payments on capital lease obligations........ (1,664) (1,297)
Repurchase of Common Stock................... (522) 0
--------- --------
Net Cash Used in Financing Activities........... (1,988) (1,238)
--------- --------
Increase (Decrease) in Cash and Cash Equivalents 167 (1,472)
Currency Translation Adjustments ................ (193) 258
Cash and cash equivalents at beginning of period. 7,167 8,580
--------- --------
Cash and Cash Equivalents At End Of Period....... $ 7,141 $ 7,366
======= =======
5
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EMBREX, INC.
FORM 10-Q
June 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
six-month periods ended June 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 $1,284,000 and $600,000 for the three months ended
June 30, 1999 and 1998, respectively, and $2,274,000 and $1,390,000 for the six
months ended June 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.
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 June 30, 1999 and 1998
- -----------------------------------------
Consolidated revenues for the second quarter of 1999 totaled $8.4 million,
representing an increase of 21% over 1998 second quarter revenues of $7.0
million.
INOVOJECT(R) system revenues amounted to $8.1 million for the 1999 second
quarter, an increase of 23% over 1998 second quarter revenues of $6.6 million.
Most of the 1999 and 1998 INOVOJECT(R) system revenues were generated from
INOVOJECT(R) system lease fees. The growth in INOVOJECT(R) system revenues was
primarily attributable to increased injection activity in North American
hatcheries as well as additional INOVOJECT(R) systems operating in Europe, Asia
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 $299,000 of product
revenue in the 1999 second quarter and $266,000 in the 1998 second quarter. The
Company's ability to generate revenue from product sales has been constrained by
the previously announced delay associated with obtaining British regulatory
approval for the sale of Bursamune(TM) in the United Kingdom by Fort Dodge
Animal Health ("Ft. Dodge"), a division of American Home Products Corp., lower
levels of breeder and broiler flock vaccination rates, and fewer reported
incidences of bursal disease in the United States. Product sales nevertheless
increased 12% during the second quarter of 1999 compared to product sales during
the second 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
INOVOJECT(R) system revenues, resulting in an improvement in gross profit from
50% of total revenues during the second quarter 1998, to 62% during the
comparable 1999 quarter.
Operating expenses increased from $2.6 million during the second quarter of
1998, to $3.6 million during the second 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 income amounted to $30,000 for the second quarter of 1999 compared
to net interest expense of $64,000 for the second quarter of 1998. The $94,000
decrease is attributable to the reduction in lease and debt obligations.
INOVOJECT(R) system revenues and improved gross margins resulted in a $725,000
increase in net income, to $1.3 million in the second quarter of 1999 compared
to $605,000 during the comparable period in 1998. Diluted net income per common
share was $0.16 for 1999 second quarter based on 8.5 million average shares
outstanding, compared to diluted net income of $0.07 per share based on 8.3
million average shares outstanding in the second quarter 1998.
7
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Six Months Ended June 30, 1999 and 1998
- ---------------------------------------
Consolidated revenues for the six months ended June 30, 1999 totaled $16.4
million, representing an increase of 19% over 1998 revenue of $13.8 million for
the comparable period.
INOVOJECT(R) system revenues amounted to $15.8 million for the first six months
of 1999, an increase of 20% over 1998 first half revenues of $13.2 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 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 $545,000 of product revenue
during the first six months of 1999 and $521,000 during the first six months of
1998. Bursaplex(R) sales increased 5% as demand in the Asian and Latin American
markets offset a decline in the North American market for the reasons previously
discussed regarding second quarter results.
Consolidated revenues grew at a faster rate than the cost of product sales and
INOVOJECT(R) system revenues, resulting in an improvement in gross profit from
52% of total revenues during the first six months of 1998, to 61% during the
comparable 1998 period. As start-up operations in Asia and Latin America develop
a sustainable revenue base, certain recurring 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 to gross profit.
Operating expenses increased from $5.5 million during the first half of 1998, to
$6.9 million during the first half 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 $25,000 for the first six months of 1999
compared to $200,000 for the first six months of 1998. The $175,000 decrease is
attributable to the reduction in lease and debt obligations.
INOVOJECT(R) system revenues and improved gross margins resulted in a $1.3
million increase in net income, to $2.5 million in the first half of 1999
compared to $1.1 million during the comparable period in 1998. Diluted net
income per common share was $0.29 for the first six months of 1999 based on 8.4
million average shares outstanding, compared to diluted net income of $0.14 per
share based on 8.3 million average shares outstanding during the first six
months of 1998.
The Company estimates that as of June 30, 1999, it was vaccinating in excess of
80% of the broiler birds grown in the United States during the first six 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 28 countries, including the United States and
Canada.
8
<PAGE>
Bursaplex(R), a product which uses the Company's Viral Neutralizing Factor
(VNF(R)) technology to form an antibody-vaccine when combined with an Infectious
Bursal Disease (IBD) virus, was granted approval from the United States
Department of Agriculture (the "USDA") in 1997 for in ovo (in-the-egg) use,
specifically for administration via the Company's INOVOJECT(R) system. To date,
regulatory approval for Bursaplex(R) has been received in Peru, Ecuador,
Pakistan, South Korea, Thailand and Vietnam, and regulatory approval is pending
in Canada, the Phillippines, People's Republic of China, Indonesia, Venezuela,
Argentina, Chile, Colombia, Malaysia and Taiwan and a number of other countries
in Asia and Latin America.
Bursamune(TM), which also utilizes the Company's VNF(R) technology, is an IBD
vaccine produced by Cyanamid Websters, a unit of Ft. Dodge and which will be
marketed by Ft. Dodge in Europe, the Middle East and Africa under Ft. Dodge's
trade name "Bursamune(TM)" upon receipt of regulatory approvals. In June 1997,
Ft. Dodge indicated that its U.K. application for in ovo regulatory approval of
Bursamune(TM) had been provisionally refused. Ft. Dodge also indicated that the
U.K. regulatory authority requested that further data be supplied. The Company
has worked with Ft. Dodge, which is responsible for obtaining the necessary
approvals for Bursamune(TM), in both the U.K. and other European Community
markets, to respond to the U.K. regulatory authority requests for data with
respect to Bursamune(TM). The Company anticipates that the regulatory review
process will be completed during 1999. To date, Bursamune(TM) has received
regulatory approval in South Africa and Spain.
For the rest of 1999, the goals of management are to maintain revenue growth and
profitability, to continue efforts to achieve worldwide placements of the
INOVOJECT(R) system, to obtain regulatory approvals and initiate marketing of
Bursaplex(R) in 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(TM) as well as regulatory approval and market acceptance of other
vaccines for in ovo delivery. In addition, normal fluctuations in the market
price of grain, domestic and international consumption levels of chicken, the
supply of broiler chicken eggs, country-specific regulations and economic
conditions, and export opportunities for the Company's U.S. customers may impact
the timing and quantity of egg injections and the corresponding in ovo delivery
of vaccines. Moreover, further delay in obtaining U.K. regulatory approval for
the sale of Bursamune(TM) would negatively impact the Company's ability to
generate revenue from both the use of INOVOJECT(R) systems for the in ovo
delivery of Bursamune(TM) and the sale of its VNF(R) compound for the production
of Bursamune(TM) in the U.K. market.
