FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1999
Commission file number 000-19495
Embrex, Inc.
(Exact name of registrant as specified in its charter)
North Carolina 56-1469825
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
1035 Swabia Court, Durham, North Carolina 27703
(Address of principal executive offices) (Zip Code)
(919) 941-5185
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.01 Par Value Per Share (and Rights Attached Thereto)
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of February 25, 2000, the aggregate market value of the voting stock held by
non-affiliates was $114.3 million, based on a price per common share of $15.625
at the close of business on that date.
As of February 25, 2000, there were 8,006,361 shares of the registrant's common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Document Where Incorporated
Proxy Statement with respect to the Annual Part III
Meeting of Shareholders to be held on May 18,
2000, to be filed with the Securities
and Exchange Commission
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INDEX
PAGE
PART I
ITEM 1. BUSINESS.....................................................1
ITEM 2. PROPERTIES...................................................7
ITEM 3. LEGAL PROCEEDINGS............................................7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..........9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS..........................................9
ITEM 6. SELECTED FINANCIAL DATA......................................9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..........................10
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..................13
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE..........................29
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...........29
ITEM 11. EXECUTIVE COMPENSATION.......................................29
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT...................................................29
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............29
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K..................................................30
SIGNATURES....................................................................37
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PART I
ITEM 1. BUSINESS
GENERAL
Embrex, Inc. ("Embrex" or the "Company") develops and markets biological
delivery technology and biological products to increase the productivity and
profitability of the global poultry industry. The Company was incorporated in
1985 in North Carolina.
Embrex has developed and commercialized the Inovoject(R) system, a proprietary,
automated in-the-egg injection system which can inoculate 20,000 to 50,000 eggs
per hour and eliminates the need for manual, post-hatch injection of certain
vaccines. The Inovoject(R) system is designed to inject vaccines and other
compounds in precisely calibrated volumes into targeted compartments within the
egg. Embrex markets the Inovoject(R) system to commercial poultry producers,
charging a fee for each egg injected.
In addition to the Inovoject(R) system, Embrex has developed and is marketing
its Viral Neutralizing Factor ("VNF(R)") technology, useful in the development
of certain avian vaccines. The Company also has developed and is marketing
Bursaplex(R), a VNF(R)-based vaccine for protection against avian infectious
bursal disease ("IBD"). Embrex also is developing various other proprietary
pharmaceutical and biological products to improve bird health, reduce bird
production costs and provide other economic benefits to the poultry industry.
These products are in various stages of development, and some are being
developed in collaboration with major drug companies, the United States
Department of Agriculture (the "USDA"), and several leading universities in the
field of avian science. These products are being designed to be delivered
through the Inovoject(R) system, and some may also be administered after
hatching.
EXISTING PRODUCTS
Inovoject(R) Patented Egg Injection System
Embrex has developed and commercialized a proprietary, automated in-the-egg
injection system which can inoculate 20,000 to 50,000 eggs per hour and
eliminates the need for manual, post-hatch injection of certain vaccines. This
proprietary system, called Inovoject(R), is designed to inject vaccines and
other compounds in precisely calibrated volumes into targeted compartments
within the egg. Embrex markets the Inovoject(R) system to commercial poultry
producers, charging a fee for each egg injected.
In 1999, the Company converted a number of hatcheries to the Inovoject(R) system
and continued operating Inovoject(R) systems in hatcheries converted prior to
1999. The Company estimates that its Inovoject(R) system inoculates in excess of
80% of all eggs produced for the North American broiler poultry market and,
therefore, expects diminished growth in the number of system installations and
only modest Inovoject(R) system revenue growth in this market. Therefore, the
Company must expand its Inovoject(R) system installations and product sales in
markets outside North America in order to realize significant overall revenue
growth. The Company estimates that approximately 69% of the world broiler
production occurs outside the United States and Canada. Accordingly, the Company
is continuing to implement a strategy of marketing its Inovoject(R) system
outside North America.
During 1999, the Company placed a number of Inovoject(R) systems for trial and
on contract at locations outside the United States and Canada. The Company's
expansion outside the United States and Canada was focused initially on Europe,
the Middle East, and Africa. In the second half of 1997, the Company began
expansion efforts in Asia and, in 1998, in Latin America. At year end 1999, the
Company had Inovoject(R) systems either installed or on trial in 29 countries.
Overall, the placement of Inovoject(R) systems outside the United States and
Canada is dependent on market acceptance of various in ovo ("in the egg")
vaccines and obtaining regulatory approval of these vaccines in numerous
countries.
Certain poultry diseases are more prevalent in some geographic regions than in
others. For example, Marek's disease, for which the Inovoject(R) system
primarily is used in the United States, is not as widespread in Europe as in
North America. IBD (also known as Gumboro disease) is prevalent both in Northern
Europe and Asia and, to a lesser extent, in the United States. The Company
expects that the primary usage of its Inovoject(R) systems will vary
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by geographic region according to the prevailing diseases as well as regulatory
approval and market acceptance of vaccines for in ovo delivery.
VNF(R) (Viral Neutralizing Factor)
Embrex has developed, patented and commercialized a Viral Neutralizing Factor
technology which permits single-dose immunization of the avian embryo effective
for the life of the bird. By using the VNF(R) technology to form an
antibody-vaccine virus complex, immunization is provided in a single step,
reducing or eliminating many of the multiple vaccinations carried out in the
industry. VNF(R) can temporarily neutralize a virulent vaccine virus without
impairing the virus' ability to stimulate an immune response. By using VNF(R) in
this manner, the virulent vaccine virus can be made into a safe and effective
vaccine which can be used in ovo or after hatching.
The VNF(R) technology is the subject of two issued U.S. patents, a pending U.S.
patent application, and several foreign patents and foreign patent applications.
The U.S. patents are owned by the University of Arkansas and exclusively
licensed to Embrex on a royalty basis for the life of the patents. Embrex also
is researching application of VNF(R) technology for other avian disease
vaccines, including Newcastle disease and infectious bronchitis, although there
is no assurance such research will result in product opportunities.
To date, the Company's research efforts with its VNF(R) technology have been
focused primarily on avian uses. Based on initial experimental data, the Company
now believes that the potential exists for VNF(R) to be used in several
non-primate species. A U.S. patent claiming the use of VNF(R) viral vaccines in
all non-primate animals was allowed in 1997 and issued in February 1999. The
Company is in the early stages of exploring collaborative relationships with
other companies for the development and licensing of VNF(R) for non-primate
uses. In August 1999, Embrex entered into a renewable research collaboration
with Boehringer Ingelheim Vetmedica, Inc., part of the Boehringer Ingelheim
worldwide group of companies, North Carolina State University, and The William
R. Kenan Institute for Engineering Technology and Science, with the objective of
developing VNF(R)-based vaccines for animal species other than poultry. Embrex
has not initiated any regulatory approval processes with respect to non-primate
uses of VNF(R) technology, nor is there any assurance that its efforts in this
area will result in products or other collaborative agreements.
Infectious Bursal Disease (IBD) Vaccines
VNF(R) technology is especially useful in vaccines against avian IBD, which
weakens a bird's immune system. Birds infected by IBD typically exhibit poor
growth or can succumb to other diseases because of a compromised immune system.
This disease is currently widespread in Northern Europe, Asia and, to a lesser
extent, in the United States To date, IBD has been treated post-hatch via
manually delivered vaccines or in drinking water. Existing vaccines are
associated with certain limitations, and some vaccines cannot be used safely or
effectively in ovo. The Company estimates the worldwide market for IBD vaccines
is approximately $60 million annually.
In August 1995, the Company entered into an agreement with Cyanamid Websters
("Websters"), a unit of Fort Dodge Animal Health ("Ft. Dodge"), a division of
American Home Products Corp., for the joint development of another IBD vaccine
containing VNF(R), which is being marketed by Ft. Dodge in certain European
countries and, upon receipt of appropriate regulatory approvals, will be
marketed by Ft. Dodge throughout the rest of Europe, the Middle East, and
Africa, under Ft. Dodge's trade name "Bursamune(R)". To date, Bursamune(R) has
received regulatory approval in South Africa and Spain and, in October 1999, has
received temporary authorization from French regulatory authorities for the
utilization of Bursamune(R) for in ovo administration.
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 the first half of 2000.
Embrex currently is seeking regulatory approval in selected Latin American and
Asian markets for in ovo and post-hatch use of Bursaplex(R). Although Embrex has
received regulatory approval in some of these markets, there is no assurance
that the remaining approvals will be obtained. The placement of Inovoject(R)
systems outside the United
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States and Canada depends, in part, on market acceptance of various in ovo
vaccines as well as regulatory approval. To date, regulatory approval for
Bursaplex(R) has been received in nine countries besides the United States, and
regulatory approval is temporary or pending in thirteen countries.
PRODUCTS UNDER DEVELOPMENT
Embrex is developing individually and in collaboration with others additional
products which address poultry health and performance needs when administered in
ovo and, in some cases, after hatching. These additional products are in various
stages of development. There can be no assurance that Embrex will successfully
develop or market any of these products. Marketing products developed jointly
with others may require royalty or other payments by Embrex to its
co-developers. Embrex has not initiated the regulatory approval process for any
of these potential products, and there is no assurance regulatory approval will
be obtained.
In Ovo Products For Control Of Coccidiosis
In 1995, the Company began an initiative aimed at developing a novel in ovo
biological control method for coccidiosis. Coccidiosis is caused by a protozoan
parasite which attacks the gut of the chicken, causing significant problems with
the intake and digestion of feed and, therefore, the physical and economic
performance of the bird. Currently, virtually all broiler chickens, and most
poultry in general, receive anti-coccidiosis compounds called coccidiostats
incorporated into poultry feed. Over the years, coccidia have developed levels
of resistance to these coccidiostats and thus effectiveness has been somewhat
reduced. A limited number of live vaccines have also been developed and are
administered orally soon after hatch. However, due to difficulties in providing
a precise oral dose to each bird, growth depression can occur in broiler flocks.
Therefore, such live vaccines are used primarily in parent stock. Using its
Inovoject(R) system technology and its knowledge of avian embryology, the
Company has begun this initiative to develop a novel, efficacious and
cost-effective means of preventing coccidiosis in broiler chickens. This program
is aimed at overcoming many of the problems associated with current practices.
In 1997, the Company established the feasibility of an in ovo biological control
method for coccidiosis. During 1998, this project met the required internal
milestones regarding results and timeliness. In 1999, Embrex entered into a
collaborative research and development agreement with Pfizer Inc. to research
and develop a live coccidiosis vaccine for in ovo delivery to poultry. Further
development of this project will involve extensive clinical and field trials.
There can be no assurances that any of these development efforts will be
successful. Embrex has not initiated the regulatory approval process with
respect to these development efforts, and does not expect any coccidiosis
product developed by the Company to reach the market in the near future.
OTHER PRODUCTS UNDER DEVELOPMENT
During 1999, Embrex continued to evaluate technologies which, when coupled with
Embrex's proprietary in ovo enabling delivery know-how, might have the potential
to yield improvements in the areas of feed conversion, muscle mass and leanness
within broiler chickens. These technologies typically need to be applied in the
first several days of embryonic development in order to have the desired effect.
While the Company plans to continue its research efforts in these areas in 2000,
there is no assurance that these efforts will yield product opportunities.
Embrex is also evaluating technologies and developing capabilities for
characterizing and sorting eggs before or after injection by the Inovoject(R)
system. One of these evaluation programs has resulted in the development and
introduction of the Vaccine Saver(TM) option for the Inovoject(R) system. The
Vaccine Saver(TM) option was introduced in Europe in the fourth quarter of 1999.
The capabilities being developed by Embrex include automated gender sorting.
Early gender sorting improves processing plant efficiencies by enabling
gender-specific feed rations, therefore improving feed conversion. In 1999,
Embrex received a small business research grant to support the development of an
automated device to sort poultry eggs by gender. There is no assurance, however,
that such research will result in product opportunities.
The Company has also researched the feasibility of developing a treatment for
avian leukosis disease, a viral infection that can result in production losses
for poultry producers. Based upon its findings, the Company does not intend to
continue research on this program for the foreseeable future.
Embrex routinely enters into collaborative agreements with various animal health
companies, pharmaceutical companies and research and academic institutions to
evaluate the utility of certain of their compounds or devices
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when delivered or applied in ovo. Depending upon the outcome of these
evaluations, Embrex may or may not proceed with these collaborations for further
development. There is no assurance that these efforts will yield products or
further collaborations.
In March 1998, Embrex entered into a marketing agreement with UniSoma, Inc., the
U.S. subsidiary of UniSoma Matematica para Productividade, S.A. ("UniSoma"). The
marketing agreement granted Embrex the exclusive North American marketing rights
for 5 years for the poultry management decision support system developed by
UniSoma. This decision support system is designed to assist producers in
optimizing decisions in production, scheduling, processing and marketing to
maximize profitability. In 1999, the Company determined that there was
insufficient demand for this system and terminated the marketing agreement with
Unisoma, Inc.
PATENTS AND PROPRIETARY RIGHTS
Embrex controls (either through direct ownership or exclusive license) 23 issued
U.S. patents, 13 pending U.S. patent applications, and more than 60 issued
foreign patents and more than 50 pending foreign patent applications. In
addition, Embrex has executed confidentiality agreements with its collaborators,
subcontractors, employees and directors.
The Inovoject(R) system utilizes a process of injecting viral, bacterial or
fungal vaccines into avian eggs that was patented in the United States by the
USDA in 1984. Embrex holds the exclusive license to this patent through its
expiration in 2002. Embrex has supplemented the USDA patent with seven
additional issued U.S. patents (and multiple foreign patents and patent
applications) covering specific design features of the Inovoject(R) system. See
Item 3, "Legal Proceedings", below.
Embrex also owns or licenses method-of-use patents for the in ovo administration
of VNF(R) vaccines and other compounds to elicit various beneficial responses in
poultry. Two U.S. patents for methods of treating IBD virus infections using
VNF(R) vaccines, including in ovo administration, were issued to Embrex in March
1995. A U.S. patent claiming the use of VNF(R) viral vaccines in all non-primate
animals was allowed in 1997 and issued in February 1999. These patents and
additional patent applications encompass the use of VNF(R) vaccine compounds
regardless of the source of the VNF(R). These VNF(R) patents additionally
include composition-of-matter claims to VNF(R) vaccines against IBD virus
disease and composition-of-matter claims to VNF(R) vaccines for combating viral
diseases in non-primate animals. These patent claims cover the vaccine
preparation, regardless of the manner in which the preparation is used. The
Company filed three new U.S. patent applications in 1998 and 10 new U.S. patent
applications in 1999. During 1999, Embrex filed 42 new patent applications in
the United States and other countries. Each application covered various aspects
of in ovo technology. Also, in April 1999, a U.S. patent was issued covering the
methods and apparatus for "candling" poultry eggs, or examining the viability of
eggs by holding the egg between the eye and light to determine suitability for
injection.
Embrex continues its efforts to patent methods of delivering compounds in ovo,
including early intervention methods and devices. In 1998, five U.S. patents
with claims to methods of, or devices for, delivering compounds to avian embryos
in ovo were allowed or issued. In 1999, one U.S. patent was allowed covering a
pump used for the precise metering of small quantities of fluid used in in ovo
administration and another U.S. patent was allowed for selectively injecting
poultry eggs.
Additionally, Embrex has federally registered the trademarks Embrex(R),
Inovoject(R), VNF(R), and Bursaplex(R) in the United States, and has applied for
federal registration of Vaccine Saver(TM) and other various trademarks.