CHANGES IN FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
- ----------------------------------------------------------------
At June 30, 1999, the Company's cash and cash equivalents amounted to $7.1
million, down $26,000 from $7.2 million on hand at year-end 1998.
Operating activities generated $4.9 million in cash during the first six months
of 1999. Cash was provided by net income of $2.5 million, adjusted by
depreciation of nearly $2.0 million, by increases in accounts payable and
accrued expenses of $0.7 million, and offset by increases in accounts receivable
and other current assets of $0.2 million.
During the first half of 1999, investing activities used $2.7 million of cash,
principally for additional INOVOJECT(R) systems well as hardware and software
for the Company's new information system.
9
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Financing activities used $2.0 million, primarily for the repayment of capital
lease obligations and repurchases of the Company's common stock.
As of June 30, 1999, the Company had outstanding purchase commitments of
approximately $4.3 million related to the production of the Company's
Bursaplex(R) product, VNF(R) for the manufacture of Bursaplex(R) and
Bursamune(TM) and materials and supplies for the construction and maintenance of
its INOVOJECT(R) systems.
In April 1999, the Company obtained a $6.0 million secured revolving line of
credit from its bank. This line of credit may be used for working capital
purposes and has a term of eighteen months.
Based on its current operations, management believes that available cash and
cash equivalents, together with cash flow from operations and its bank line of
credit, will be sufficient to meet its foreseeable cash requirements in support
of its operations, including necessary capital investments, continued global
expansion, funding new product development and repurchases of its common stock.
YEAR 2000 ISSUE
- ---------------
The Company established a team to address the Year 2000 issue in June 1998. The
team has conducted an inventory and assessment of the Company's computer
hardware and software systems, as well as embedded systems in its INOVOJECT(R)
system, manufacturing and laboratory equipment and office facilities, such as
security and fire alarm systems. The team has developed remediation, testing,
and implementation plans for imbedded systems, including the INOVOJECT(R)
system. The Company expects to complete all remediation, testing and
implementation not later than October 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 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 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
10
<PAGE>
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 is 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 presently expects to incur no more than $200,000 in addressing Year
2000 issues, including an estimated $100,000 spent during the first six 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 correct all relevant computer codes,
unforeseen circumstances that would cause the Company to allocate its resources
elsewhere, and similar uncertainties.
FORWARD-LOOKING STATEMENTS
- --------------------------
This report contains forward-looking statements, including statements with
respect to future products, services, markets and financial results. These
statements involve risks and uncertainties that could cause actual results to
differ materially, including without limitation the ability of the Company to
penetrate new markets, place INOVOJECT(R) systems worldwide, establish a degree
of market acceptance for new products such as but not limited to Bursaplex(R)
and Bursamune(TM) , prevail in the outcome of its patent litigation appeal,
complete commercial development of potential future products or obtain
regulatory approval of its products, which approval is dependent upon a number
of factors, such as results of trials, the discretion of regulatory officials,
and potential changes in regulations, and the Company's dependence on certain
customers. These statements are also contingent upon continued growth of the
global poultry industry and the economic viability of certain markets.
Additional information on these risks and other factors which could affect the
Company's financial results is included in the Company's Form 10-K filed with
the Securities and Exchange Commission and other filings with the SEC, including
the Company's Forms 10-Q and 8-K.
11
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
- ------------------------------------------------------------------
A portion of the Company's operations are in jurisdictions outside North
America. The Company leases INOVOJECT(R) systems and sells products in Europe,
Asia and Latin America. As a result, the Company's financial results could be
affected by factors such as changes in foreign currency exchange rates or weak
economic conditions in the foreign markets in which the Company distributes its
products. At June 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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
- ---------------------------
For a description of certain patent infringement proceedings initiated by the
registrant and related legal proceedings, see the registrant's Form 10-K for the
year ended December 31, 1998 filed with the Securities and Exchange Commission
on March 31, 1999.
On April 7, 1999, the registrant announced that the U.S. District Court for the
District of Maryland had granted the United States Department of Agriculture's
("USDA") motion for summary judgment in the litigation brought against the USDA
by Service Engineering Corporation and Edward G. Bounds ("SEC/Bounds"). The
court agreed that "the plaintiff (SEC/Bounds) lacked standing to challenge the
USDA's actions in this matter and that the [USDA's] motion for summary judgment
will be granted." In this lawsuit, SEC/Bounds filed suit against the USDA with
respect to its grant to Embrex of an exclusive license for U.S. Patent No.
4,458,630 ("patent '630", or the "Sharma patent"). Patent '630 relates to in ovo
(in-the-egg) injection.
This decision, combined with the verdict rendered in Embrex's favor in the U.S.
District Court for the Eastern District of North Carolina in July 1998,
reaffirms both the validity of the USDA's actions and the validity of the Sharma
patent.
The July 1998 verdict fully upheld the validity of all claims of the Sharma
patent, finding that SEC/Bounds had willingly infringed all asserted claims of
the patent. The jury also found that SEC/Bounds had breached a 1995 Consent
Judgment and Settlement Agreement and that such breach was not in good faith. In
October 1998, SEC/Bounds filed a notice of appeal in the U.S. Court of Appeals
for the Federal Circuit seeking reversal of the judgment. Embrex has opposed the
appeal.
On April 15, 1999, Machining Technologies, Inc. served on Embrex a Complaint
for Declaratory Judgment against Embrex in the U. S. District Court for the
District of Maryland. Machining Technologies seeks a declaration that U.S.
Patent No. 4,458,630 is not infringed, invalid and/or not enforceable.
Machining Technologies was a manufacturer of egg injection machine parts to
Bounds and Service Engineering. Embrex believes the action to be without
legal basis and moved for its dismissal.
12
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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.
- ------- ----------------------------------------------------
On May 20, 1999 the Annual Meeting of Shareholders was held and the following
matters were submitted to the shareholders for a vote. There were 7,218,271
shares represented at the meeting in person or by proxy and set forth below is a
brief description of the matters voted on and the number of votes cast for,
against or withheld, as well as the number of abstentions. There were no broker
non-votes.
ELECTION OF DIRECTORS:
Votes Votes Votes
Director Votes For Withheld Against Abstained Totals
- -------- --------- -------- ------- --------- ------
Charles E. Austin 7,016,159 202,112 n/a n/a 7,218,271
C. Daniel Blackshear 6,974,859 243,412 n/a n/a 7,218,271
Lester M. Crawford,
D.V.M., Ph.D. 7,014,459 203,812 n/a n/a 7,218,271
Peter J. Holzer 7,011,959 206,312 n/a n/a 7,218,271
Randall L. Marcuson 6,918,142 300,129 n/a n/a 7,218,271
Kenneth N. May, Ph.D. 7,017,259 201,012 n/a n/a 7,218,271
Arthur M. Pappas 7,015,259 203,012 n/a n/a 7,218,271
Walter V. Smiley 7,043,084 175,187 n/a n/a 7,218,271
RATIFY THE ACTION OF THE BOARD OF DIRECTORS IN APPOINTING ERNST & YOUNG LLP AS
INDEPENDENT ACCOUNTANTS FOR THE FISCAL YEAR ENDING DECEMBER 31, 1999:
Broker
For Against Abstain Non-Votes
--------- --------- --------- ----------
7,170,507 28,629 19,135 0
Item 5. Other Information. Not applicable.
- ------- ------------------
Item 6. Exhibits and Reports on Form 8-K.
- ------- ---------------------------------
(a) Exhibits
10.1 Loan Agreement between Embrex, Inc. and Branch Banking and
Trust Company dated as of April 7,1999.
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: August 13, 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 June 30, 1999
EXHIBIT INDEX
Exhibit
- -------
10.1 Loan Agreement between Embrex, Inc. and Branch Banking and Trust
Company dated as of April 7,1999.
27. Financial Data Schedule
15
Exhibit 10.1
BB&T
LOAN AGREEMENT
This Loan Agreement (the "Agreement") is made this 7th day of April, 1999,
by and between BRANCH BANKING AND TRUST COMPANY, a banking association organized
and existing under the laws of North Carolina ("Bank"), and:
_____________________________, _________________________________, and
_______________________, individuals residing in the State of
_____________________ (collectively "Borrower"), d/b/a__________________________
____________________________________, a ________________ general limited
partnership(s) ("Borrower"), having principal offices in_______________________.
Embrex, Inc., a corporation(s) organized under the laws of North Carolina
("Borrower"), having principal offices in Durham, North Carolina.
____________________________________, a limited liability company
partnership organized under the laws of __________________________ ("Borrower"),
having principal offices in ______________________________________________
___________________________________________________ and _________________
___________________________________________ ("Guarantor").
The Borrower has applied to Bank for and the Bank has agreed to make,
subject to the terms of this Agreement, the following loan(s):
Term Loan ("Loan #1") in the principal amount of $__________________ for
the purpose of________________________________________________________________
to be evidenced by the Borrower's Promissory Note dated ______________,
________, payable in _________ consecutive equal __________________ principal
installments in the amount of $_____________ plus accrued interest or
installments of principal and interest in the amount of $______________________,
commencing on the _________ day of ___________, _______, and the _________ day
of each _________ thereafter through _______________, _______. Loan #1 shall
mature on __________________, _____, when the entire unpaid principal balance
then outstanding plus accrued interest thereon shall be paid in full. Loan #1
shall bear interest at a rate at all times equal to ______% per annum or
________% per annum above the Bank's Prime Rate adjusted daily monthly quarterly
and shall be secured by ________________
_______________________________________________________________________________.
Line of Credit ("Loan #3") in principal amount not to exceed $6,000,000.00
in the aggregate at any one time outstanding for the purpose of providing a
working capital line of credit to be evidenced by the Borrower's Promissory Note
dated April 7, 1999 maturing October 2, 2000, when the entire unpaid principal
balance then outstanding plus accrued interest thereon shall be paid in full.
Prior to maturity or the occurrence of any Event of Default hereunder the
Borrower may borrow, repay, and reborrow hereunder through maturity. Loan #3
shall bear
<PAGE>
interest at a rate at all times equal to _________% per annum or 2.00% per annum
above the Bank's LIBOR Rate, adjusted daily monthly quarterly and shall be
secured by (See Exhibit A).
________________ ("Loan #3") in the principal amount not to exceed
$____________, for the purpose of______________________________________________
to be evidenced by the Borrower's Promissory Note dated ___________, ______,
maturing on ____________, _________, when the entire principal balance then
outstanding plus accrued interest thereon shall be paid in full. Loan #3 is
repayable_____________________________________________________________________
________________________________________________________________. Loan #3 shall
bear interest at a rate at all times equal to _________% per annum or ______%
per annum above the Bank's Prime Rate, adjusted daily monthly quarterly and
shall be secured by
________________________________________________________________________________
____________________________________________________________.
Additional terms of Loan #__________________ are described in Schedule
"_____" attached hereto.
Section 1: Conditions Precedent
- --------------------------------
The Bank shall not be obligated to make any disbursement until all of the
following conditions have been satisfied by proper evidence, execution, and/or
delivery to the Bank of the following items, all in form and substance
satisfactory to the Bank and the Bank's counsel in their sole discretion:
1.01. Note(s): The Note(s) evidencing Loan #(s) 00003 duly executed by the
Borrower.
1.02. Deed(s) of Trust: The Deed(s) of Trust in which Borrower shall grant to
Bank a deed of trust lien on the Borrower's real property securing the
Note(s) ("Mortgaged Property"). The Deed(s) of Trust shall be junior to prior
lien(s) not to exceed $______________ in the aggregate.
1.03. Assignment of Leases and Rents: The Assignment of Leases and Rents in
which the Borrower shall assign to Bank all existing and thereafter arising
leases on the Mortgaged Property and the rents and profits therefrom.
1.04. Title Insurance: A Standard ALTA mortgagee policy from a company or
companies approved by the Bank, providing coverage for the full principal
amount of the Note(s) which are secured by the Deed(s) of Trust and
containing no title exceptions not approved by the Bank and Bank's counsel.
1.05. Title Opinion: A favorable opinion of title from legal counsel
acceptable to the Bank certifying that the Borrower has good and marketable
fee simple title to the Mortgaged Property and that the Deed(s) of Trust
granted to the Bank constitutes a first priority lien thereon without
exceptions, except as are acceptable to the Bank and the Bank's counsel.
1.06. Survey: A certified copy of a recent survey of the Mortgaged Property
prepared by a registered land surveyor or Civil Engineer.
1.07. Flood Hazard Certification: Evidence satisfactory to Bank and Bank's
counsel as to whether the Mortgaged Property is located within an area
identified as having "special flood hazards" as such term is used in the
Federal Flood Disaster Protection Act of 1973.
1.08. Environmental Audit Report: A favorable "Phase I" unedited environmental
audit covering the Mortgaged Property from an independent environmental
engineering firm satisfactory to Bank which reflects that no hazardous waste,
toxic substances, or other
2
<PAGE>
pollutants have contaminated the Mortgaged Property or, if the Mortgaged
Property has been so contaminated, that is has been satisfactorily cleaned
up in accordance with all Environmental Laws. The Bank shall be fully
authorized to discuss all aspects of the audit with the engineering firm.
1.09. Security Agreement: A Security Agreement in which Borrower shall grant
to Bank a first lien and security interest in the Borrower's specified
personal property securing the Note(s). (If Bank will be a junior lienholder
on any personal property, Borrower must fully disclose to Bank any and all
prior liens, and Bank must specifically approve its junior lien position as
an exception to standard loan policy.) If checked here, a favorable
opinion is required from legal counsel acceptable to Bank regarding the
priority of Bank's lien position.