COMPETITION
The primary competition for the Inovoject(R) system is the manual, post-hatch
administration of biological products. Since most of Embrex's products and
potential products are being designed to be administered through the
Inovoject(R) system, the Inovoject(R) system must continue to be accepted within
the poultry industry and operated as intended under long-term commercial
conditions for these potential products to be marketed successfully.
The Company holds the exclusive license to the U.S. patent for injecting
vaccines into an avian embryo. Embrex has supplemented this patent with seven
additional U.S. patents covering specific design features of the Inovoject(R)
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system. In addition, Embrex relies on numerous foreign patents to protect its
intellectual properties and to afford a competitive advantage. See "Patents and
Proprietary Rights," above. There can be no assurance, however, that a
competitive delivery method, either within or outside the United States, will
not be developed and gain commercial acceptance. Embrex continues to monitor for
the presence of any competitive in ovo administration systems worldwide. See
Item 3, "Legal Proceedings," below.
Competitive success for Embrex will be based primarily on commercial acceptance
of its in ovo products, achieving and retaining scientific expertise and
technological superiority, identifying and pursuing scientifically feasible and
commercially viable opportunities, obtaining proprietary protection for its
research achievements, obtaining adequate funding and timely regulatory
approvals, and attracting corporate sponsors or partners in developing, testing,
producing, and marketing products, none of which can be assured. In addition, a
primary competitive factor affecting Embrex is its ability to conduct research
and development. Embrex's ability to successfully compete also is dependent on
its ability to attract and retain key personnel. Maintaining financial and human
resources, therefore, are important factors for success.
PRODUCTION, MARKETING AND DISTRIBUTION
Production
Embrex currently subcontracts the production of substantially all of its
mechanical and biological products and expects to continue to do so for the
foreseeable future. The Company believes that alternative sources of manufacture
and supply generally exist.
Inovoject(R) System
Embrex's in-house engineering staff designs the Inovoject(R) system, which
incorporates proprietary mechanical, pneumatic and electronic sub-systems and
concepts. The Company uses one contract manufacturer to fabricate its
Inovoject(R) systems. While other machine fabricators exist and have constructed
limited numbers of Inovoject(R) systems, a change in fabricators could cause a
delay in manufacturing and a possible delay in the timing of future Inovoject(R)
system installations and revenues from those installations.
VNF(R) (Viral Neutralizing Factor)
In 1993, Embrex signed multi-year agreements with SPAFAS, Inc. ("SPAFAS"), a
subsidiary of Charles River Laboratories, Inc., under which SPAFAS will supply
the active ingredient in VNF(R). In connection with this agreement, Embrex
maintains appropriate inventory levels and places orders with SPAFAS to allow
Embrex to satisfy anticipated customer demand for VNF(R). The regulatory
approval granted by the USDA for Bursaplex(R) in January 1997 specifically
covers the vaccine produced with SPAFAS-manufactured VNF(R).
The Company has granted Merial Select, Inc. ("Select") (a Merck Rhone-Poulenc
company) exclusive rights to manufacture IBD vaccines containing Embrex's VNF(R)
product, known as Bursaplex(R), for Embrex to market in North America, Latin
America and Asia. Embrex has also granted Ft. Dodge (a unit of American Home
Products Corp.) rights to manufacture IBD vaccines containing the Company's
VNF(R) product, known as Bursamune(R), to be marketed in Europe, the Middle East
and Africa. Abic Ltd. has been granted similar rights to manufacture and market
an IBD vaccine, known as GuMBryo(TM), in Israel. The manufacture of the IBD
vaccines being produced by Select and Ft. Dodge, and the Company's VNF(R)
product, generally must be performed in licensed facilities or under approved
regulatory methods. Although there are other manufacturers who are capable of
manufacturing IBD products and producing products such as VNF(R), a change of
supplier for the Company could adversely affect Embrex's future operating
results due to the time it would take a new supplier to obtain regulatory
approval of its production process or manufacturing facilities.
MARKETING AND DISTRIBUTION
Because of the geographical and industrial concentration of the poultry industry
in the United States, Embrex markets its products and provides ongoing service
directly to the industry. Embrex's marketing is focused principally on the
broiler chicken segment of the poultry industry, but the Company also has
adapted its products for use by,
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and initiated trials and entered into commercial contracts with broiler breeder
companies, a layer company and a limited number of turkey producers.
In order to encourage proper use of the Inovoject(R) system technology within an
appropriate production environment, Embrex leases and licenses Inovoject(R)
systems to hatcheries. The agreements cover the use of the mechanical equipment
and ongoing field service, maintenance and technical support provided by Embrex.
The agreements also include a license with royalty fees for use of Embrex's
proprietary injection process. Products which are delivered in ovo are sold
separately and generate some royalty revenue for the Company.
The Company also is initiating arrangements for international distribution of
Bursaplex(R), subject in each case to the availability of required regulatory
approvals. The Company has agreements with other parties to distribute
Bursaplex(R) in Chile, Ecuador, Peru and Pakistan. Of these countries,
regulatory approval has been granted in Ecuador, Peru and Pakistan. An agreement
for Israel also entitles a distributor, Abic Ltd., to manufacture a VNF(R)-based
IBD vaccine mentioned above. Subject to these agreements, the Company also will
conduct international marketing directly.
Other significant poultry markets exist in Asia and Latin America. Embrex has
held a number of discussions regarding marketing and distribution in each of
these markets. In 1997 and 1998, the Company entered into agreements with other
parties to distribute Bursaplex(R) in Venezuela, Colombia, South Korea,
Malaysia, Taiwan, Japan and Vietnam, subject to regulatory approvals. To date,
regulatory approval for Bursaplex(R) has been granted in nine countries besides
the United States, and regulatory approval is temporary or pending in thirteen
countries. Embrex also hired management for selected Asian and Latin American
markets and installed Inovoject(R) systems on a commercial or trial basis in
certain Asian markets. In 1998, Embrex established Embrex BioTech Trade
(Shanghai) Co., Ltd. in China, which will focus on marketing and distribution of
Embrex products in China. Also in 1998, Embrex established Embrex Inc. Sucursal
Argentina, a branch office in Argentina, responsible for commercial development
and customer service and support. Initially, this office will serve only
Argentina, but may extend to other regional markets such as Chile, Paraguay or
Uruguay. In 1999, Embrex established a subsidiary in Brazil, Inovoject(R) do
Brasil Ltda. Also, in April 1999, Bangkok Livestock Processing Company, Ltd.
began administering Bursaplex(R) using Embrex's Inovoject(R) system in Thailand.
Embrex has initiated activities necessary for the commercialization of its
technology in Japan. In 1992, Embrex entered into a distribution agreement with
Ishii Company, Ltd. ("Ishii"), a leading chick producer and the dominant
supplier of hatchery equipment in Japan. Veterinary medical device regulatory
approval was granted by the Japanese Ministry of Agriculture, Fisheries and
Forestry in 1999. Ishii intends to distribute the Inovoject(R) egg injection
system to poultry producers throughout Japan.
The Company's revenues attributable to international operations in 1999, 1998
and 1997 were 23%, 20% and 15% of the Company's consolidated revenues,
respectively. The Company's identifiable assets attributable to international
operations in 1999, 1998 and 1997 were 16%, 26% and 24% of the Company's
consolidated assets, respectively. The Company's gross profit attributable to
international operations in 1999, 1998 and 1997 were 19%, 14% and 7% of the
Company's consolidated gross margin, respectively. See "Notes to Consolidated
Financial Statements."
RESEARCH AND DEVELOPMENT
In 1998, Embrex opened a 12,800 square-foot research facility near the Company's
headquarters. This new facility has increased the Company's clinical trial
capabilities. Research and development expense was $4.2 million in 1997, $5.0
million in 1998 and $5.9 million in 1999. The increase in research and
development expense from 1997 to 1999 largely reflects increases in outside
contract research, supplies consumption, operating activities at the new
research facility, and Inovoject(R) design and development and global technical
support activity. Research and development is principally Company sponsored and
funded primarily from internal sources.
GOVERNMENTAL REGULATION
Regulation by governmental authorities in the United States and other countries
is a significant factor in the production and marketing of Embrex's products and
in its on-going research and development activities. Although the use of the
Inovoject(R) system is not subject to regulatory approval in the United States,
animal health products
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being developed by Embrex and other companies must receive approval for
marketing from either the USDA or the Food and Drug Administration (the "FDA")
and from similar agencies in foreign countries where the Company has begun or
contemplates doing business. These countries may also require approval of the
Inovoject(R) system. Regulatory agencies require that products be tested and
demonstrate appropriate levels of safety and efficacy. Generally, with respect
to animal health products, the USDA has regulatory authority over products which
are biological in origin or which stimulate or affect an animal's immune system,
and the FDA has authority over all other products. The time and cost of USDA
approvals are generally less than those for FDA approvals. FDA approval
generally requires more extensive animal and toxicology testing than USDA
approvals and may take five or more years to obtain, whereas USDA approvals
generally take one to three years to obtain. The Company's products also are
subject to regulatory approval in other countries.
Management believes that compliance with environmental regulations currently has
no material adverse effect on the Company's capital expenditures, earnings or
competitive position.
EMPLOYEES
At December 31, 1999, Embrex employed 171 persons, 169 of whom were full-time
employees, an increase of 44 persons from the 125 full-time employees at
December 31, 1998.
SIGNIFICANT CUSTOMERS
Tyson Foods, Inc.("Tyson") accounted for approximately 24% of Embrex's
consolidated 1999 revenues. Based on millions of pounds of ready-to-cook poultry
meat produced in 1999, Tyson accounted for approximately 24% of the broilers
grown in the United States. During 1997, Tyson extended its contract with Embrex
through 2004. There are no customers besides Tyson that represent 10% or greater
of total revenues. However, Embrex's three largest customers, including Tyson,
accounted for approximately 38% of consolidated 1999 revenues, down from 42% in
1998. The decrease in 1999 is partly the result of the expansion of the
Company's customer base.
See "Risk Factors" filed as Exhibit 99 to this report.
ITEM 2. PROPERTIES
Embrex leases its corporate headquarters and research and development
facilities, which occupy approximately 23,000 square feet and are located
adjacent to Research Triangle Park, North Carolina. Two-thirds of the space is
devoted to research and development. The lease is a fifteen-year term expiring
March 31, 2002. Embrex paid an annual rent of approximately $208,000 during
1999. Annual rent increases thereafter amount to approximately 3%. In addition
to research and development activities conducted at its corporate headquarters,
Embrex opened a new 12,800 square-foot research facility near its headquarters
in 1998. The lease is a ten-year term expiring November 14, 2007, with a
five-year renewal option. The annual rent paid in 1999 was approximately
$139,000, with annual increases of approximately 3% through the first ten years
and approximately 4% during the five-year renewal term. During the fourth
quarter 1999, Embrex entered into a six-year lease for a larger corporate
headquarters and research and development facility near its present facilities.
This building has been leased in two phases. The first phase encompasses
approximately 20,000 square feet. The second phase encompasses another 24,000
square feet. The annual rent is approximately $400,000, with annual increases of
approximately 3% through the initial six-year term and approximately 4% during
an additional six-year renewal term. The Company intends to vacate its present
corporate headquarters once the second phase is ready for occupancy during the
second quarter of 2001.
Embrex leases approximately 3,000 square feet of warehouse space in Springdale,
Arkansas, on a year-to-year basis, which is used to support the Embrex customer
service function in the region. The Company also leases offices of 1,250 square
feet and warehouse space of 2,500 square feet in Great Dunmow, Essex, England.
Embrex also has access to facilities at certain universities. The use of these
facilities is important to Embrex's ongoing research and development efforts.
Embrex also has access to facilities used for incubating eggs and growing live
birds and for research and testing purposes at North Carolina State University.
ITEM 3. LEGAL PROCEEDINGS
In September 1996, Embrex filed a patent infringement suit in the U.S. District
Court for the Eastern District of North
7
<PAGE>
Carolina against Service Engineering Corporation, a Maryland corporation, and
Edward G. Bounds, Jr., a Maryland resident and officer of Service Engineering
Corporation. The suit alleged that each of the defendants' development of an in
ovo injection device, designed to compete with Embrex's patented Inovoject(R)
injection method, infringes at least one claim of U.S. Patent No. 4,458,630
exclusively licensed to Embrex for the in ovo injection of vaccines into an
avian embryo (the "Sharma Patent"). Further, Embrex claimed that the defendants
had violated the terms of a Consent Judgment and Settlement Agreement entered
into with Embrex in November 1995 in which prior litigation was concluded with
Service Engineering Corporation and Edward G. Bounds, Jr. agreeing not to engage
in future activities violating the Sharma Patent. Embrex sought injunctive
relief to prevent infringement of the Sharma Patent as well as monetary damages.
In November 1996, Service Engineering Corporation and Edward G. Bounds, Jr.,
responded to Embrex's patent infringement suit by asserting various affirmative
defenses and denying the substantive allegations in Embrex's complaint. This
suit concluded on July 30, 1998 with a jury verdict in favor of Embrex. The
verdict fully upheld the validity of all claims of the Sharma Patent, finding
that the defendants had willingly infringed all asserted claims of the patent.
The jury also found that Service Engineering Corporation and Edward G. Bounds,
Jr., had breached the 1995 Consent Judgment and Settlement Agreement and that
such breach was not in good faith. The jury awarded Embrex damages of $500,000
plus litigation expenses and court costs. The U.S. District Court for the
Eastern District of North Carolina entered a Judgment in favor of Embrex on
September 28, 1998, which included a monetary award of $2,612,885 and an
injunction prohibiting Service Engineering Corporation and Edward G. Bounds,
Jr., from practicing methods claimed in, or otherwise infringing, the Sharma
Patent. On October 28, 1998, Service Engineering Corporation and Edward G.
Bounds, Jr. filed a notice of appeal in the U.S. Court of Appeals for the
Federal Circuit seeking a reversal of the Judgment. The Company has opposed the
appeal.
In November 1996, Embrex filed a patent infringement suit in the U.S. District
Court for the Eastern District of North Carolina against IGI, Inc., a Delaware
corporation. The suit alleged that IGI, Inc., through its activities with
Service Engineering Corporation and Edward G. Bounds, Jr. was engaging in
activities that constituted infringement of the Sharma Patent. Embrex sought
injunctive relief to prevent infringement of the Sharma Patent as well as
monetary damages. In January 1997, IGI, Inc. responded to Embrex's patent
infringement suit by asserting various affirmative defenses and denying the
substantive allegations in Embrex's complaint. This suit was concluded by
agreement between Embrex and IGI, Inc. in January 1998, pursuant to which Embrex
and IGI have agreed to dismiss all pending claims against each other, and IGI
has agreed to abide by the terms of a royalty-bearing sublicense to the Sharma
Patent for avian vaccination.
In March 1997, Service Engineering Corporation and Edward G. Bounds, Jr. filed
suit against the U.S. Department of Agriculture in the U.S. District Court for
the District of Maryland with respect to its grant to Embrex of an exclusive
license for the Sharma Patent. The complaint alleged that the USDA did not
adequately comply with statutory and regulatory requirements in making the grant
to Embrex of an exclusive license to the Sharma Patent, the revision of the
exclusive license in 1991 and the revision of the exclusive license in 1994,
which extended the period of exclusivity, originally set to terminate on
December 31, 1996, through the patent expiration date. Plaintiffs alleged that
in December 1996 (after Embrex had instituted the above referenced action for
patent infringement and breach of contract), the Plaintiffs requested the USDA
to grant them a license of the Sharma Patent. The Plaintiffs alleged that the
USDA refused to do so because the USDA said that the license was not available
and that the Plaintiffs had no basis for relief. Plaintiffs also alleged that
the USDA wrongfully consented to Embrex's bringing suit against the Plaintiffs.