1.10. UCC Financing Statements: Acknowledged copies of UCC Financing
Statements (UCC-1) duly filed in all jurisdictions necessary, or in the
opinion of the Bank desirable, to perfect the security interest granted in
the Security Agreement, and certified copies of Requests For Information
(UCC-1) identifying all previous financing statements on record for the
Borrower from all jurisdictions indicating that no security interest has
previously been granted in any of the collateral described in the Security
Agreement, unless prior approval has been given by Bank.
1.11. Commitment Fee: A commitment fee of $ see below payable to the Bank on
the date of execution of the Loan Documents, unless a schedule follows: one
eighth (1/8) of one percent (1.00%) of the unused portion of the line shall
be payable annually in arrears.
1.12. Corporate Resolution: A Corporate Resolution from the Board of Directors
of the Borrower authorizing the execution, delivery, and performance of the
Loan Documents on or in a form provided by or acceptable to Bank.
1.13. Articles of Incorporation: A copy of the Articles of Incorporation and
all other charter documents of the Borrower, all certified by the Secretary
of State of the State of the Borrower's incorporation.
1.14. By-Laws: A copy of the By-Laws of the Borrower, certified by the
Secretary of the Borrower as to their completeness and accuracy.
1.15. Certificate of Incumbency: A certificate of the Secretary of the
Borrower certifying the names and true signatures of the officers of the
Borrower authorized to sign the Loan Documents.
1.16. Certificate of Good Standing: A certification of the Secretary of State
of the State of the Borrower's Incorporation or Organization as to the good
standing of the Borrower and its charter documents on file.
1.17. Opinion of Counsel: A favorable opinion of counsel for the Borrower
satisfactory to the Bank and Bank's counsel, that:
(i) The representations and warranties of the Borrower set forth in
Sections 2 and 6 of the Agreement are true and correct in all
respects.
(ii) The Loan Documents have been duly executed and delivered by the
Borrower and Guarantor, and constitute the legal, valid, and binding
obligations of the Borrower and Guarantor, enforceable in accordance
with their respective terms.
(iii) No registration with, consent of, approval of, or other action by
any Federal, State, or other governmental authority or regulatory
body to the execution and delivery of the Loan Documents is required
by law, or, if so required, such registration has been made, and
consent or approval given, or such other appropriate action taken.
(iv) The loan transactions entered into pursuant to this Agreement are
not usurious.
3
<PAGE>
(v) To such additional matters as the Bank may reasonably request.
1.18. Guaranty: Guaranty Agreement(s) duly executed by_______________________
_______________________ (jointly and severally the "Guarantor"). In addition
the Guarantor covenants and agrees to provide the Bank with appropriate
financial information including tax returns, a balance sheet and income
information satisfactory to the Bank not less often than annually.
1.19. Assignment of Life Insurance Policy: An Assignment of Life Insurance
Policy on the life of ____________________________ in the amount of
$____________________.
1.20. Partnership Agreement: A copy of the Borrower's Partnership Agreement.
1.21. Declaration of Partnership: A Declaration of Partnership from the
partners authorizing the execution, delivery and performance of the Loan
Documents on or in a form provided by or acceptable to Bank.
1.22. Assignment of Savings Account(s)/Savings Instrument(s): Assignment of
Savings Account(s)/Savings Instrument(s) in which Borrower shall assign to
Bank savings account(s) and/or savings instrument(s) in the amount of at
least $____________ as collateral for the Note(s).
1.23. Stock Certificate(s) and Assignment(s) Separate from Certificate(s):
Stock certificate(s) for all shares of stock pledged by Borrower as
collateral for the Note(s) and a signed Assignment Separate from Certificate
for each stock certificate.
1.24. Appraisal(s): Two (2) copies of an appraisal of the estimated market
value of the real and/or personal property offered as collateral for the
Loan(s) referenced herein. The appraisal(s) must be addressed to the Bank and
must conform to the Uniform Standards of Professional Appraisal Practice
("USPAP") adopted by the Appraisal Standards Board of the Appraisal
Foundation. Any deviation from the USPAP must be explained in the
appraisal(s). The appraiser(s) must be licensed and/or certified if required
by applicable Federal Deposit Insurance Corporation regulations or state
laws.
1.25. Declaration of Limited Liability Company or Limited Liability
Partnership: A Declaration from the members authorizing the execution,
delivery and performance of the Loan Documents on or in a form provided by or
acceptable to Bank.
1.26. Operating Agreement: A copy of the Borrower's Operating Agreement,
certified by a Manager of the Borrower as to its completeness and accuracy.
1.27. Articles of Organization: A copy of the Articles of Organization and all
other organizational documents of the Borrower, all certified by the
Secretary of State of the State of the Borrower's organization.
1.28. Additional Documents: Receipt by the Bank of other approvals,
opinions, or documents as the Bank may reasonably request.
4
<PAGE>
Section 2: Representations and Warranties
- ------------------------------------------
The Borrower and Guarantor represent and warrant to Bank that:
2.01 Financial Statements. The balance sheet of the Borrower and its
subsidiaries and the related Statements of Income and Retained Earnings of
the Borrower and its subsidiaries, the accompanying footnotes together with
the accountant's opinion thereon, and all other financial information
previously furnished to the Bank, are true and correct and fairly reflect
the financial condition of the Borrower and its subsidiaries as of the
dates thereof, including all contingent liability of every type, and the
financial condition of the Borrower and its subsidiaries as stated therein
has not changed materially and adversely since the date thereof. Guarantor
also makes the same representations and warranties as the Borrower
concerning its financial statements and condition.
2.02 Capacity and Standing. If the Borrower and/or the Guarantor is a
corporation, LLC, or LLP, each warrants and represents that it is duly
organized and validly existing under the laws of its respective state of
incorporation, it and its subsidiaries are duly qualified and in good
standing in every other state in which the nature of their business shall
require such qualification, and are each duly authorized by their
respective boards of directors to make and perform the obligations under
the Loan Documents.
2.03 No Violation of Other Agreements. The execution of any of the Loan
Documents, and the performance by the Borrower thereunder will not violate
any provision of its articles of incorporation or by-laws, or of any law,
other agreement, indenture, note, or other instrument binding upon the
Borrower or Guarantor, or give cause for the acceleration of any of the
respective obligations of the Borrower or Guarantor.
2.04 Authority. All authority from and approval by any governmental body,
commission, or agency, whether federal, state, or local necessary to the
making, validity, or enforceability of this Agreement or the other Loan
Documents has been obtained.
2.05 Asset Ownership. The Borrower and Guarantor have good and marketable title
to all of the properties and assets reflected on the balance sheets and
financial statements supplied to the Bank, and all such properties and
assets are free and clear of mortgages, deeds of trust, pledges, liens, and
all other encumbrances except as otherwise disclosed by such financial
statements.
2.06 Discharge of Liens and Taxes. The Borrower, its subsidiaries, and Guarantor
have filed, paid, and/or discharged all taxes or other claims which may
become a lien on any of their respective properties or assets, excepting to
the extent that such items are being appropriately contested in good faith
and for which an adequate reserve for the payment thereof is being
maintained.
2.07 Regulation U. None of the proceeds of the loan(s) made pursuant to this
Agreement shall be used directly or indirectly for the purpose of
purchasing or carrying any stock in violation of any of the provisions of
Regulation U of the Board of Governors of the Federal Reserve System.
2.08 ERISA. Each employee benefit plan, as defined by the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), maintained by the
Borrower or by any subsidiary of the Borrower or Guarantor meets, as of the
date hereof, the minimum funding standards of Section 302 of ERISA, all
applicable requirements of ERISA and of the Internal Revenue Code of 1986,
as amended, and no "Reportable Event" nor "Prohibited Transaction" (as
5
<PAGE>
defined by ERISA) has occurred with respect to any such plan.
2.09 Litigation. There is no pending or threatened action or proceeding against
or affecting the Borrower, any of its subsidiaries, or the Guarantor before
any court, commission, governmental agency, whether State or Federal, or
arbitration which may materially adversely affect the financial condition,
operations, properties, or business of the Borrower, any such subsidiary,
or the Guarantor, or the ability of the Borrower or the Guarantor to
perform its obligations under the Loan Documents.
2.10 Binding and Enforceable. The Loan Documents, when executed, shall
constitute valid and binding obligations of the Borrower and Guarantor
respectively and are enforceable in accordance with their terms, except as
may be limited by bankruptcy, insolvency, moratorium, or similar laws
affecting creditors' rights generally.
Section 3: Affirmative Covenants
- ---------------------------------
The Borrower covenants and agrees that from date hereof and until payment
in full of all indebtedness and performance of all obligations under the Loan
Documents, it will:
3.01 Maintain Existence. Preserve and maintain its existence and good standing
in the state of its organization, and qualify and remain qualified as a
foreign corporation, LLC, or LLP in each jurisdiction in which such
qualification is required.
3.02 Maintain Records. Keep adequate records and books of account, in which
complete entries will be made in accordance with generally accepted
accounting principles consistently applied, reflecting all financial
transactions of the Borrower.
3.03 Maintain Properties. Maintain, keep and preserve all of its properties
(tangible and intangible) necessary or useful in the conduct of its
business in good working order and condition, ordinary wear and tear
excepted.
3.04 Conduct of Business. Continue to engage in an efficient, prudent, and
economical manner in a business of the same general type as now conducted.
3.05 Maintain insurance. Maintain insurance with financially sound and reputable
insurance companies or associations in such amounts and covering such risks
as are usually carried by companies engaged in the same or a similar
business, which insurance may provide for a reasonable deductible. The Bank
shall be named as loss payee on all policies which apply to the Bank's
collateral, and the Borrower shall deliver certificates of insurance at
closing evidencing same. All such insurance policies shall provide, and the
certificates shall state, that no policy will be terminated without 20 days
prior written notice to Bank.
3.06 Comply with Laws. Comply in all respects with all applicable laws, rules,
regulations, and orders including, without limitation, paying before the
delinquency of all taxes, assessments, and governmental charges imposed
upon it or upon its property, and all Environmental Laws.
3.07 Right of Inspection. Permit the officers and authorized agents of the Bank,
at any reasonable time, to examine and make copies of the records and books
of account of, and visit the properties of the Borrower, and to discuss
such matters with any officers, directors, and the Borrower's independent
accountant as the Bank deems necessary.
6
<PAGE>
3.08 Reporting Requirements. Furnish to the Bank:
(1) Monthly Quarterly Financial Statements: As soon as available and not
more than sixty (60) days after the end of each quarter, balance
sheets, statements of income and retained earnings for the period ended
and a statement of changes in the financial position, all in reasonable
detail, and all prepared in accordance with GAAP consistently applied
and certified as true and correct by an officer of the Borrower.
(2) Annual Financial Statements: As soon as available and not more than
ninety (90) days after the end of each fiscal year, balance sheets,
statements of income and retained earnings for the period ended and a
statement of changes in the financial position, all in reasonable
detail, and all prepared in accordance with GAAP consistently applied.
The financial statements must be of the following quality or better:
compiled reviewed audited.
(3) Loan Base Report: On or before the N/A day of each month, a Loan Base
Report in a form acceptable to Bank signed by the President or chief
financial officer of the Borrower.
(4) Notice of Litigation: Promptly after the receipt by the Borrower of
notice or complaint of any action, suit, and proceeding before any
court or governmental agency of any type which, if determined
adversely, could have a material adverse effect on the financial
condition, properties, or operations of the Borrower.
(5) Tax Returns: As soon as available each year, copies of all state and
federal tax returns filed by Borrower.
(6) Other Information: Such other information as the Bank may from time to
time reasonably request.
3.09 Deposit Accounts. Maintain substantially all of its demand deposit accounts
with the Bank. If checked here , Borrower will be subject to the
compensating deposit account requirements described in attached Schedule
"AA."
3.10 Lines of Credit To Builders and/or Construction Loans. Additional terms,
conditions, and covenants of this Agreement are described in Schedule "BB"
Schedule "CC" attached hereto.
Section 4: Financial Covenants
- -------------------------------
The Borrower covenants and agrees that from the date hereof until payment in
full of all indebtedness and the performance of all obligations under the Loan
Documents, the Borrower shall at times maintain the following financial position
and ratios all in accordance with GAAP unless otherwise specified:
4.01 Current Ratio. A ratio of total current assets to total current
liabilities of not less than 1.50 to 1.00.
4.02 Quick Ratio. A ratio of the total of cash plus readily marketable United
States securities plus commercial paper rated A-1 by Standard & Poors
Corporation plus trade accounts receivable not more than
________________ (____) days past due to total current liabilities of
not less than __________ to ___________.
4.03 Working Capital. The difference between total current assets and total
current liabilities shall not be less than $___________.
4.04 Tangible Net Worth. A minimum tangible net worth of not less than
$15,000,000.00.
4.05 Debt to Worth. A ratio of total liabilities to tangible net worth of not
greater than
7
<PAGE>
____________ to ______________________.
4.06 Cash Flow Ratio. A ratio of Net Income after taxes plus depreciation
plus amortization to long-term debt payments (excluding interest due)
within the next twelve (12) months of at least 1.50 to 1.00. This ratio
will be calculated based only on the fiscal year-end financial
statements.
4.07 Capital Expenditures Limitation. Expenditures for fixed assets in any
fiscal year shall not exceed in the aggregate the sum of
$______________________ without the prior written consent of the Bank.
4.08 Other. Such other financial covenants listed on Schedule "_______"
hereto.