Plaintiffs sought to have the court set aside the extension of the exclusive
license, the USDA's grant of permission for Embrex to sue Service Engineering
Corporation, Edwards G. Bounds, Jr. and IGI, Inc. for patent infringement, the
USDA's refusal to grant to Service Engineering Corporation a non-exclusive
license to the Sharma Patent and the USDA's refusal to act favorably upon
Service Engineering Corporation's appeal from the refusal to grant it a
non-exclusive license. In addition, Plaintiffs sought to have the court issue an
order requiring the USDA, prior to granting any exclusive license under the
Sharma Patent, including by extending the term of a pre-existing exclusive
license, to observe the procedures set forth under laws and regulations
governing the grant of licenses to patents owned by the USDA, and to remand the
matter to the USDA to take action in accordance with the order. Plaintiffs also
sought attorneys' fees and costs from the USDA. The USDA filed a motion for
summary judgment. In March 1999, the U.S. District Court for the District of
Maryland granted the USDA's motion for summary judgment, agreeing that "the
plaintiff lacked standing to challenge the USDA's actions in this matter and
that the [USDA's] motion for summary judgment will be granted."
On April 15, 1999, Machining Technologies, Inc. of Hebron, Maryland served on
Embrex a Complaint for Declaratory Judgment against Embrex in the U.S. District
Court for the District of Maryland. Machining
8
<PAGE>
Technologies, Inc. seeks a declaration that the Sharma Patent is not infringed,
invalid and/or not enforceable. Machining Technologies, Inc. was a manufacturer
of egg injection machine parts to Edward G. Bounds, Jr. and Service Engineering
Corporation. Embrex believed the action was without legal basis and, on June 4,
1999, filed a motion to dismiss the action. On March 7, 2000, the U.S. District
Court for the District of Maryland granted Embrex's motion to dismiss this
action and ordered this case closed.
See "Risk Factors" filed as Exhibit 99 to this report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock trades on the Nasdaq National Market System under the
symbol EMBX. The quarterly trading ranges of the Company's Common Stock for the
last two fiscal years were as shown in the table below:
Common Stock
Price Per Share
---------------
Quarter Ended High Low
------------- ---- ---
1998
----
March 31, 1998 6 3/8 5
June 30, 1998 6 7/8 5 3/8
September 30, 1998 6 3/16 4 5/16
December 31, 1998 6 3 5/8
1999
----
March 31, 1999 5 1/2 4 1/8
June 30, 1999 8 1/2 4 3/16
September 30, 1999 10 7 15/16
December 31, 1999 12 5/8 7
At February 25, 2000 (the most recent practicable date), there were 427 holders
of record of the Common Stock. The Company has paid no dividends on any stock
since inception and has no plans to pay dividends on its Common Stock in the
foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
SUMMARY OF OPERATIONS BY QUARTERS (UNAUDITED)
(Dollars In Thousands, Except Per
Share Amounts)
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1998
---- ----
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
------- ------- ------- ------- ------- ------- ------- -------
Revenues $8,016 $8,411 $8,249 $9,074 $6,857 $6,961 $7,404 $7,393
Operating Expenses 3,314 3,551 3,250 3,923 2,857 2,618 3,179 3,178
Net income 1,137 1,330 1,552 1,725 527 605 753 976
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1998
---- ----
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
------- ------- ------- ------- ------- ------- ------- -------
Net income (per share of Common Stock)
Basic $0.14 $0.16 $0.19 $0.22 $0.06 $0.07 $0.09 $0.12
Diluted $0.14 $0.16 $0.18 $0.20 $0.06 $0.07 $0.09 $0.12
Number of Shares Used in Per Share
Calculation (thousands)
Basic 8,293 8,250 8,135 7,927 8,243 8,249 8,262 8,264
Diluted 8,368 8,456 8,683 8,443 8,334 8,340 8,339 8,341
5-YEAR SUMMARY OF SELECTED FINANCIAL DATA
(Dollars In Thousands, Except Per 1999 1998 1997 1996 1995
Share Amounts) ---- ---- ---- ---- ----
(Restated)
STATEMENTS OF OPERATIONS DATA
Revenues ............................ $ 33,750 $ 28,615 $ 24,789 $ 20,632 $ 13,719
Research and development expenses ... 5,857 4,995 4,188 4,036 3,416
Other operating expenses ............ 8,181 6,837 5,607 3,775 3,836
Net income (loss) ................... 5,744 2,861 1,760 341 (4,512)
Net income (loss) per share of Common
Stock
Basic ........................ $ 0.70 $ 0.35 $ 0.21 $ 0.05 ($ 0.73)
Diluted ...................... $ 0.68 $ 0.34 $ 0.21 $ 0.06 ($ 0.73)
Number of Shares Used in Per Share
Calculation (thousands)
Basic ......................... 8,151 8,255 8,184 7,218 6,187
Diluted ....................... 8,488 8,339 8,339 7,520 6,187
BALANCE SHEET DATA
Working capital ..................... $ 7,858 $ 8,299 $ 7,585 $ 7,552 $ 5,934
Total assets ........................ 26,233 24,990 25,161 25,554 21,789
Long-term liabilities ............... 20 644 3,278 5,814 10,966
Accumulated deficit ................. (30,328) (36,072) (38,933) (40,693) (41,034)
Shareholders' equity ................ 21,035 18,805 15,741 13,309 5,909
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Company's financial statements and related notes appearing elsewhere in this
report.
Consolidated net income for 1999 was $5.7 million compared to $2.9 million in
1998 and $1.8 million in 1997. Diluted earnings per share increased from $0.21
in 1997 and $0.34 in 1998 to $0.68 in 1999. For the year ended 1999, shares
outstanding on a diluted basis were 8.5 million, up from 8.3 million for the
years ended 1998 and 1997. 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
half of 1999 as well as Common Stock repurchases.
REVENUES
Consolidated revenues in 1999 totaled $33.8 million, representing an increase of
18% over 1998 revenues of $28.6 million, which were 15% over 1997 revenues of
$24.8 million. Inovoject(R) revenues totaled $32.3 million in 1999 compared to
$27.4 million in 1998 and $23.6 million in 1997, representing increases of 18%
from 1998 to 1999, and 16% from 1997 to 1998, with the 1999 increase coming
principally from increased placement and throughput of Inovoject(R) systems in
North America and Europe.
The 1999 revenues include Inovoject(R) lease fees derived from multi-year
contracts and paid trials in the United States and foreign countries, and the
sale of Inovoject(R) systems to distributors. Embrex estimates that as of
December 31, 1999, it was vaccinating in excess of 80% of the estimated 8.0
billion broiler birds grown in the
10
<PAGE>
United States in 1999, 1998 and 1997. Given its market penetration, the Company
expects only moderate Inovoject(R) systems revenue growth in this market.
Management anticipates moderate revenue and earnings growth in 2000 from
existing Inovoject(R) operations in the United States and Canada, new
Inovoject(R) system leases in other countries, and sales of Bursaplex(R) product
to poultry producers worldwide. However, the rate at which the marketplace will
accept the Inovoject(R) technology outside the United States and Canada, the
timing of regulatory approvals of third-party vaccines for in ovo use outside
the United States and Canada, start-up costs in new markets, possible
variability in United States hatchery bird production as a result of grain price
fluctuations, and variability in the demand for, and pricing of, U.S. poultry
and poultry products outside the United States, will impact the pace of revenue
growth, if any, and the sustaining of profitability from the installation and
operational throughputs of Inovoject(R) systems.
Sales of Bursaplex(R), the Company's proprietary vaccine for the treatment of
avian infectious bursal disease, was the principal source of $1.3 million of
product revenues in 1999 and $931,000 of product revenues in 1998. The Company's
ability to generate revenue from product sales has been constrained by the
previously announced delay associated with Ft. Dodge's obtaining British
regulatory approval for the sale of Bursamune(R) in the United Kingdom, lower
levels of breeder and broiler flock vaccination rates, and fewer reported
incidences of bursal disease in the United States. Product sales increased 34%
during 1999 from the $931,000 recorded for the same period in 1998. Sales of
VNF(R) for inclusion in IBD vaccines were the principal source of previous
years' product revenues, which generated $1.1 million and $1.2 million in 1997
and 1996, respectively.
COST OF PRODUCT SALES AND INOVOJECT(R) REVENUES
Cost of revenues as a percentage of revenues decreased from 47% and 49% of total
revenues in 1998 and 1997, respectively, to 39% of total revenues in 1999. The
improvement in 1999 is primarily attributable to Inovoject(R) system-related
cost reductions and some price increases in selected markets.
OPERATING EXPENSES
Operating expenses totaled $14.0 million in 1999 compared to $11.8 million in
1998, and $9.8 million in 1997.
General and administrative ("G&A") expenses were $7.4 million in 1999, up 19%
from $6.2 million in 1998, and up 48% from $5.0 million in 1997. The 1999 and
1998 G&A increases over 1997 were primarily attributable to development costs in
Asia and Latin America as well as legal expenses incurred in connection with
various patent infringement lawsuits filed by the Company.
Sales and marketing expenses totaled $795,000 in 1999 compared to $633,000 in
1998 and $587,000 in 1997. Fluctuations during these periods resulted from
various levels of activity in the Company's sales and customer service functions
to support market expansion and field support of Inovoject(R) systems, as well
as stepped-up international activity, principally in Europe.
Certain 1997 operating expenses were reclassified to cost of revenues to conform
to the 1998 presentation. These reclassifications had no effect on previously
reported net income or shareholders' equity.
Research and development ("R&D") expenses were $5.9 million in 1999 compared to
$5.0 million in 1998 and $4.2 million in 1997. The increase in R&D expense from
1997 to 1999 largely reflects an increase in outside contract research, supplies
consumption, operating expenses for the new research facility and Inovoject(R)
design and development and global technical support activity. The Company
continues to manage its research and development effort to leverage its
know-how, patent position, market presence and expenditures.
OTHER INCOME AND EXPENSE
Interest income totaled $315,000, $402,000 and $488,000 in years 1999, 1998 and
1997, respectively. The 1999 decrease relative to 1998 resulted principally from
lower cash balances and the 1998 decrease relative to 1997 resulted principally
from lower cash balances and lower interest rates.
Interest expense totaled $311,000 in 1999 compared to $645,000 in 1998 and $1.1
million in 1997. In 1999, the
11
<PAGE>
decrease in interest expense reflected the repayment of approximately $2.7
million of external financing, primarily in the form of equipment leases. In
1998, the decrease in interest expense reflected the repayment of approximately
$2.8 million of external financing, primarily in the form of equipment leases.
In 1997, the amount of interest expense was principally attributable to the
Company's funding of its growing installed base of Inovoject(R) systems with the
use of capital lease financing. Management expects to continue to rely on the
use of internally generated funds to finance the cost of additional Inovoject(R)
systems in 2000, as was the case in 1999.
EFFECT OF INFLATION
Management expects cost of product sales and Inovoject(R) systems revenues,
operating expenses and capital equipment costs to change in line with periodic
inflationary changes in price levels. While management generally believes that
the Company will be able to offset the effect of price level changes by
adjusting selling/lease prices and effecting operating efficiencies, any
material unfavorable changes in price levels could have a material adverse
affect on its results of operations.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, the Company's cash and short-term investment balances
totaled $4.8 million compared to $7.2 million and $8.6 million at December 31,
1998 and 1997, respectively. The decrease reflected the ability of the Company
to fund capital expenditures with internal cash instead of equipment lease
financing. Working capital decreased to $7.9 million in 1999 from $8.3 million
in 1998, as a decrease in cash was offset by a reduction in the short-term
portions of capital lease obligations.
During 1999, operating activities generated $9.6 million in cash, primarily due
to non-cash depreciation and net income. Within investing activities,
Inovoject(R) systems, the Company's new research facility, and equipment
purchases required $5.9 million. Financing activities used $5.8 million, of
which $2.7 million was used to repay long-term debt and capital lease
obligations and $3.8 million was used to repurchase the Company's Common Stock
(see below).
In October 1998, the Company announced that the Board of Directors authorized a
share repurchase program to purchase up to 10% of outstanding shares of Common
Stock, or up to approximately 830,000 shares over 18 months, in open market or
privately negotiated transactions. As of December 31, 1999, the Company had
purchased 499,600 shares for $4.0 million at an average price of $7.9844. See
"Notes to Consolidated Financial Statements."
As of December 31, 1999, the Company had outstanding purchase commitments of
approximately $3.4 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 construction and maintenance of
Inovoject(R) egg injection systems.
The Company maintained during 1998 a $2.0 million secured line of credit with a
bank in the United Kingdom, which could be used to finance the construction of
additional Inovoject(R) systems for Europe, the Middle East and Africa. The
Company utilized $0.4 million of this line during 1998. This line of credit was
repaid and terminated by year-end 1998.
In April 1999, the Company obtained a $6.0 million secured revolving line of
credit from its bank, Branch Banking and Trust Company. This line of credit may
be used for working capital purposes and has a term of 18 months.
Based on its current operations, management believes that the Company's
available cash and short-term investments, together with cash flow from
operations, will be sufficient to meet its foreseeable cash requirements.
YEAR 2000 ISSUE
The Company established a team to address the Year 2000 issue in June 1998. The
team conducted an inventory and assessment of the Company's computer hardware
and software systems, as well as embedded systems in its Inovoject(R) systems,
manufacturing and laboratory equipment and office facilities. The team developed
remediation, testing, and implementation plans for imbedded systems, including
the Inovoject(R) system, which remediation, testing, and implementation was
completed in October 1999. The Company also engaged an outside
12
<PAGE>
consulting firm to conduct an independent verification and validation of the
controls and software that operate the Inovoject(R) system, which determined
that the Inovoject(R) system was not affected by Year 2000 considerations.
The Company incurred approximately $200,000 in 1999 addressing Year 2000 issues.
To date, the Company is not aware of any immediate, adverse impact resulting
from Year 2000 issues, either on the Company's ability to operate and manage the
Inovoject(R) system at its customers' hatcheries or its ability to manage its
business and to communicate with its customers and suppliers. However, the
Company cannot provide any assurance that its systems and business relationships
have not been impacted in a manner that is not yet apparent. The Company will
continue to monitor its systems in order to promptly remediate any adversely
impacted systems.
FORWARD-LOOKING STATEMENTS
Information set forth in this Annual Report on Form 10-K contains various
"forward looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which
statements represent the Company's judgment concerning the future and are
subject to risks and uncertainties that could cause the Company's actual
operating results and financial position to differ materially. Such forward
looking statements can be identified by the use of forward looking terminology
such as "may," "will," "expect," "anticipate," "estimate," "believe," or
"continue," or the negative thereof or other variations thereof or comparable
terminology.