Section 5: Negative Covenants
- ------------------------------
The Borrower covenants and agrees that from the date hereof and until
payment in full of all indebtedness and performance of all obligations under the
Loan Documents, the Borrower shall not, without the prior written consent of the
Bank:
5.01 Liens. Create, incur, assume, or suffer to exist any lien upon or with
respect to any of its properties, now owned or hereafter acquired, except:
(a) Liens in favor of the Bank;
(b) Liens for taxes not yet due and payable or otherwise being contested
in good faith and for which appropriate reserves are maintained;
(c) Other liens imposed by law not yet due and payable, or otherwise
being contested in good faith and for which appropriate reserves are
maintained;
(d) Liens on ________________________________, securing an obligation to
________________________________________ not to exceed $_________,
or described on Schedule "_______" hereto.
(e) Purchase Money Liens on any property hereafter acquired, provided
that such lien shall attached only to the property acquired.
5.02 Debt. Create, incur, assume, or suffer to exist any debt, except:
(a) Debt to the Bank;
(b) Debt presently outstanding and shown on the most recent financial
statements submitted to the Bank;
(c) Accounts payable to trade creditors incurred in the ordinary course
of business;
(d) Debt secured by purchase money liens as outlined above in Section
5.01(e);
(e) Additional debt not to exceed $_________________________.
5.03 Mergers. Merge or consolidate with or sell, assign, lease, or otherwise
dispose of all or substantially all of its assets to any person, or acquire
all or substantially all of the assets or the business of any person.
5.04 Leases. Create, incur, assume, or suffer to exist any leases, except:
(a)Leases presently outstanding and showing on the most recent financial
statement submitted to the Bank;
(b) Operating Leases for machinery and equipment which do not in the
aggregate require payments in excess of $_____________________ in
any fiscal year of the Borrower.
5.05 Dividends. Declare or pay any dividends; or purchase or redeem, retire or
otherwise acquire any of its capital stock now or hereafter outstanding in
excess of $________________ in any fiscal year of the Borrower.
8
<PAGE>
5.06 Salaries. Salaries and any other cash compensation to owners/officers
shall be limited as follows: N/A.
5.07 Guaranties. Assume, guarantee, endorse, or otherwise be or become directly
or contingently liable for obligations of any person, except guaranties by
endorsement of negotiable instrument for deposit or collection or similar
transactions in the ordinary course of business.
5.08 Loans. Loans to owners/officers shall be limited as follows: N/A.
5.09 Sale of Assets. Sell, lease, or otherwise dispose of any of its assets or
properties except in the ordinary and usual course of its business.
5.10 Transfer of Ownership. If Borrower is a corporation, transfer or sell
more than 10% of the total number of shares of stock in Borrower prior to
the maturity of the Note(s).
5.11 Other. Such other negative covenants listed on Schedule "______" hereto.
Section 6: Hazardous Materials and Environmental Compliance
- ------------------------------------------------------------
6.01 Investigation. Borrower hereby certifies that it has exercised due
diligence, to ascertain whether its real property, including without
limitation the Mortgaged Property, is or has been affected by the presence
of asbestos, oil or oil products, urea formaldehyde, PCBs, hazardous or
nuclear waste, toxic chemicals and substances, or other hazardous
materials, as defined in applicable Environmental Laws. Borrower represents
and warrants that there are no such materials contaminating its real
property, nor have any such materials been stored on or improperly disposed
of on its real property. Borrower hereby agrees that it shall not permit
any such contamination as long as any indebtedness or obligations to Bank
under the Loan Documents remains unpaid or unfulfilled. In addition,
Borrower does not have or use any underground storage tanks on its property
which are not registered with the appropriate Federal and/or State agencies
and which are not properly equipped and maintained in accordance with all
Environmental Laws. If requested by Bank, Borrower shall provide Bank with
all necessary and reasonable assistance required for purposes of
determining the existence of hazardous materials on the Mortgaged Property,
including allowing Bank access to the Mortgaged Property, and access to
Borrower's employees having knowledge of, and to files and records within
Borrower's control relating to the existence, storage or discharge of
hazardous materials on the Mortgaged Property.
6.02 Compliance. Borrower agrees to comply with all applicable Environmental
Laws, rules and regulations, including, without limitation, all those
relating to hazardous materials. Borrower further agrees to provide Bank,
and all appropriate Federal and State authorities, with immediate notice in
writing of any hazardous or toxic materials released on the Mortgaged
Property and to pursue diligently to completion all appropriate and/or
required remedial action in the event of such release.
6.03 Remedial Action. Bank shall have the right, but not the obligation, to
undertake all or any part of such remedial action in the event of a release
of hazardous or toxic materials on the Mortgaged Property and to add any
expenditures so made to the principal indebtedness secured by the Deed(s)
of Trust. Borrower agrees to indemnify and hold Bank harmless from any and
all loss or liability arising out of any violation of the representations,
covenants and obligations contained in this Section 6, or resulting from
the recording of the Deed(s) of Trust.
9
<PAGE>
Section 7: Events of Default
- -----------------------------
The following shall be Events of Default by Borrower or Guarantor:
7.01 *The failure to make prompt payment of any installment of principal or
interest on the Note(s) when due or payable; or
7.02 Any representation or warranty made in the Loan Documents which shall prove
to be false or misleading in any material respect; or
7.03 Any report, certificate, financial statement or other document furnished
prior to the execution of or pursuant to the terms of this Agreement shall
prove to be false or misleading in any material respect; or
7.04 *The Borrower or Guarantor shall default on the performance of any other
obligation when due or in the performance of any obligation incurred for
money borrowed; or
7.05 The breach of any covenant, condition, or agreement made by the Borrower or
Guarantor under the Loan Documents; or
7.06 If a custodian shall be appointed for or take possession of any or all of
the assets of the Borrower or Guarantor, or should the Borrower or
Guarantor either voluntarily or involuntarily become subject to any
insolvency proceeding, any proceeding to dissolve the Borrower or
Guarantor, any proceeding to have a receiver appointed, or should the
Borrower or Guarantor make an assignment for the benefit of creditors, or
should there be an attachment, execution or other judicial seizure of all
or any portion of the Borrower's or Guarantor's assets, including an action
or proceeding to seize any funds on deposit with the Bank, and such seizure
is not discharged within 20 days; or
7.07 Final judgment for the payment of money shall be rendered against the
Borrower or Guarantor which is not covered by insurance and shall remain
undischarged for a period of 30 days unless such judgment or execution
thereon be effectively stayed; or
7.08 The dissolution or termination of the existence of either the Borrower or
Guarantor; or
7.09 The Borrower or Guarantor shall become a debtor (as the term "debtor" is
defined in the U.S. Bankruptcy Code), whether voluntarily or involuntarily;
or
7.10 Should the Bank in good faith deem itself, its liens and security
interests, if any, or any debt hereunder unsafe or insecure, or should the
Bank believe in good faith that the prospect of payment or other
performance by the Borrower or Guarantor is impaired; or
7.11 Should any lien or security interest granted to bank to secure payment of
the Note(s) terminate, fail for any reason to have the priority believed by
Bank on the date granted, or become unperfected for any reason.