The Company cautions that any such forward looking statements include statements
with respect to future products, services, markets and financial results. These
statements involve risks and uncertainties that could cause actual results to
differ materially, including without limitation the ability of the Company to
penetrate new markets, 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, the
number of eggs set by poultry producers, 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 are included in the Risk Factors described in Exhibit 99 to this report
and in the Company's other filings with the SEC, including the Company's Forms
10-Q, 10-K and 8-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A portion of the Company's operations are in jurisdictions outside North
America. The Company leases Inovoject(R) systems and sells products in Europe,
Asia, and 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 December 31, 1999, the Company's operations outside North America
were not material to the Company's consolidated results as a whole, and a
significant change in currency exchange rates or economic conditions in the
jurisdictions outside North America in which the Company operates would not have
a material effect on the Company's consolidated financial results.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Embrex Inc.
We have audited the accompanying consolidated balance sheets of Embrex, Inc. and
subsidiaries as of December 31, 1999 and 1998, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1999. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
13
<PAGE>
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Embrex, Inc. and
subsidiaries at December 31, 1999 and 1998, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule when considered in relation to the basic financial statements
taken as a whole, presents fairly in all material respects the information set
forth therein.
/s/ Ernst & Young LLP
Raleigh, North Carolina
February 15, 2000
14
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Dollars in thousands)
December 31,
------------
<S> <C> <C>
ASSETS 1999 1998
---- ----
Current Assets
Cash and cash equivalents................................. $4,799 $7,167
Restricted cash (Note 2).................................. 275 275
Inventories:
Materials and supplies............................. 1,562 925
Product............................................ 827 1,281
Accounts receivable - trade............................... 4,751 3,454
Other current assets............................................ 822 738
-------- --------
Total Current Assets...................... 13,036 13,840
Inovoject(R)Systems under construction.......................... 978 568
Inovoject(R)Systems............................................. 27,386 24,161
Less accumulated depreciation............................. (19,804) (16,297)
-------- --------
7,582 7,864
Equipment, furniture and fixtures............................... 7,195 5,060
Less accumulated depreciation............................. (2,906) (2,468)
-------- --------
4,289 2,592
OTHER ASSETS:
Patents and exclusive licenses of patentable
technology (net of accumulated amortization of $108
in 1999 and $196 in 1998). 348 126
TOTAL ASSETS.................................................... $26,233 $24,990
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable.......................................... $538 $393
Accrued expenses.......................................... 2,738 2,033
Deferred revenue.......................................... 584 175
Product warranty accrual.................................. 394 322
Current portion of capital lease obligations.............. 568 2,618
Line of credit (Note 4)................................... 356 -0-
-------- --------
Total Current Liabilities ............... 5,178 5,541
Capital lease obligations, less current portion (Note 3)....... 20 634
Long-term debt, less current portion (Note 4)................... 0 10
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Shareholders' Equity (Notes 5, 6, 7 and 8) Common Stock, $.01 par value per
share
Authorized - 30,000,000 shares
Issued and outstanding - 7,922,627
net of 499,600 treasury shares and 8,264,490 net of 40,800 treasury
shares at December 31, 1999 and 1998, respectively 84 83
Additional paid-in capital................................ 55,231 54,894
Accumulated other comprehensive income.................... 37 113
Accumulated deficit....................................... (30,328) (36,072)
Treasury stock............................................ (3,989) (213)
-------- --------
Total Shareholders' Equity................ 21,035 18,805
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY...................... 26,233 $24,990
======== ========
</TABLE>
See accompanying notes.
16
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
<S> <C>
(In thousands, except per share amounts) Year ended December 31,
-----------------------
1999 1998 1997
-------- -------- --------
REVENUES
Inovoject(R)revenue ............................... $ 32,314 $ 27,426 $ 23,614
Product revenue ................................... 1,252 931 1,062
Other revenue ..................................... 184 258 113
-------- -------- --------
Total Revenues .............................. 33,750 28,615 24,789
Cost of Product Sales and Inovoject(R)Revenues ......... 13,119 13,341 12,244
-------- -------- --------
20,631 15,274 12,545
OPERATING EXPENSES
General and administrative ........................ 7,386 6,204 5,020
Sales and marketing ............................... 795 633 587
Research and development .......................... 5,857 4,995 4,188
-------- -------- --------
Total Operating Expenses .................... 14,038 11,832 9,795
-------- -------- --------
Operating Income ....................................... 6,593 3,442 2,750
Other Income (Expense)
Interest income ................................... 315 402 488
Interest expense .................................. (311) (645) (1,070)
Other ............................................. (12) 38 14
-------- -------- --------
Total Other Expense ........................ (8) (205) (568)
-------- -------- --------
Income Before Taxes ........................ 6,585 3,237 2,182
Income Taxes (Note 9) .................................. 841 376 422
-------- -------- --------
Net Income ............................................. $ 5,744 $ 2,861 $ 1,760
======== ======== ========
Net Income per share of Common Stock (Note 11)
Basic ............................................. $ 0.70 $ 0.35 $ 0.21
Diluted ........................................... $ 0.68 $ 0.34 $ 0.21
Number of Shares Used in Per Share Calculation (Note 11)
Basic ............................................. 8,151 8,255 8,184
Diluted ........................................... 8,488 8,339 8,339
</TABLE>
See accompanying notes.
17
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
<S> <C>
(Dollars in thousands) Year ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
Operating Activities
Net income................................................... $5,744 $2,861 $1,760
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization.......................... 4,096 4,884 4,043
Changes in operating assets and liabilities:
Accounts receivable, inventories and other
current assets................................. (1,564) (1,526) (797)
Accounts payable, accrued expenses and
other current liabilities.................. 1,331 (537) 1,083
------- ------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 9,607 5,682 6,089
Investing Activities
Sales of short-term investments -0- -0- 876
Collateralization of Lease (Note 2) -0- -0- (275)
Purchases of Inovoject(R)systems, equipment, furniture
and fixtures (5,903) (4,850) (3,962)
(Additions)/reductions to patents and other noncurrent assets (240) 248 280
------- ------- -------
NET CASH USED IN INVESTING ACTIVITIES (6,143) (4,602) (3,081)
Financing Activities
Issuance of Common Stock 338 107 257
Net proceeds from line of credit 356 -0- -0-
Repayment of long-term debt (10) (286) (119)
Proceeds from capital lease obligations -0- 101 102
Payments on capital lease obligations (2,664) (2,511) (3,328)
Repurchase of Common Stock (3,776) (213) -0-
------- ------- -------
NET CASH USED IN FINANCING ACTIVITIES (5,756) (2,802) (3,088)
------- ------- -------
DECREASE IN CASH AND CASH EQUIVALENTS (2,292) (1,722) (80)
CURRENCY TRANSLATION ADJUSTMENTS (76) 309 (376)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 7,167 8,580 9,036
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $4,799 $7,167 $8,580
======= ======= =======
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Total interest paid was $311,000, $645,000 and $1,070,000 for the years ended
December 31, 1999, 1998 and 1997 respectively.
Total income taxes paid were $618,000, $277,000 and $70,000 for the years ended
December 31, 1999, 1998 and 1997, respectively.
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITY:
During 1997, $425,000 of outstanding debentures along with $139,000 of accrued
interest were converted into 98,267 shares of Common Stock net of unamortized
debt issuance costs totaling $1,000. In addition, 419 shares of Embrex Common
Stock were issued pursuant to the non-cash exercise of warrants related to the
initial sale of the debentures in May 1995. As of December 1, 1997, all
debentures had been converted into Common Stock.
On May 27, 1997, 34,320 shares of Common Stock were issued in exchange for
substantially all of the assets of Agrimatic Corporation.
See accompanying notes.
18
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Paid-in Comprehensive Accumulated Treasury
Stock Capital Income Deficit Stock Total
----- ------- ------ ------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996 ................ $ 80 $ 53,742 $ 180 $(40,693) $ 0 $ 13,309
Stock issued:
Upon exercise of options ............ 1 201 202
Under employee stock purchase plan .. 55 55
Upon conversion of long-term debt
(net of issuance cost of $111) .. 1 563 564
Upon issuance of shares for
Agrimatic acquisition ............ 227 227
Other Comprehensive Income, Net of Tax
(Note 1)
Currency translation adjustments . (376) (376)
Net income ....................... 1,760 1,760
----- ------- ------ ------- ----- -----
Comprehensive income ............. 1,384
--------
BALANCE AT DECEMBER 31, 1997 ................ 82 54,788 (196) (38,933) 0 15,741
Stock Repurchased ....................... (213) (213)
Stock issued:
Upon exercise of options ............ 1 1
Under employee stock purchase plan .. 1 105 106
Other Comprehensive Income, Net of Tax
(Note 1)
Currency translation adjustments . 309 309
Net income ....................... 2,861 2,861
----- ------- ------ ------- ----- -----
Comprehensive income ............. 3,170
-----
BALANCE AT DECEMBER 31, 1998 ................ 83 54,894 113 (36,072) (213) 18,805
Stock Repurchased ....................... (3,776) (3,776)
Stock issued:
Upon exercise of options and issuance
of bonus stock ...................... 1 401 402
Under employee stock purchase plan .. 87 87
Upon exercise of warrants ........... (151) (151)
Other Comprehensive Income, Net of Tax
(Note 1)
Currency translation adjustments . (76) (76)
Net income ....................... 5,744 5,744
----- ------- ------ ------- ----- -----
Comprehensive income ............. 5,668
-----
BALANCE AT DECEMBER 31, 1999 ................ $ 84 $ 55,231 $ 37 $(30,328) $ (3,989) $ 21,035
======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes.
19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Embrex, Inc. has developed and commercialized the Inovoject(R) system, a
proprietary, automated, in-the-egg injection system which eliminates the need
for manual, post-hatch injection of certain vaccines for newly hatched broiler
chicks. Embrex also develops and markets proprietary pharmaceutical and
biological products to improve bird health, reduce bird production costs and
provide other economic benefits to the poultry industry.
ACQUISITION
On May 27, 1997, the Company issued 34,320 shares of Common Stock in exchange
for substantially all of the assets of Agrimatic Corporation. In 1998, the book
value of the assets acquired in this acquisition was written off. This
transaction and subsequent write-off had an immaterial effect on the operations
of Embrex.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Embrex, Inc. and
its wholly owned subsidiaries, Embrex Europe Limited and Embrex Sales, Inc. (the
"Company"). All significant intercompany transactions and accounts have been
eliminated. Currently, non-U.S. operations account for approximately 23% of the
Company's revenues.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
INVENTORIES
Items recorded as inventory are generally purchased from others and recorded at
the lower of cost or market using the average cost method. Materials and
supplies inventories include spare parts for the Inovoject(R) systems as well as
laboratory and general supplies. Product inventories are comprised of biological
compounds, principally the Company's Viral Neutralizing Factor product (VNF(R)).
INOVOJECT(R) SYSTEMS
Inovoject(R) systems are comprised of egg injection and related equipment
available for lease to customers. The equipment is recorded at the lower of cost
or estimated net realizable value. Depreciation is computed principally by using
accelerated and straight-line methods over the estimated useful life of the
equipment and commences after construction is complete and the equipment is
placed in service.
EQUIPMENT, FURNITURE AND FIXTURES
Equipment, furniture and fixtures are recorded at cost. Depreciation is computed
principally by using accelerated and straight-line methods over the estimated
three-to-five years useful lives of the assets placed in service.
PATENTS AND EXCLUSIVE LICENSES OF PATENTABLE TECHNOLOGY
Costs incurred to acquire exclusive licenses of U.S. patentable technology and
to apply for and obtain U.S. patents on internally developed technology are
capitalized and amortized using the straight-line method. Exclusive license
agreements are amortized over the period of the license. Patents are amortized
over the shorter of the useful or legal life of the patent.
20
<PAGE>
FOREIGN CURRENCY TRANSLATION
All assets and liabilities in the balance sheets of the Company's foreign
subsidiary, Embrex Europe Limited, and its Asian operations, are translated at
year-end exchange rates except shareholders' equity which is translated at
historical rates. Revenues, costs and expenses are recorded at average rates of
exchange during the year. Translation gains and losses are accumulated as a
component of shareholders' equity. Foreign currency transaction gains and losses
are included in determining net income.
REVENUE RECOGNITION
Inovoject(R) system fees are recognized based on eggs processed during the
period. Product sales are recognized when the products are shipped. Contract
research revenue is recognized as services are performed over the term of the
contract. Revenue received, but not yet earned, is classified as deferred
revenue.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs, including costs incurred to complete contract
research, are charged to operations when incurred and are included in operating
expenses.
INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). SFAS 109 requires recognition of deferred tax assets and liabilities for
the expected future tax consequences of temporary basis differences that have
arisen between financial statement and income tax reporting.
NET INCOME PER SHARE
Basic net income per share was determined by dividing net income available for
common shareholders by the weighted average number of common shares outstanding
during each year. Diluted net income per share reflects the potential dilution
that could occur assuming conversion or exercise of all convertible securities
and issued and unexercised stock options. A reconciliation of the net income
available for common shareholders and number of shares used in computing basic
and diluted net income per share is in Note 11.
USE OF ESTIMATES
The presentation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from these estimates.
PRINCIPAL CUSTOMERS
Tyson Foods, Inc. ("Tyson") accounted for approximately 24%, 27% and 28% of
consolidated 1999, 1998 and 1997 revenues, respectively. Based on the millions
of pounds of ready-to-eat poultry meat produced in 1999, Tyson accounted for
approximately 24% of the broilers grown in the United States. In 1999, Tyson was
the only customer that represented greater than 10% of total revenues.
CONCENTRATION OF CREDIT RISK
The Company's principal financial instrument, subject to potential concentration
of credit risk, is accounts receivable which are unsecured. As of December 31,
1999, Tyson Foods, Inc. accounted for approximately 13% of consolidated accounts
receivable, and substantially all of the Company's accounts receivable are due
from companies in the poultry industry.
SOURCES OF SUPPLY
The Company has developed a strategic relationship with one contract
manufacturer to fabricate its Inovoject(R)
21
<PAGE>
systems. While other machine fabricators exist and have constructed limited
numbers of Inovoject(R) systems, a change in fabricators could cause a delay in
manufacturing and a possible delay in the timing of future Inovoject(R)
installations and revenues from those installations.
The Company has granted Merial Select, Inc. ("Select") (a Merck Rhone-Poulenc
company) exclusive rights to manufacture IBD vaccines containing Embrex's
proprietary VNF(R) product for Embrex to market in North America, Latin America
and Asia under the trade name Bursaplex(R). In 1995, Embrex granted Cyanamid
Websters ("Websters"), a unit of Ft. Dodge Animal Health, which is a division of
American Home Products Corp. ("Ft. Dodge"), rights to manufacture and market
bursal disease vaccines containing the Company's VNF(R) product to be marketed
in Europe, the Middle East and Africa under the trade name Bursamune(R).
Additionally, the Company has one contract supplier of its VNF(R) product. The
manufacture of the bursal disease vaccines being produced by Select and Ft.
Dodge and the Company's VNF(R) product generally must be performed in licensed
facilities and/or under methods approved by regulatory agencies. Although there
are other manufacturers who are capable of manufacturing bursal disease products
and producing products such as VNF(R), a change of suppliers could adversely
effect the Company's future operating results due to the time it would take a
new supplier to obtain regulatory approval of its production process and/or
manufacturing facilities. The Company seeks to minimize this exposure through
multi-year supply agreements and the maintenance of adequate inventories.
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 $5.7 million, $3.2 million and $1.4 million for the years
ended December 31, 1999, 1998 and 1997, respectively. Embrex's total
comprehensive income represents net income plus the after-tax effect of foreign
currency translation adjustments for the years presented.