7.12 If any Guaranty given in connection with the Loan is terminated.
7.13 ___________________________________________________________________________
______________________________________________________________
* See Addendum Number 2 to Loan Agreement
Section 8: Remedies Upon Default
- ---------------------------------
Upon the occurrence of any of the above listed events of default, the Bank
may at any time thereafter, at its option, take any or all of the following
actions, at the same or at different times:
8.01 Declare the balance of the Note(s) to be immediately due and payable, both
as to principal and
10
<PAGE>
interest, without presentment, demand, protest, or notice of any kind, all
of which are hereby expressly waived by Borrower and Guarantor, and such
balance shall accrue interest at the Default Rate.
8.02 Require the Borrower or Guarantor to pledge additional collateral to the
Bank from the Borrower's or Guarantor's assets and properties, the
acceptability and sufficiency of such collateral to be determined in the
Bank's sole discretion;
8.03 Take immediate possession of and foreclose upon any or all collateral
including real and personal property, which may be granted to the Bank as
security for the indebtedness and obligations of Borrower under the Loan
Documents;
8.04 Exercise other rights and remedies as the Bank may be provided in the Loan
Documents, as a secured party under the North Carolina Uniform Commercial
Code, or as provided by law.
8.05 Any obligation of the Bank to advance funds under the Note(s) and all other
obligations (if any) of the Bank shall immediately cease and terminate
unless and until Bank shall reinstate in writing.
Section 9: Miscellaneous Provisions
- ------------------------------------
9.01 Definitions.
(a) "Borrowing Base" shall mean the lesser of (i) $N/A or (ii) the Total
Available Loan Base shown on the Loan Base Report furnished by Borrower
to Bank on or before the N/A day of each month as long as this
Agreement shall remain in force. The percentages of acceptable
collateral, as defined by Bank, which will be used to determine the
Total Available Loan Base, shall be the following: Inventory - N/A%;
Accounts Receivable - N/A%.
(b) "Default Rate" shall mean a rate of interest equal to Bank's Prime Rate
plus five percent (5%) per annum (not to exceed the legal maximum rate)
from and after the date of an Event of Default hereunder which shall
apply, in the Bank's sole discretion, to all sums owing, including
principal and interest, on such date.
(c) "Environmental Laws" shall mean all federal and state laws and
regulations which affect or may affect the Mortgaged Property,
including without limitation the Comprehensive Environmental Response,
Compensation and Liability Act (42 U.S.C. Sections 9601 et seq.), the
Resource Conservation and Recovery Act (42 U.S.C. Sections 6901 et
seq.), the Federal Water Pollution Control Act (33 U.S.C. Sections 1251
et seq.), the Clean Air Act (42 U.S.C. Section 7401 et seq.), the Toxic
Substances Control Act (15 U.S.C. Section 2601 et seq.), the
Sedimentation Pollution Control Act ( N.C.G.S. Sections 113A-5 et
seq.), the Hazardous Chemicals Right to Know Act (N.C.G.S. Sections
95-173 et seq.), the Oil Pollution and Hazardous Substances Control Act
(N.C.G.S. Sections 143-215.75 et seq.), the North Carolina Solid Waste
Management Act (N.C.G.S. Sections 130A-290 et seq.), and the Coastal
Area Management Act (N.C.G.S. Sections 113-a-119 et seq.), as such laws
or regulations have been amended or may be amended.
(d) "Loan Documents" shall mean this Agreement, the Note(s), the Deed(s) of
Trust, the Security Agreement(s), all UCC-1 Financing Statements, the
Guaranty Agreement(s), commitment letter(s), and all other documents,
certificates, and instruments executed in connection therewith, and all
renewals, extensions, modifications, substitutions, and replacements
thereto and therefor.
11
<PAGE>
(e) "Person" shall mean an individual, partnership, corporation, trust,
incorporated organization, LLC, LLP, association, joint venture, or a
government agency or political subdivision thereof.
(f) "GAAP" shall mean generally accepted accounting principles as
established by the Financial Accounting Standards Board or the American
Institute of Certified Public Accountants, as amended and supplemented
from time to time.
(g) "Prime Rate" shall mean the rate of interest per annum announced by the
Bank from time to time and adopted as its Prime Rate. The Prime Rate is
one of several rate indexes employed by the Bank when extending credit.
9.02 Non-impairment. If any one or more provisions contained in the Loan
Documents shall be held invalid, illegal or unenforceable in any respect,
the validity, legality and enforceability of the remaining provisions
contained therein shall not in any way be affected or impaired thereby and
shall otherwise remain in full force and effect.
9.03 Applicable Law. The Loan Documents shall be construed in accordance with
and governed by the laws of the state of North Carolina.
9.04 Waiver. Neither the failure or any delay on the part of the Bank in
exercising any right, power or privilege granted in the Loan Documents
shall operate as a waiver thereof, nor shall any single or partial exercise
thereof preclude any other or further exercise of any other right, power or
privilege which may be provided by law.
9.05 Modification. No modification, amendment or waiver of any provision of any
of the Loan Documents shall be effective unless in writing and signed by
the Borrower and Bank.
9.06 Payment Amount Adjustment. In the event that any Loan(s) referenced herein
has a variable (floating) interest rate and the interest rate increases,
Bank, at its sole discretion, may at any time adjust the Borrower's payment
amount(s) to prevent the amount of interest accrued in a given period to
exceed the periodic payment amount or to cause the Loan(s) to be repaid
within the same period of time as originally agreed upon.
9.07 Stamps and Fees. The Borrower shall pay all federal or state stamps, taxes,
or other fees or charges, if any are payable or are determined to be
payable by reason of the execution, delivery or issuance of the Loan
Documents or any security granted to the Bank; and the Borrower and
Guarantor agree to indemnify and hold harmless the Bank against any and all
liability in respect thereof.
9.08 Attorneys Fees. In the event the Borrower or Guarantor shall default in any
of its obligations hereunder and the Bank believes it necessary to employ
an attorney to assist in the enforcement or collection of the indebtedness
of the Borrower to the Bank, to enforce the terms and provisions of the
Loan Documents or in the event the Bank voluntarily or otherwise should
become a party to any suit or legal proceeding (including a proceeding
conducted under the Bankruptcy Code), the Borrower and Guarantors agree to
pay the reasonable attorneys' fees of the Bank and all related costs that
may be reasonably incurred by the Bank. The Borrower and Guarantor shall be
liable for such attorneys fees and costs whether or not any suit or
proceeding commences.
9.09 Bank Making Required Payments. In the event Borrower shall fail to maintain
insurance, pay taxes or assessments, costs and expenses which Borrower is,
under any of the terms hereof or of any Loan Documents, required to pay, or
fail to keep any of the properties and assets constituting collateral free
from new security interests, liens, or encumbrances, except as permitted
herein, Bank may at its election make expenditures for any or all such
purposes and the amounts expended together with interest thereon at the
Default Rate, shall become
12
<PAGE>
immediately due and payable to Bank, and shall have benefit of and be
secured by the collateral. The Bank shall be under no duty or obligation
whatever with respect to any of the foregoing expenditures.