SEGMENTS
Effective January 1, 1998, the Company adopted SFAS 131, "Disclosures about
Segments of an Enterprise and Related Information". This pronouncement
superseded SFAS 14, "Financial Reporting for Segments of a Business Enterprise".
SFAS 131 establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports. SFAS 131 also establishes standards for
related disclosures about products and services, geographic areas and major
customers. The adoption of SFAS 131 did not affect results of operations or
financial position. The Company is considered to have only one operating segment
based on SFAS 131.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments
and for Hedging Activities". This pronouncement was originally effective for
annual periods beginning after June 15, 1999. The FASB amended SFAS 133 to defer
the effective date of adoption until all fiscal quarters of all fiscal years
beginning after June 15, 2000. SFAS 137, "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133", was issued in June 1999. SFAS 133 requires all derivatives to be recorded
on the balance sheet and establishes accounting rules for hedging activities.
The effect of the hedge accounting rules is to offset changes in value or cash
flows of both the hedge and hedged item in earnings in the same period. Changes
in the fair value of derivatives that do not qualify for hedge accounting are
reported in earnings in the period of the change. Based on the fact that the
Company does not currently use derivatives, adoption of this pronouncement is
not expected to have a material impact on the Company's financial position or
results of operations.
During 1998, the Company adopted SOP 98-1, "Accounting for the Costs of Computer
Software Developed or
22
<PAGE>
Obtained for Internal Use", which requires capitalization of certain costs
incurred in connection with developing or obtaining internal use software. The
impact of adoption was not material.
2. RESTRICTED CASH
On October 13, 1997, the Company executed a ten-year collateralized lease
relative to the facilities housing the Company's new research facility. Such
collateral exists in the form of a certificate of deposit, which is required to
be maintained at least through the end of the seventh year of the lease.
3. LEASES
At December 31, 1999 and 1998, the Company had assets totaling $944,000 and $3.3
million, respectively, financed by capital lease agreements which expire through
December 2001. Accumulated depreciation and amortization includes $784,000 and
$2.3 million of amortization related to these assets at December 31, 1999 and
1998, respectively. Amortization of assets financed by capital leases is
included with depreciation expense.
The Company leases its facilities under a number of operating leases extending
through November 2007. The Company has the option to cancel one of its operating
lease agreements with the payment of a $180,000 penalty. Total rent expense was
$483,000, $456,000 and $312,000 for the years ended December 31, 1999, 1998 and
1997, respectively.
At December 31, 1999, the Company's minimum future commitments under capital and
operating leases were as follows:
Operating Capital
Leases Leases
------ ------
2000................................... $765,000 $616,000
2001................................... 834,000 11,000
2002................................... 682,000 11,000
2003................................... 628,000 0
2004................................... 648,000 0
Beyond................................. 896,000 0
------- -
Total.................................. $4,453,000 $638,000
========== ========
Less amounts representing interest..... (50,000)
--------
Present value of future minimum lease payments $588,000
========
4. DEBT
During 1997, $425,000 of outstanding debentures along with $66,000 of accrued
interest were converted into 98,267 shares of Common Stock net of unamortized
debt issuance costs totaling $1,000. In addition, 419 shares of Embrex Common
Stock were issued pursuant to the non-cash exercise of warrants related to the
initial sale of such debentures.
In April 1999, the Company obtained a $6.0 million secured revolving line of
credit facility from its bank, Branch Banking and Trust Company. This facility
may be used for working capital purposes, has a term of 18 months and matures on
October 2, 2000. The entire unpaid balance of the line of credit
then-outstanding plus accrued interest is due in full at maturity. Borrowings
drawn down under this facility bear interest at a rate over LIBOR and are
collateralized by a security interest in the Company's inventory and accounts
receivable. At December 31, 1999, the unused amount of this line of credit
facility amounted to $5.6 million.
A $10,000 note from the State of North Carolina with an interest rate of 8.75%
was repaid along with accrued interest in 1999.
23
<PAGE>
5. SHAREHOLDERS' EQUITY
On May 16, 1996, the Company's shareholders approved an increase in the number
of authorized shares of Common Stock from 15,000,000 to 30,000,000 shares and an
increase in the amount of authorized Preferred Stock from 20,000 to 15,000,000
shares. In addition, the Company changed the par value of the Common Stock and
Series A Participating Preferred Stock from no par value to par value stock,
with a par value of $.01 per share.
At December 31, 1999, the Company had reserved a total of 2,048,114 shares of
its Common Stock for future issuance as follows:
For exercise of warrants to purchase Common Stock................... 122,000
For exercise of Common Stock options and Bonus Stock................ 1,914,475
For possible future issuance to employees and others
under employee stock purchase plans................................. 11,639
---------
Total reserved...................................................... 2,048,114
=========
At December 31, 1999, the Company had issued and outstanding warrants to
purchase Common Stock as follows:
<TABLE>
<CAPTION>
Date through Which
Exercise Price Shares Reserved for Warrants are
Per Share Exercise of Warrants Exercisable
--------- -------------------- -----------
<S> <C> <C> <C>
$9.50................................................. 30,000 12/31/00
$9.50................................................. 15,000 6/9/01
$6.00................................................. 47,000 4/30/00
$7.28................................................. 30,000 10/30/01
------
122,000
=======
</TABLE>
In October 1998, the Company announced that the Board of Directors authorized a
share repurchase program to purchase up to 10% of outstanding shares of Common
Stock, or up to approximately 830,000 shares over 18 months, in open market or
privately negotiated transactions. As of December 31, 1999, the Company had
purchased 499,600 shares for $4.0 million at an average price of $7.9844.
6. STOCK OPTION PLANS
The Company has elected to follow Accounting Principles Board Option No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation," requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
The Company's stock option plans provide for option grants designated as either
non-qualified or incentive stock options. The options generally vest over a
four-year period and expire ten years from the date of grant. In general, the
exercise price of stock options is the closing price of the Company's Common
Stock on the date of grant.
Most U.S. employees and certain employees outside the United States are eligible
to receive a grant of stock options periodically with the number of shares
generally determined by the employee's salary grade and performance level. In
addition, certain management and professional level employees may receive a
stock option grant upon hire. Non-employee directors of the Company receive
annual grants of stock options in amounts specified in the applicable plan.
24
<PAGE>
Stock option information with respect to all of the Company's stock option plans
follows:
<TABLE>
<CAPTION>
Number Option Price Expiration
of Shares Range per Share Date
--------- --------------- ----
<S> <C> <C>
Balance at December 31, 1996, outstanding
options................................................... 866,414 $2.00 to $8.375 1998-2006
Granted............................................. 279,525 $6.063 to $7.125 2007
Exercised........................................... (53,773) $2.00 to $7.00
Canceled............................................ (53,468) $6.125 to $7.00
--------
Balance at December 31, 1997, outstanding
options................................................... 1,038,698 $2.00 to $8.75 1998-2007
Granted............................................. 307,495 $5.00 to $6.375
Exercised........................................... (3,900) $2.00
Canceled............................................ (47,754) $5.375 to $7.00
--------
Balance at December 31, 1998, outstanding
options................................................... 1,294,539 $2.00 to $8.75 1999-2008
Granted............................................. 340,416 $4.625 to $6.125
Exercised........................................... (159,513) $2.00 to $7.00
Canceled............................................ (75,412) $5.125 to $7.125
Balance at December 31, 1999, outstanding
options................................................... 1,400,030 $2.00 to $8.75 1998-2008
</TABLE>
The Company's 1998 Amendment to its 1993 Incentive Stock Option Plan increased
the authorized grant of options to company personnel from 1.2 million shares of
common stock up to 1.9 million shares. All options granted have ten year terms
and a four-year vesting schedule.
Pro forma information regarding net income and income per share is required by
SFAS 123, and has been determined as if the Company accounted for its employee
stock options granted subsequent to December 31, 1994 under the fair value
method of SFAS 123. The fair value for these options was estimated at the date
of grant using a Black-Scholes option pricing model with the following weighted
average assumptions:
1999 1998 1997
---- ---- ----
Risk free interest rate......... 4.76% 4.92% 6.13%
Dividends....................... -- -- --
Volatility factor............... 0.500 0.305 0.358
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
changes in the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:
For the year ended December 31
1999 1998 1997
---- ---- ----
Pro forma net income (in thousands).......... $5,017 $2,212 $1,272
Pro forma basic income per share............. $0.62 $0.27 $0.16
At December 31, 1999, 1998 and 1997, exercisable options for 857,962, 791,468
and 612,628 shares, respectively were outstanding.
25
<PAGE>
The weighted average remaining contractual life of those options is 6.65 years.
The weighted average exercisable price of outstanding options at December 31,
1999 is $5.89.
7. EMPLOYEE STOCK PURCHASE PLAN
The Company has an Employee Stock Purchase Plan (the "Purchase Plan") to provide
its employees with an additional opportunity to share in the ownership of the
Company. Under terms of the Purchase Plan, all regular full-time employees of
the Company may make voluntary payroll contributions thereby enabling them to
purchase Common Stock. Contributions are limited to 20% of an employee's
compensation. Up to 100,000 shares of Common Stock may be issued under the
Purchase Plan. The purchase price of the stock is the lesser of 85% of the Fair
Market Value on the first business day of the Purchase Period or 85% of the Fair
Market Value on the date of exercise which can be at any time during the Plan
year.
Under the Purchase Plan, during 1999, 1998 and 1997, 21,074, 20,594 and 9,764
shares of Common Stock, respectively, were purchased. To date, 88,361 shares of
Common Stock have been purchased.
8. 401(K) RETIREMENT SAVINGS PLAN
The Company has a 401(k) plan which is available to all employees upon
employment who are at least 18 years of age. Employer contributions are
voluntary at the discretion of the Company.
Company contributions amounted to $74,542, $62,988 and $44,080 for the years
ended December 31, 1999, 1998 and 1997, respectively.
9. INCOME TAXES
The components of income tax expense for the year ended December 31 are as
follows:
1999 1998 1997
---- ---- ----
Current:
Federal.......................... $348,000 $197,000 $ 59,000
State............................ 169,000 34,000 84,000
Foreign.......................... 324,000 145,000 279,000
------- ------- -------
$841,000 $376,000 $422,000
======== ======== ========
The Company's consolidated effective tax rate differed from the statutory rate
as set forth below for the year ended December 31:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1999 1998 1997
---- ---- ----
Federal taxes at statutory rate ............ $ 2,178,000 $ 1,101,000 $ 742,000
State and local income taxes, net of Federal
benefit .................................. 321,000 162,000 84,000
Non-deductible expenses .................... 488,000 75,000 24,000
Foreign losses for which no benefit has been
recognized ............................... (67,000) 230,000 346,000
Change in valuation allowance .............. (2,403,000) (1,337,000) (1,112,000)
Alternative minimum and foreign withholding
taxes .................................... 324,000 145,000 338,000
----------- ----------- -----------
$ 841,000 $ 376,000 $ 422,000
=========== =========== ===========
</TABLE>
26
<PAGE>
Deferred income taxes reflect the net effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. The Company has no deferred tax
liabilities. Significant components of the Company's deferred tax assets are as
follows:
<TABLE>
<CAPTION>
<S> <C>
At December 31,
---------------
1999 1998
---- ----
Deferred tax assets:
Book over tax depreciation and amortization ...... $ 88,000 $ 278,000
Net operating loss carryforwards ................. 7,450,000 9,710,000
Research and experimental tax credit carryforwards 2,487,000 2,228,000
Charitable contributions carryforward ............ 27,000 22,000
Accrued liabilities and reserves ................. 245,000 457,000
Alternative Minimum Tax credit carryforward ...... 200,000 205,000
------------ ------------
Total deferred tax assets .................. $ 10,497,000 $ 12,900,000
Valuation allowance for deferred tax assets ............ ($10,497,000) ($12,900,000)
------------ ------------
Net deferred tax assets ....................... $ 0 $ 0
============ ============
</TABLE>
During 1999 and 1998, the valuation allowance decreased by ($2,403,000) and
($1,337,000), respectively.
At December 31, 1999, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $19.6 million which are available
to offset future taxable income. These net operating loss carryforwards expire
during the years 2000 through 2006. Any loss carryforward amounts exceeding the
limitation can be carried forward to future years within the carryforward
period.
In addition, the Company has Research and Experimental Tax Credit carryforwards
totaling approximately $2.5 million which are available to offset future federal
income taxes. These credits expire during the years 2000 through 2014.
10. COMMITMENTS AND CONTINGENCIES
As of December 31, 1999, the Company had outstanding purchase commitments of
approximately $3.4 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
Inovoject(R) egg injection systems.
The Company is engaged in certain legal and administrative proceedings
incidental to its normal business activities. While it is not possible to
determine the ultimate outcome of those actions, in the opinion of management
after discussion with legal counsel, it is unlikely that the outcome of such
litigation and other proceedings will have a material adverse effect on the
results of the Company's operations or its financial position.
11. NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net income
per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1999 1998 1997
------ ------ ------
Numerator:
Net Income Available To Common Stockholders ................ $5,744 $2,861 $1,760
Effect of dilutive securities:
Regulation S Debentures .......................... 0 0 9
------ ------ ------
Numerator for diluted earnings per share-income
available to common stockholders after assumed
27
<PAGE>
conversions ................................... $5,744 $2,861 $1,769
====== ====== ======
Denominator:
Denominator for basic net income per share--weighted-average
shares ..................................................... 8,151 8,255 8,184
Effect of Dilutive Securities:
Employee Stock Options ........................... 336 84 143
Warrants ......................................... 1 0 8
Convertible Debentures ........................... 0 0 4
Dilutive Potential Shares ..................... 337 84 155
Denominator for diluted net income per
share--adjusted weighted-average shares and
assumed conversions ........................... 8,488 8,339 8,339
====== ====== ======
Basic net income per share ................................. $ 0.70 $ 0.35 $0.21
====== ====== ======
Diluted net income per share ............................... $ 0.68 $ 0.34 $0.21
====== ====== ======
</TABLE>
28
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information on the executive officers and directors is incorporated by reference
from the Company's Proxy Statement (under the headings "Management" and
"Proposal 1: Election of Directors," respectively), with respect to the Annual
Meeting of Shareholders to be held on May 18, 2000, to be filed with the
Securities and Exchange Commission.
ITEM 11. EXECUTIVE COMPENSATION
This information is incorporated by reference from the Company's Proxy Statement
(under the heading "Executive Compensation"), with respect to the Annual Meeting
of Shareholders to be held on May 18, 2000, to be filed with the Securities and
Exchange Commission.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information is incorporated by reference from the Company's Proxy Statement
(under the heading "Share Ownership of Management and Certain Beneficial
Owners"), with respect to the Annual Meeting of Shareholders to be held on May
18, 2000, to be filed with the Securities and Exchange Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
29
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1). The financial statements listed below are included in Item 8 of this
report.
Report of Independent Auditors
Financial Statements
Consolidated Balance Sheets at December 31, 1999 and 1998
Consolidated Statements of Operations for each of the three years ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for each of the three years ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Shareholders' Equity for each of the three
years ended December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
The financial statements of the Company's Employee Stock Purchase Plan
listed below are filed herewith, pursuant to Form 10-K, General Instruction F.
Report of Independent Auditors
Financial Statements
Statements of Net Assets Available for Plan Benefits at December 31, 1999
and 1998
Statements of Changes in Net Assets Available for Plan Benefits for the
three years ended December 31, 1999, 1998 and 1997
Notes to Financial Statements
(a)(2) Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts
30
<PAGE>
(a)(3). The exhibits listed below are filed as part of this report. Executive
compensation plans and arrangements are listed in Exhibits 10.15 through 10.43.
Exhibits Description
3.1(1) Restated Articles of Incorporation
3.2(2) Articles of Amendment to Restated Articles of
Incorporation, effective March 21, 1996
3.3(3) Articles of Amendment to Restated Articles of
Incorporation, effective May 28, 1996
3.4 Amended and Restated Bylaws, effective April 16, 1999
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4
4.2(4) Specimen of Common Stock Certificate
4.3(5) Warrant to Purchase Common Stock of Embrex issued to
Schwartz Investments, Inc.
4.4(6) Rights Agreement dated as of March 21, 1996 between
Embrex and Branch Banking and Trust Company, as Rights
Agent
10.1(7) Exchange Agreement dated May 28, 1991, between Embrex
and American Cyanamid Company, Advent First Limited
Partnership A, Biotechnology Venture Fund S.A.,
Biotechnology Investments Limited, Domain Partners,
L.P., Elf Technologies, Inc., Prince Venture Partners
III, L.P., 3I Securities Corporation, and Charles E.
Austin
10.2(7) License Agreement dated December 11, 1991, between
Embrex and the National Technical Information Service, a
primary operating unit of the United States Department
of Commerce
10.3(7) Collaborative Research Agreement dated January 17, 1989
between Embrex and the University of Arkansas
10.4(7) License Agreement dated October 1, 1998 between Embrex
and the National Technical Information Service, a
primary operating unit of the United States Department
of Commerce
10.5(7) Lease Agreement dated December 9, 1986 between Embrex,
as tenant, and Imperial Center Partnership and Petula
Associates, Ltd., as landlord, as amended by First
Amendment dated June 11, 1987, Second Amendment dated
December 1, 1988, and Third Amendment dated May 2, 1989
10.6(4) Fourth Amendment of Lease dated October 1, 1994 between
the Company and Glaxo Inc. (as successor in interest to
Imperial Center Partnership and Petula Associates, Ltd.)
10.7(4) Fifth Amendment of Lease dated December 13, 1996 between
the Company and Glaxo Wellcome Inc. (as successor in
interest to Glaxo Inc.)
10.8(8) Lease for Royal Center II dated October 13, 1997 between
the Company and Petula Associates, Ltd.
10.9 Sublease Agreement dated October 1, 1999, between
Embrex, as subtenant, and Wandel & Goltermann
Technologies, Inc., as sublandlord
10.10 First Amendment to Sublease Agreement dated February 29,
2000, among Wandel & Goltermann Technologies, Inc.,
Embrex and W & G Associates
10.11(7) Facility Agreement dated March 1, 1991, between Embrex
and Mississippi Agriculture and
31
<PAGE>
Forestry Experiment Station, Mississippi State
University
10.12(7) Unrestricted Grant Agreement dated April 1, 1988,
between Embrex and North Carolina State University, as
amended by Amendment dated September 15, 1989 and
Amendment dated April 22, 1991
10.13(7) Unrestricted Grant Agreement dated November 1, 1986,
between Embrex and North Carolina State University, as
amended by Amendment dated May 3, 1989, Amendment dated
September 15, 1989, and Amendment dated April 22, 1991
10.14(7) Basic Research Agreement dated October 24, 1989, between
Embrex and University of Arkansas, as amended on October
23, 1990, February 1, 1991 and July 22, 1991
10.15(7) 1988 Incentive Stock Option Plan and form of Incentive
Stock Option Agreement
10.16(7) 1989 Nonstatutory Stock Option Plan and form of
Nonstatutory Stock Option Agreement
10.17(7) 1991 Nonstatutory Stock Option Plan and form of
Nonstatutory Stock Option Agreement
10.18(9) Incentive Stock Option and Nonstatutory Stock Option
Plan and forms of Stock Option Agreements - June 1993
10.19(3) Amendment dated May 16, 1996 to Incentive Stock Option
and Nonstatutory Stock Option Plan - June 1993
10.20(10) Amended and Restated Incentive Stock Option and
Nonstatutory Stock Option Plan - May 1998
10.21(14) Amended and Restated Incentive Stock Option and
Nonstatutory Stock Option Plan - January 1999 and form
of Stock Option Agreement
10.22(4) Amended and Restated Employee Stock Purchase Plan
10.23(7) Employment Agreement dated November 15, 1989, between
Embrex and Randall L. Marcuson
10.24(4) Amendment to Employment Agreement dated May 21, 1996
between Embrex and Randall L. Marcuson
10.25(4) Change In Control Severance Agreement dated May 21, 1996
between Embrex and Randall L. Marcuson
10.26(13) Amendment to Change in Control Severance Agreement dated
October 1, 1998 between Embrex and Randall L. Marcuson
10.27(7) Employment Agreement dated October 16, 1989, between
Embrex and Catherine A. Ricks
10.28(4) Change In Control Severance Agreement dated May 21, 1996
between Embrex and Catherine A. Ricks
10.29(13) Amendment to Change in Control Severance Agreement dated
October 1, 1998 between Embrex and Catherine A. Ricks
10.30(2) General Provisions to Employment Agreement between
Embrex and Brian V. Cosgriff dated August 18, 1995
10.31(4) Change In Control Severance Agreement dated May 21, 1996
between Embrex and Brian V. Cosgriff
32
<PAGE>
10.32(13) Amendment to Change in Control Severance Agreement dated
October 1, 1998 between Embrex and Brian V. Cosgriff
10.33(2) Terms and Conditions of Employment between Embrex Europe
Limited and David M. Baines dated May 12, 1994
10.34(4) Change In Control Severance Agreement dated June 9, 1996
between Embrex and David M. Baines
10.35(13) Amendment to Change in Control Severance Agreement dated
October 1, 1998 between Embrex and David M. Baines
10.36(4) Letter Agreement and General Provisions to Employment
Agreement dated August 20, 1996 between Embrex and Don
T. Seaquist and Amendment to Employment Agreement dated
September 9, 1996 between Embrex and Don T. Seaquist
10.37(4) Change In Control Severance Agreement dated September 9,
1996 between Embrex and Don T. Seaquist
10.38(13) Amendment to Change in Control Severance Agreement dated
October 1, 1998 between Embrex and Don T. Seaquist
10.39(13) Letter Agreement and General Provisions to Employment
Agreement dated May 31, 1991 between Embrex and V. Hayes
Fenstermacher and Amendment to Employment Agreement
dated July 18, 1996 between Embrex and V. Hayes
Fenstermacher
10.40(13) Change In Control Severance Agreement dated October 16,
1996 between Embrex and V. Hayes Fenstermacher
10.41(13) Amendment to Change in Control Severance Agreement dated
October 1, 1998 between Embrex and V. Hayes
Fenstermacher
10.42(13) Letter Agreement and General Provisions to Employment
Agreement dated February 3, 1999 between Embrex and
Brian C. Hrudka
10.43(13) Change In Control Severance Agreement dated March 24,
1999 between Embrex and Brian C. Hrudka
10.44(7) Shareholders' Agreement dated August 14, 1991 by and
among Embrex, Advent Euroventures Limited Partnership,
and Plant Resource Venture Fund II Limited Partnership
10.45(14) Agreement among Embrex, Micro Cap Partners, L.P., Palo
Alto Investors, Inc., Walter Smiley and William L.
Edwards dated as of April 18, 1999
10.46(14) Indemnification Agreement among Embrex, Randall L.
Marcuson, Charles E. Austin, C. Daniel Blackshear,
Lester M. Crawford, Peter J. Holzer, Kenneth N. May, and
Arthur M. Pappas dated as of April 1, 1999
10.47(16) Letter Agreement among Embrex, Micro Cap Partners, L.P.,
Palo Alto Investors, Inc., and William L. Edwards dated
as of February 11, 2000
10.48(8) Inovoject(R) Egg Injection System Lease, Limited
License, Supply and Service Agreement dated September 1,
1994 between Embrex and Tyson Foods, Inc. (asterisks
located within the exhibit denote information which has
been deleted pursuant to a request for confidential
treatment filed with the Securities and Exchange
Commission)
33
<PAGE>
10.49(8) Amendment dated March 26, 1997 to the Inovoject(R) Egg
Injection System Lease, Limited License, Supply and
Service Agreement dated September 1, 1994 between Embrex
and Tyson Foods, Inc. (asterisks located within the
exhibit denote information which has been deleted
pursuant to a request for confidential treatment filed
with the Securities and Exchange Commission)
10.50(11) Master Lease Agreement dated December 3, 1993 between
Embrex and Capital Associates International, Inc. with a
form of equipment schedule and collateral assignment of
lease attached
10.51(11) Master Lease Agreement dated January 28, 1994 between
Embrex and Aberlyn Capital Management Limited
Partnership with a form of lease schedule and collateral
assignment of lease attached
10.52(11) Agreement to Issue Warrant dated January 28, 1994
between Embrex and Aberlyn Capital Management Limited
Partnership
10.53(11) Common Stock Purchase Warrant issued to Aberlyn Capital
Management Limited Partnership
10.54(11) Agreement to Issue Warrant dated January 28, 1994
between Embrex and Aberlyn Holding Company, Inc.
10.55(11) Common Stock Purchase Warrant issued to Aberlyn Holding
Company, Inc.
10.56(12) Master Equipment Lease Agreement dated as of December 7,
1994between Financing for Science International, Inc.
and Embrex with a Consent to Assignment of Equipment
Lease Agreement, Security Agreement and Rental Schedule
attached
10.57(12) License Agreement dated as of December 7, 1994 between
Financing for Science International, Inc. and Embrex
with Sublicense Agreement attached
10.58(12) Common Stock Purchase Warrant dated January 17, 1995
issued to Financing for Science International, Inc.
10.59(12) Agreement for Sale of Equipment and Rights Under User
Agreement dated as of December 7, 1994 between Financing
for Science International, Inc. and Embrex
10.60(2) Limited License and Supply Agreement dated as of
July 20, 1995 between Embrex and Webster
10.61(4) Amendments dated August 1, 1996 and November 11, 1996 to
Limited License and Supply Agreement dated as of July
20, 1995 between Embrex and Webster
10.62(2) Agreement dated as of January 22, 1996 between Embrex
and Select
10.63(2) Letter Agreement dated as of January 22, 1996 between
Select and Embrex
10.64(2) License dated as of January 22, 1996 granted by Select
to Embrex
10.65(2) Commitment letter accepted June 14, 1995 between Embrex
and Financing for Science International, Inc. for $2.0
million capital lease financing facility
10.66(2) Stock Purchase Warrant dated June 9, 1995 issued to
Financing for Science International, Inc.
34
<PAGE>
10.67(2) Financing Agreement (Number 10783) dated as of October
30, 1995 between Lease Management Services, Inc. and
Embrex, and Addendum thereto dated October 30, 1995
attached
10.68(2) License Agreement dated October 30, 1995 between Embrex
and Lease Management Services, Inc.
10.69(2) Sublicense Agreement dated as of October 30, 1995
between Embrex and Lease Management Services, Inc.
10.70(2) Movable Hypothec on Equipment and Contracts dated as of
October 30, 1995 between Embrex and Lease Management
Services, Inc.
10.71(2) Warrant to Purchase 30,000 Shares of Common Stock dated
October 30, 1995 issued to Lease Management Services,
Inc.
10.72(2) Intercreditor Agreement dated as of October 31, 1995
among Financing for Science International, Inc., Lease
Management Services, Inc., and Embrex
10.73(15) Loan Agreement between Embrex and Branch Banking and
Trust Company dated as of April 7, 1999
21 Subsidiaries
23 Consent of Ernst & Young LLP to the inclusion of their
report dated February 15, 2000 with respect to the
consolidated financial statements and schedule of the
Company in this Form 10-K and the incorporation by
reference of such report into the Registration
Statements on Form S-3 (Registration Nos. 333-18231 and
333-31811), as filed with the Securities and Exchange
Commission on December 19, 1996 and July 22, 1997,
respectively, and into the Registration Statements under
the Securities Act of 1933 on Form S-8 (Registration
Nos. 33-51582, 33-63318, 333-04109, and 333-56279), as
filed with the Securities and Exchange Commission on
September 1, 1992, May 25, 1993, May 20, 1996, and June
8, 1998, respectively, and to the incorporation by
reference in the Registration Statement on Form S-8
(Registration No. 33-63318) pertaining to the Employee
Stock Purchase Plan of their report dated March 20, 2000
with respect to the financial statements of the Embrex,
Inc. Employee Stock Purchase Plan included in this Form
10-K
24 Powers of Attorney (included in the signature page for
this report)
27 Financial Data Schedule to the Company's Form 10-K for
the year ended December 31, 1999
99 Risk Factors relating to the Company
(1) Exhibit to the Company's Form 10-K as filed with the Securities and Exchange
Commission for fiscal year ending December 31, 1991 and incorporated herein by
reference
(2) Exhibit to the Company's Form 10-K as filed with the Securities and Exchange
Commission for the fiscal year ending December 31, 1995 and incorporated herein
by reference
(3) Exhibit to the Company's Form 10-Q as filed with the Securities and Exchange
Commission for the three months ended June 30, 1996 and incorporated herein by
reference
(4) Exhibit to the Company's Form 10-K as filed with the Securities and Exchange
Commission for fiscal year ending December 31, 1996 and incorporated herein by
reference
(5) Exhibit to the Company's Form 10-Q as filed with the Securities and Exchange
Commission for the three
35
<PAGE>
months ended June 30, 1995 and incorporated herein by reference
(6) Exhibit to the Company's Registration Statement on Form 8-A as filed with
the Securities and Exchange Commission on March 22, 1996 and incorporated herein
by reference
(7) Exhibit to the Company's Registration Statement on Form S-1 as filed with
the Securities and Exchange Commission (Registration No. 33-42482) effective
November 7, 1991 and incorporated herein by reference
(8) Exhibit to the Company's Form 10-K as filed with the Securities and Exchange
Commission for the fiscal year ending December 31, 1997 and incorporated herein
by reference.
(9) Exhibit to the Company's Form 10-K as filed with the Securities and Exchange
Commission for the fiscal year ending December 31, 1992 and incorporated herein
by reference
(10) Exhibit to the Company's Registration Statement on Form S-8 as filed with
the Securities and Exchange Commission (Registration No. 333-56279) effective
June 8, 1998 and incorporated herein by reference
(11) Exhibit to the Company's Form 10-KSB, as amended, as filed with the
Securities and Exchange Commission for the fiscal year ending December 31, 1993
and incorporated herein by reference
(12) Exhibit to the Company's Form 10-K as filed with the Securities and
Exchange Commission for the fiscal year ending December 31, 1994 and
incorporated herein by reference
(13) Exhibit to the Company's Form 10-K as filed with the Securities and
Exchange Commission for the fiscal year ending December 31, 1998 and
incorporated herein by reference
(14) Exhibit to the Company's Form 10-Q as filed with the Securities and
Exchange Commission for the three months ended March 31, 1999 and incorporated
herein by reference
(15) Exhibit to the Company's Form 10-Q as filed with the Securities and
Exchange Commission for the three months ended June 30, 1999 and incorporated
herein by reference
(16) Exhibit to the Company's Form 8-K as filed with the Securities and Exchange
Commission on February 22, 2000.
(b). No reports on Form 8-K were filed during the last quarter of the fiscal
year ended December 31, 1999. The Company filed a report of Form 8-K on February
22, 2000.