9.10 Right of Offset. Any indebtedness owing from Bank to Borrower may be set
off and applied by Bank on any indebtedness or liability of Borrower to
Bank, at any time and from time to time after maturity, whether by
acceleration or otherwise, and without demand or notice to Borrower. Bank
may sell participations in or make assignments of any loans made under this
Agreement, and Borrower agrees that any such participant or assignee shall
have the same right of setoff as is granted to the Bank herein.
9.11 Modification and Renewal Fees. Bank may, at its option, charge any fees for
modification, renewal, extension, or amendment of any terms of the Note(s)
permitted by N.C.G.S. ss.24.1.1.
9.12 Conflicting Provisions. If provisions of this Agreement shall be construed
to conflict with any terms or provisions of the Note(s), the provisions of
the Note(s) shall take priority over any provisions in the Agreement.
9.13 Notices. Any notice permitted or required by the provisions of this
Agreement shall be deemed to have been given when delivered in writing to
the President or any Vice President of either party hereto at their
respective offices at the banking offices of the Bank in 505 S. Duke
Street, Durham, North Carolina, and at the offices of the Borrower in 1035
Swabia Court, Durham, NC 27703 when sent by certified mail and return
receipt requested.
9.14 Consent to Jurisdiction. Borrower hereby irrevocably agrees that any legal
action or proceeding arising out of or relating to this Agreement may be
instituted in the Superior Court in Wilson County, North Carolina, or the
United States District Court for the Eastern District of North Carolina, or
in such other appropriate court and venue as Bank may choose as its sole
discretion. Borrower consents to the jurisdiction of such courts and waives
any objection relating to the basis for personal or in rem jurisdiction or
to venue which Borrower may now or hereafter have in any such legal action
or proceedings.
9.15 Counterparts. This Agreement may be executed by one or more parties on any
number of separate counterparts and all of such counterparts taken together
shall be deemed to constitute one and the same instrument.
9.16 Entire Agreement. The Loan Documents embody the entire agreement between
Borrower and Bank with respect to the Loans, and there are no oral or parol
agreements existing between Bank and Borrower with respect to the Loans
which are not expressly set forth in the Loan Documents.
13
<PAGE>
IN WITNESS WHEREOF, the Borrower and Guarantor have caused this Agreement
to be duly executed all as of the date first above written.
Witness: _____________________________ _______________________________(Seal)
Witness:______________________________ _______________________________(Seal)
Witness:______________________________ _______________________________(Seal)
____________________________________
a _____________ partnership, LLC, or
LLP
Witness:______________________________ By:____________________________(Seal)
(General Partner or Manager)
Embrex, Inc.
-----------------------------
Name of Corporation
Attest: /s/ Don T. Seaquist By: /s/ Randall L. Marcuson
-------------------------------- --------------------------
(Corporate Seal)
Title: President
--------------------------
Witness:______________________________ _______________________________(Seal)
Guarantor
Witness:______________________________ _______________________________(Seal)
Guarantor
BRANCH BANKING & TRUST COMPANY
Attest: /s/ Nancy G. Frost By: /s/ Jeff Stoddard
------------------------------- ------------------------------
Assistant Secretary
(Corporate Seal)
Title: Vice President
-------------------------------
14
<PAGE>
EXHIBIT A
All of Debtor's now owned or existing or hereafter acquired (i) inventory; (ii)
accounts, chattel paper and contract rights that arise or result from Debtor's
sale or lease of goods or equipment or services rendered in the ordinary course
of its business, including without limitation pursuant to Debtor's INOVOJECT(R)
Egg Injection System Lease, Limited License, Supply and Service Agreements
("Agreements"); (iii) general intangibles comprised of rights to payment that
arise or result from Debtor's license of patents in the ordinary course of its
business, including without limitation pursuant to the Agreements; and (iv)
proceeds of the foregoing.
<PAGE>
County: Durham
-----------------
State: North Carolina
------------------
I, Colleen S. Loree , a Notary Public for said County and State, do hereby
certify that Don T. Seaquist personally came before me this day and acknowledged
that _____he is the _____________________ Secretary of Embrex, Inc. Corporation,
and that by authority duly given and as the act of the corporation, the
foregoing instrument was signed in its name by its ____________________
President, sealed with its corporate seal, and attested by __himself as its
____________________ Secretary.
Witness by hand and notarial seal, this __7th_______ day of ___April___, 1999.
My Commission Expires: April 15, 2001
/s/ Colleen S. Loree
- ------------------------------
Notary Public
Seal/Stamp
16
<PAGE>
ADDENDUM NUMBER 2 TO LOAN AGREEMENT
THIS ADDENDUM NUMBER 2 amends and supplements the Loan Agreement
dated_____________________, 1999 between Embrex, Inc. ("Borrower") and Branch
Banking and Trust Company ("Bank").
ADDITIONAL PROVISIONS REGARDING EVENTS OF DEFAULT:
1. Amendment to Section 7.01: Borrower shall have ten (10) business days
from the date that it receives written notification from Bank of an Event of
Default pursuant to Section 7.01 to cure such Event of Default.
2. Amendment to Section 7.04: Notwithstanding the language of Section 7.04
or anything else in the Loan Documents to the contrary, defaults by the Borrower
on the performance of any other obligation when due or in the performance of any
obligation incurred for money borrowed shall not be an Event of Default under
any of the Loan Documents unless such defaults are with respect to obligations
that in the aggregate exceed $100,000.
EMBREX, INC.
Attest: __________________________ By: ______________________________________
(Corporate Seal) Title: __________ President
BRANCH BANKING AND TRUST COMPANY
Attest: __________________________ By: ______________________________________
(Corporate Seal) Title: __________ President
17
<PAGE>
County: _________________________
State: _________________________
I, _________________________________________, a Notary Public for said County
and State, do hereby certify that _____________________________ personally came
before me this day and acknowledged that ___he is the ______________ Secretary
of Embrex, Inc., a North Carolina corporation, and that by authority duly given
and as the act of the corporation, the foregoing instrument was signed in its
name by its _____________ President, sealed with its corporate seal, and
attested by _____self as its Secretary.
Witness my hand and notarial seal, this ____ day of ________________, 1999.
My Commission Expires: __________________________________
__________________________________________________________
Notary Public
Seal/Stamp
18
<PAGE>
County: _________________________
State: _________________________
I, _________________________________________, a Notary Public for said County
and State, do hereby certify that _____________________________ personally came
before me this day and acknowledged that ___he is the ___________________ of
Branch Banking and Trust Company, a North Carolina banking corporation, and that
by authority duly given and as the act of the corporation, the foregoing
instrument was signed in its name by its _____________ President, sealed with
its corporate seal, and attested by _____self as its _________________.
Witness my hand and notarial seal, this ____ day of ________________, 1999.
My Commission Expires: __________________________________
__________________________________________________________
Notary Public
Seal/Stamp
19
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
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0
0
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