36
<PAGE>
SIGNATURES AND POWER OF ATTORNEY
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized.
EMBREX, INC.
/s/ Randall L. Marcuson
By:________________________
Date : March 24, 2000 Randall L. Marcuson
President and Chief Executive
Officer
We, the undersigned directors and officers of Embrex, Inc. (the "Company"), do
hereby constitute and appoint Randall L. Marcuson and Don T. Seaquist or either
of them, our true and lawful attorneys-in-fact and agents, with full power of
substitution, to execute and deliver an Annual Report on Form 10-K pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the
"Act"), with respect to the year ended December 31, 1999, to be filed with the
Securities and Exchange Commission, and to do any and all acts and things and to
execute any and all instruments for us and in our names in the capacities
indicated below, which said attorneys-in-fact and agents, or either of them, may
deem necessary or advisable to enable the Company to comply with the Act and any
rules, regulations, and requirements of the Securities and Exchange Commission
in connection with such Report, including without limitation the power and
authority to execute and deliver for us or any of us in our names and in the
capacities indicated below any and all amendments to such Report; and we do
hereby ratify and confirm all that the said attorneys-in-fact and agents, or
either of them, shall do or cause to be done by virtue of this power of
attorney.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
Signature Title Date
- --------- ----- ----
/s/ Randall L. Marcuson President, Chief Executive Officer March 24, 2000
- -------------------------------- and Director
Randall L. Marcuson
/s/ Don T. Seaquist Vice President, Finance and March 24, 2000
- --------------------- Administration (Principal Financial
Don T. Seaquist and Accounting Officer)
/s/ Charles E. Austin Director March 24, 2000
- --------------------------------
Charles E. Austin
/s/ C. Daniel Blackshear Director March 24, 2000
- --------------------------------
C. Daniel Blackshear
/s/ Lester M. Crawford Director March 24, 2000
- --------------------------------
Lester M. Crawford, D.V.M. Ph.D.
/s/ Peter J. Holzer Director March 24, 2000
- --------------------------------
Peter J. Holzer
/s/ Kenneth N. May Director March 24, 2000
- --------------------------------
Kenneth N. May, Ph.D.
/s/ Arthur M. Pappas Director March 24, 2000
- --------------------------------
Arthur M. Pappas
/s/ Walter V. Smiley Director March 24, 2000
- --------------------------------
Walter V. Smiley
</TABLE>
37
<PAGE>
Report of Independent Auditors
The Board of Directors
Embrex, Inc.
We have audited the accompanying statements of net assets available for plan
benefits of Embrex, Inc. Employee Stock Purchase Plan as of December 31, 1999
and 1998, and the related statements of changes in net assets available for plan
benefits for each of the three years in the period ended December 31, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the net assets available for plan benefits of Embrex,
Inc. Employee Stock Purchase Plan at December 31, 1999 and 1998, and the changes
in net assets available for plan benefits for each of the three years in the
period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States.
/s/ Ernst & Young LLP
Raleigh, North Carolina
March 20, 2000
38
<PAGE>
STATEMENTS OF NET ASSETS AVAILABLE FOR PLAN BENEFITS
EMBREX, INC. EMPLOYEE STOCK PURCHASE PLAN
At December 31,
1999 1998
---- ----
Receivable from Company............................. $74,719 $46,243
------- -------
Net assets available for Plan benefits.............. $74,719 $46,243
======= =======
See accompanying notes.
STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS
EMBREX, INC. EMPLOYEE STOCK PURCHASE PLAN
Years Ended December 31,
1999 1998 1997
Employee contributions ...................... $136,073 $137,454 $87,189
Deductions:
Purchases of Common Stock 95,535 99,354 46,355
Withdrawals ............. 12,062 30,523 28,245
-------- -------- -------
107,597 129,877 74,600
-------- -------- -------
Net (decrease) increase ..................... 28,476 7,577 12,589
Net assets available for Plan benefits at
beginning of period ..... 46,243 38,666 26,077
-------- -------- -------
Net assets available for Plan benefits at
end of period ........... $ 74,719 $ 46,243 $ 38,666
======== ======== =======
Shares of Common Stock purchased
during year ...................... $ 21,074 20,594 8,209
======== ======== =======
39
<PAGE>
EMBREX, INC. EMPLOYEE STOCK PURCHASE PLAN
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
NOTE 1 - BASIS OF PRESENTATION
The accompanying financial statements of the Embrex, Inc. Employee Stock
Purchase Plan ("the Plan") have been prepared on the accrual basis.
NOTE 2 - PLAN DESCRIPTION AND SUMMARY OF SIGNIFICANT PLAN PROVISIONS
The Board of Directors of Embrex, Inc. ("the Company") adopted the Plan on
January 28, 1993, and the Plan was approved by shareholders of the Company at
the Annual Meeting of Shareholders on May 20, 1993. The Plan became effective as
of June 1, 1993.
The purpose of this Plan is to provide the Company's employees with an
additional opportunity to share in the ownership of the Company. Under terms of
the Plan, all regular full-time employees of the Company may make voluntary
payroll contributions thereby enabling them to purchase Common Stock at a price
to be determined by the Compensation Committee of the Board, but not less than
85% of the lower of the fair market values as of the first business day of the
twelve-month offering period or the date of exercise which can be at any time
during the offering period.
Contributions are limited to 20% of an employee's compensation, and the
aggregate number of shares of Common Stock which may be purchased in total by
all Plan participants may not exceed 100,000 shares.
Contributions to the Plan are maintained in a non-interest bearing account until
such time as the participant exercises the option to purchase shares of Common
Stock from his or her available contributions, or withdraws from the account.
All amounts representing net Plan assets are considered general assets of the
Company and may be subject to the claims of creditors.
In addition to contributions, plan activity consists of voluntary purchases of
shares of Common Stock and withdrawals from participation in the Plan.
Participants may purchase whole shares of Common Stock during a Purchase Period
(generally a twelve-month period ending each June 30th). A participant may
withdraw from the Plan and cease making contributions at any time.
The Plan is not subject to the provisions of the Employee Retirement Income
Security Act of 1974 ("ERISA") and is not qualified under Section 401(a) of the
Internal Revenue Code of 1986, as amended which relates to qualification of
certain pension, profit-sharing and stock bonus plans.
All costs to administer the Plan are paid by the Company.
40
<PAGE>
FINANCIAL STATEMENT SCHEDULE
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
EMBREX, INC. AND CONSOLIDATED SUBSIDIARIES
<TABLE>
<CAPTION>
ADDITIONS
(1) (2)
CHARGED TO CHARGED TO
BALANCE AT COSTS AND OTHER BALANCE AT
BEGINNING OF EXPENSES ACCOUNTS-- DEDUCTIONS-- END OF
PERIOD -------- DESCRIBE DESCRIBE PERIOD
------ -------- -------- ------
DESCRIPTION
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1999
Allowance for doubtful accounts $ 133,521 $ 66,231(a) $ (28,446)(a) $ 171,306
Inventory valuation allowance 585,049 110,000(a) (247,061)(a) 447,988
Amortization of intangible assets 74,364 9,543(a) 0 83,907
YEAR ENDED DECEMBER 31, 1998
Allowance for doubtful accounts $ 48,665 $ 94,227(a) $ (9,371)(a) $ 133,521
Inventory valuation allowance 333,416 313,942(a) (62,309)(a) 585,049
Amortization of intangible assets 79,952 55,143(a) (60,731)(f) 74,364
YEAR ENDED DECEMBER 31, 1997
Allowance for doubtful accounts $ 6,590 $ 42,075(a) $ 0 $ 48,665
Inventory valuation allowance 272,385 173,500(a) (112,469)(a) 333,416
Amortization of intangible assets 57,673 22,279(a) 0 79,952
</TABLE>
(a) To adjust allowance for change in estimates.
(b) Fully-amortized intangible assets written off.
(c) Purchase accounting adjustments.
(d) Sales of assets
(e) Revaluation adjustments.
(f) Not fully amortized - intangible asset write off
41
EXHIBIT 3.4
RESTATED EFFECTIVE MAY 21, 1998
AMENDED EFFECTIVE APRIL 16, 1999
AMENDED AND RESTATED BYLAWS
OF
EMBREX, INC.
ARTICLE I
DEFINITIONS
In these bylaws, unless otherwise provided, the following terms shall
have the following meanings:
(1) "Act" shall mean the North Carolina Business Corporation
Act as codified in Chapter 55 of the North Carolina General Statutes effective
July 1, 1990, and as amended from time to time;
(2) "Articles of Incorporation" shall mean the Corporation's
articles of incorporation, including amended and restated articles of
incorporation and articles of merger;
(3) "Corporation" shall mean Embrex, Inc.;
(4) "Distribution" shall mean a direct or indirect transfer of
money or other property (except the Corporation's own shares) or incurrence of
indebtedness by the Corporation to or for the benefit of its shareholders in
respect of any of its shares. A distribution may be in the form of a declaration
or payment of a dividend, a purchase, redemption, or other acquisition of
shares, a distribution of indebtedness, or otherwise;
(5) "Emergency" shall mean a catastrophic event which prevents
a quorum of the board of directors from being readily assembled;
(6) "Shares" shall mean the units into which the proprietary
interests in the Corporation are divided; and
(7) "Voting group" shall mean all shares of one or more
classes or series that under the articles of incorporation or the Act are
entitled to vote and be counted together collectively on a matter at a meeting
of shareholders. All shares entitled by the articles of incorporation or the Act
to vote generally on a matter are for that purpose a single voting group.
ARTICLE II
OFFICES
SECTION 1. PRINCIPAL OFFICE: The principal office of the Corporation
shall be located at 1035 Swabia Court, Durham, Durham County, North Carolina
27703, or at such other place as may be determined from time to time by the
directors.
SECTION 2. REGISTERED OFFICE: The registered office of the Corporation
shall be located at 1035 Swabia Court, Durham, Durham County, North Carolina
27703.
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SECTION 3. OTHER OFFICES: The Corporation may have offices at such
other places, either within or without the State of North Carolina, as the board
of directors may from time to time determine, or as the affairs of the
Corporation may require.
ARTICLE III
MEETINGS OF SHAREHOLDERS
SECTION 1. PLACE OF MEETINGS: All meetings of shareholders shall be
held at the principal office of the Corporation, or at such other place, either
within or without the State of North Carolina, as shall be designated in the
notice of the meeting or as may be agreed upon by a majority of the shareholders
entitled to vote at the meeting.
SECTION 2. ANNUAL MEETING: The annual meeting of shareholders for the
election of directors and the transaction of other business shall be held
annually in any month on any day (except Saturday, Sunday or a legal holiday) as
fixed by the board of directors.
SECTION 3. SUBSTITUTE ANNUAL MEETING: If the annual meeting shall not
be held on the day designated by these bylaws, a substitute annual meeting may
be called by the board of directors, the chairman of the board, the chief
executive officer or the president. A meeting so called shall be designated and
treated for all purposes as the annual meeting.
SECTION 4. SPECIAL MEETINGS: Special meetings of the shareholders may
be called at any time by any two directors. Only business within the purpose or
purposes described in the meeting notice specified in Section 6 of this Article
may be conducted at a special meeting of shareholders.
SECTION 5. CONDUCT OF BUSINESS: The chairman of the meeting of
shareholders shall determine the order of business and the procedure at the
meeting, including such regulation of the manner of voting and the conduct of
discussion as seem to him in order.
SECTION 6. NOTICE OF MEETING: Written or printed notice stating the
time and place of the meeting shall be delivered not less than ten (10) nor more
than sixty (60) days before the date of any shareholders' meeting, either
personally, by mail, by telegraph, by teletype, or by facsimile transmission, by
or at the direction of the chairman of the board, the chief executive officer,
the president, the secretary, or other person calling the meeting to each
shareholder of record entitled to vote at such meeting. If mailed, such notice
shall be deemed to be delivered when deposited in the United States mail,
addressed to the shareholder at his address as it appears on the record of the
shareholders of the Corporation, with postage thereon prepaid.
In the case of a special meeting, the notice of meeting shall
specifically state the purpose or purposes for which the meeting is called. In
the case of an annual or substitute annual meeting, the notice of meeting need
not specifically state the business to be transacted unless such a statement is
required by the Act.
When an annual or special meeting is adjourned to a different date,
time, and place, it is not necessary to give any notice of the adjourned meeting
other than by announcement at the meeting at which the adjournment is taken;
provided, however, that if a new record date for the adjourned meeting is or
must be set, notice of the adjourned meeting must be given to persons who are
shareholders as of the new record date.
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The record date for determining the shareholders entitled to notice of
and to vote at an annual or special meeting shall be fixed as provided in
Section 3 of Article VIII.
SECTION 7. WAIVER OF NOTICE: A shareholder may waive notice of any
meeting either before or after such meeting. Such waiver shall be in writing,
signed by the shareholder, and filed with the minutes or corporate records. A
shareholder's attendance at a meeting: (i) waives objection to lack of notice or
defective notice of the meeting, unless the shareholder at the beginning of the
meeting objects to holding the meeting or transacting business at the meeting;
and (ii) waives objection to consideration of a particular matter at the meeting
that is not within the purpose or purposes described in the meeting notice,
unless the shareholder objects to considering the matter before it is voted
upon.
SECTION 8. SHAREHOLDER LIST: Commencing two (2) business days after
notice of a meeting of shareholders is given and continuing through such
meeting, the secretary of the Corporation shall maintain at the principal office
of the Corporation an alphabetical list of the shareholders entitled to vote at
such meeting, arranged by voting group, with the address of and number of shares
held by each. This list shall be subject to inspection by any shareholder or his
agent or attorney at any time during usual business hours and may be copied at
the shareholder's expense.
SECTION 9. QUORUM: A majority of the votes entitled to be cast on a
matter by any voting group, represented in person or by proxy, shall constitute
a quorum of that voting group for action on that matter. The shareholders
present at a duly organized meeting may continue to transact business until
adjournment, notwithstanding the withdrawal of enough shareholders to leave less
than a quorum.
In the absence of a quorum at the opening of any meeting of
shareholders, such meeting may be adjourned from time to time by a majority of
the votes voting on the motion to adjourn; and at any adjourned meeting at which
a quorum is present, any business may be transacted which might have been
transacted at the original meeting.
SECTION 10. PROXIES: Shares may be voted either in person or by one or
more agents authorized by a written proxy executed by the shareholder or by his
duly authorized attorney in fact. A proxy may take the form of a telegram,
telex, facsimile or other form of wire or wireless communication which appears
to have been transmitted by a shareholder. A proxy is effective when received by
the secretary or other officer or agent authorized to tabulate votes. A proxy is
not valid after the expiration of eleven (11) months from the date of its
execution, unless the person executing it specifies therein the length of time
for which it is to continue in force or limits its use to a particular meeting.
SECTION 11. VOTING OF SHARES: Unless otherwise provided in these
bylaws, the articles of incorporation, or the Act, each outstanding share,
regardless of class, shall be entitled to one vote on each matter submitted to a
vote at a meeting of shareholders.
Except for the election of directors, which is governed by the
provisions of Section 4 of Article IV, if a quorum is present, action on a
matter by a voting group is approved if the votes cast within the voting group
favoring the action exceed the votes cast against the action, unless the vote of
a greater number is required by the Act, the articles of incorporation, or these
bylaws.
Shares of the Corporation are not entitled to vote if: (i) they are
owned, directly or indirectly, by the Corporation, unless they are held by it in
a fiduciary capacity; (ii) they are owned, directly or indirectly, by a second
corporation in which the Corporation owns a majority of the shares entitled to
vote for directors of the second corporation; or (iii) they are redeemable
shares and (x) notice of redemption has been given and (y) a sum sufficient to
redeem the shares has been deposited with a bank, trust company, or other
financial institution under an irrevocable obligation to pay the holders the
redemption price upon surrender of the shares.
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Either the board of directors or the chairman of the meeting may
appoint one or more voting inspectors, each of whom shall take an oath to
execute his duties impartially and to the best of his ability. The voting
inspector may be an officer, employee or agent of the Corporation. The voting
inspectors shall, by majority vote, resolve all questions regarding voting of
shares, including the number of shares outstanding, the voting power of each,
the shares represented at the meeting, the qualification of voters, the validity
of proxies, the existence of a quorum as to any voting group, and the
acceptance, rejection and tabulation of votes.
SECTION 12. INFORMAL ACTION BY SHAREHOLDERS: Any action which may be
taken at a meeting of the shareholders may be taken without a meeting if a
consent in writing, setting forth the action so taken, is signed by all of the
persons who would be entitled to vote upon such action at a meeting and is
delivered to the Corporation to be included in the minutes or to be kept as part
of the corporate records.
SECTION 13. SHAREHOLDER PROPOSALS: Any shareholder wishing to bring any
business before a meeting of shareholders must provide notice to the Corporation
not more than ninety (90) and not less than fifty (50) days before the meeting
in writing by registered mail, return receipt requested, of the business to be
presented by such shareholder at the meeting. Any such notice shall set forth
the following as to each matter the shareholder proposes to bring before the
meeting: (i) a brief description of the business desired to be brought before
the meeting and the reasons for conducting such business at the meeting and, if
such business includes a proposal to amend the bylaws of the Corporation, the
language of the proposed amendment; (ii) the name and address, as they appear on
the Corporation's books, of the shareholder proposing such business; (iii) the
class and number of shares of the Corporation which are beneficially owned by
such shareholder; (iv) a representation that the shareholder is a holder of
record of stock of the Corporation entitled to vote at such meeting and intends
to appear in person or by proxy at the meeting to propose such business; and (v)
any material interest of the shareholder in such business. Notwithstanding the
foregoing provisions of this Section, a shareholder shall also comply with all
applicable requirements of the Securities Exchange Act of 1934, as amended, and
the rules and regulations thereunder with respect to the matters set forth in
this Section. In the absence of such notice to the Corporation meeting the above
requirements, a shareholder shall not be entitled to present any business at any
meeting of the shareholders.
SECTION 14. CORPORATION'S ACCEPTANCE OF VOTES: If the name signed on a
vote, consent, waiver, or proxy appointment corresponds to the name of a
shareholder, the Corporation is entitled to accept the vote, consent, waiver, or
proxy appointment and to give it effect as the act of the shareholder.
If the name signed on a vote, consent, waiver, or proxy appointment
does not correspond to the name of its shareholder, the Corporation is
nevertheless entitled to accept the vote, consent, waiver, or proxy appointment
and to give it effect as the act of the shareholder if: (i) the shareholder is
an entity and the name signed purports to be that of an officer or agent of the
entity; (ii) the name signed purports to be that of an administrator, executor,
guardian, or conservator representing the shareholder and, if the Corporation
requests, evidence of fiduciary status acceptable to the Corporation has been
presented with respect to the vote, consent, waiver, or proxy appointment; (iii)
the name signed purports to be that of a receiver or trustee in bankruptcy of
the shareholder and, if the Corporation requests, evidence of its status
acceptable to the Corporation has been presented with respect to the vote,
consent, waiver, or proxy appointment; (iv) the name signed purports to be that
of a beneficial owner or attorney-in-fact of the shareholder and, if the
Corporation requests, evidence acceptable to the Corporation of the signatory's
authority to sign for the shareholder has been presented with respect to the
vote, consent, waiver, or proxy appointment; or (v) two or more persons
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are the shareholder as co-tenants or fiduciaries and the name signed purports to
be the name of at least one of the co-owners and the person signing appears to
be acting on behalf of all the co-owners.
The Corporation is entitled to reject a vote, consent, waiver, or proxy
appointment if the secretary or other officer or agent authorized to tabulate
votes has a reasonable basis for doubt about the validity of the signature on it
or about the signatory's authority to sign for the shareholder.
SECTION 15. NUMBER OF SHAREHOLDERS: The following persons or entities
identified as a shareholder in the Corporation's current record of shareholders
constitute one shareholder for purposes of these bylaws: (i) all co-owners of
the same shares; (ii) a corporation, partnership, trust, estate, or other
entity; (iii) the trustees, guardians, custodians, or other fiduciaries of a
single trust, estate, or account. Shareholdings registered in substantially
similar names constitute one shareholder if it is reasonable to believe that the
names represent the same person.
ARTICLE IV
BOARD OF DIRECTORS
SECTION 1. GENERAL POWERS: All corporate powers shall be exercised by
or under the authority of, and the business and affairs of the Corporation shall
be managed under the direction of, its board of directors.
SECTION 2. NUMBER, TERM AND QUALIFICATIONS: The number constituting the
board of directors shall be not less than one (1) nor more than twelve (12). The
number of directors within this variable range may be fixed or changed from time
to time by the shareholders or the board of directors. Each director shall hold
office until his death, resignation, retirement, removal, disqualification, or
until his successor is elected and qualified. Directors need not be residents of
the State of North Carolina or shareholders of the Corporation.
SECTION 3. NOMINATION OF DIRECTORS: Nominations for the election of
directors may only be made by the board of directors, by the nominating
committee of the board of directors (or, if none, any other committee serving a
similar function) or by any shareholder entitled to vote generally in elections
of directors where the shareholder complies with the requirements of this
Section. The Chief Executive Officer of the Corporation shall be a nominee for
election to the board of directors. Any shareholder of record entitled to vote
generally in elections of directors may nominate one or more persons for
election as directors at a meeting of shareholders only if written notice of
such shareholder's intent to make such nomination or nominations has been given,
either by personal delivery or by registered mail, return receipt requested, to
the Secretary of the Corporation (i) with respect to an election to be held at
an annual meeting of shareholders, not more than ninety (90) days nor less than
fifty (50) days in advance of such meeting; and (ii) with respect to an election
to be held at a special meeting of shareholders called for the purpose of the
election of directors, not later than the close of business on the tenth
business day following the date on which notice of such meeting is first given
to shareholders. Each such notice of a shareholder's intent to nominate a
director or directors at an annual or special meeting shall set forth the
following: (A) the name and address, as they appear on the Corporation's books,
of the shareholder who intends to make the nomination and the name and residence
address of the person or persons to be nominated; (B) the class and number of
shares of the Corporation which are beneficially owned by the shareholder; (C) a
representation that the shareholder is a holder of record of stock of the
Corporation entitled to vote at such meeting and intends to appear in person or
by proxy at the meeting to nominate the person or persons specified in the
notice; (D) a description of all arrangements or understandings between the
shareholder and each nominee and any other person or persons (naming such person
or persons) pursuant to which the
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nomination or nominations are to be made by the shareholders; (E) such other
information regarding each nominee proposed by such shareholder as would be
required to be disclosed in solicitations of proxies for election of directors,
or as would otherwise be required, in each case pursuant to Regulation 14A under
the Securities and Exchange Act of 1934, as amended, including any information
that would be required to be included in a proxy statement filed pursuant to
Regulation 14A had the nominee been nominated by the board of directors; and (F)
the written consent of each nominee to be named in a proxy statement and to
serve as director of the Corporation if so elected. No person nominated by a
shareholder shall be eligible to serve as a director of the Corporation unless
nominated in accordance with the procedures set forth in this Section. If the
chairman of the shareholders meeting shall determine that a nomination was not
made in accordance with the procedures described by the bylaws of the
Corporation, he shall so declare to the meeting, and the defective nomination
shall be disregarded. Notwithstanding the foregoing provisions of this Section,
a shareholder shall also comply with all applicable requirements of the
Securities Exchange Act of 1934, as amended, and the rules and regulations
thereunder with respect to the matters set forth in this Section.
SECTION 4. ELECTION OF DIRECTORS: Except as provided in Section 6 of
this Article, the directors shall be elected at the annual meeting of
shareholders by plurality vote; and accordingly those persons who receive the
highest number of votes shall be deemed to have been elected. If any shareholder
so demands, the election of directors shall be by ballot.
SECTION 5. REMOVAL: Any director, or the entire board of directors, may
be removed from office at any time, with or without cause, but only if the
number of votes cast to remove him exceeds the number of votes cast not to
remove him. If a director is elected by a voting group of shareholders, only
members of that voting group may participate in the vote to remove him. A
director may not be removed by the shareholders at a meeting unless the notice
of the meeting specifies such removal as one of its purposes. If any directors
are removed, new directors may be elected at the same meeting.
SECTION 6. VACANCIES: Any vacancy occurring in the board of directors,
including, without limitation, a vacancy resulting from an increase in the
number of directors or from the failure by the shareholders to elect the full
authorized number of directors, shall be filled by the shareholders or the board
of directors. If such vacancy is to be filled by the board of directors, and if
the directors remaining in office constitute fewer than a quorum of the board,
such vacancy may be filled by the affirmative vote of a majority of the
remaining directors or by the sole remaining director. If the vacant office was
held by a director elected by a voting group of shareholders, only the remaining
director or directors elected by that voting group or the holders of shares of
that voting group are entitled to fill the vacancy. The term of a director
elected to fill a vacancy shall expire at the next shareholders' meeting at
which directors are elected.
SECTION 7. CHAIRMAN OF THE BOARD: The board of directors from time to
time may appoint from their number a chairman of the board. The chairman of the
board, if one is appointed, shall preside at all meetings of the board of
directors and the shareholders and shall perform such other duties as may be
prescribed from time to time by the board of directors.
SECTION 8. COMPENSATION: The board of directors may compensate
directors for their services as such and may provide for the payment of all
expenses incurred by directors in attending regular and special meetings of the
board.
SECTION 9. COMMITTEES: The board of directors may create one or more
committees of the board, each of which shall have at least two (2) members, all
of whom shall be directors. The creation of a committee and the appointment of
members to it must be approved by a majority of all the directors in office when
the action is taken. Each committee may, as specified by the board of
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directors, exercise some or all of the authority of the board except that a
committee may not: (i) authorize distributions; (ii) approve or propose to
shareholders action that the Act requires be approved by shareholders; (iii)
fill vacancies on the board of directors or on any of its committees; (iv) amend
the articles of incorporation pursuant to N.C. Gen. Stat. Section 55-10-02 or
its successor; (v) adopt, amend, or repeal bylaws; (vi) approve a plan of merger
not requiring shareholder approval; (vii) authorize or approve a reacquisition
of shares, except according to a formula or method prescribed by the board of
directors; or (viii) authorize or approve the issuance or sale or contract for
sale of shares, or determine the designation and relative rights, preferences,
and limitations of a class or series of shares, except that the board of
directors may authorize a committee to do so within limits specifically
prescribed by the board of directors to the full extent permitted by applicable
law. The provisions of Article V, which govern meetings of the board of
directors, shall likewise apply to meetings of any committee of the board.
SECTION 10. EXECUTIVE COMMITTEE: In accordance with Section 9 of this
Article, the board of directors may designate an executive committee. Subject to
the provisions of Section 9 of this Article, any executive committee so
designated may exercise all of the power of the board of directors during
intervals between meetings thereof, including but not limited to the power to
authorize the execution of contracts, deeds, leases, and other agreements
respecting real or personal property. The board of directors shall approve,
disapprove, or modify action taken by any such executive committee and shall
record such action in the minutes of the board meeting.
ARTICLE V
MEETINGS OF DIRECTORS
SECTION 1. REGULAR MEETINGS: Regular meetings of the board of directors
shall be held at such place or places, on such date or dates, and at such time
or times as shall have been established by the board of directors and publicized
among all directors.
SECTION 2. SPECIAL MEETINGS: Special meetings of the board of directors
may be called by one-third of the directors then in office or by the chief
executive officer and shall be held at such place, either within or without the
State of North Carolina, on such date, and at such time as they or he shall fix.
SECTION 3. NOTICE OF MEETINGS: Regular meetings of the board of
directors may be held without notice. The person or persons calling a special
meeting of the board of directors shall, at least three (3) days before the
meeting, give notice of the meeting by any usual means of communication,
including by telephone, telegraph, teletype, mail, private carrier, facsimile
transmission, or other form of wire or wireless communication. Such notice may
be oral and need not specify the purpose for which the meeting is called.
SECTION 4. WAIVER OF NOTICE: Any director may waive notice of any
meeting either before or after such meeting. Such waiver shall be in writing,
signed by the director, and filed with the minutes or corporate records;
provided, however, that a director's attendance at or participation in a meeting
waives any required notice to him unless the director at the beginning of the
meeting (or promptly upon his arrival) objects to holding the meeting or
transacting business at the meeting and does not thereafter vote for or assent
to action taken at the meeting.
SECTION 5. QUORUM: A majority of the directors fixed by or pursuant to
these bylaws shall constitute a quorum for the transaction of business at any
meeting of the board of directors.
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SECTION 6. MANNER OF ACTING: The act of a majority of the directors
present at a meeting at which a quorum is present shall be the act of the board
of directors, unless a greater number is required by the articles of
incorporation or these bylaws.
SECTION 7. PRESUMPTION OF ASSENT: A director of the Corporation who is
present at a meeting of the board of directors or a committee of the board of
directors when corporate action is taken is deemed to have assented to the
action taken unless: (i) he objects at the beginning of the meeting (or promptly
upon his arrival) to holding it or transacting business at the meeting; (ii) his
dissent or abstention from the action taken is entered in the minutes of the
meeting; or (iii) he files written notice of his dissent or abstention with the
presiding officer of the meeting before its adjournment or with the Corporation
immediately after adjournment of the meeting. This right of dissent or
abstention is not available to a director who votes in favor of the action
taken.
SECTION 8. PARTICIPATION IN MEETINGS: Any or all of the directors may
participate in a regular or special meeting by, or conduct the meeting through
the use of, any means of communication by which all directors participating may
simultaneously hear each other during the meeting.
SECTION 9. ACTION WITHOUT MEETING: Action which may be taken at a board
of directors meeting may be taken without a meeting if the action is taken by
all members of the board and is evidenced by one or more written consents signed
by each director before or after such action, which describes the action taken
and is included in the minutes or filed with the corporate records. Such action
is effective when the last director signs the consent, unless the consent
specifies a different effective date.
ARTICLE VI
OFFICERS
SECTION 1. OFFICERS OF THE CORPORATION: The officers of the Corporation
shall consist of a chief executive officer, president, secretary, treasurer, and
such vice presidents, assistant secretaries, assistant treasurers, and other
officers as the board of directors may from time to time appoint. Any two or
more offices may be held by the same person, but no officer may act in more than
one capacity where action of two or more officers is required.
SECTION 2. APPOINTMENT AND TERM: The officers of the Corporation shall
be appointed by the board of directors. A duly appointed officer may appoint one
or more officers or assistant officers if authorized by the board of directors.
Each officer shall hold office until his death, resignation, retirement,
removal, disqualification or until his successor is appointed and qualifies. The
appointment of an officer does not itself create contract rights for either the
officer or the Corporation.
SECTION 3. COMPENSATION OF OFFICERS: The compensation of officers of
the Corporation shall be fixed by the board of directors. No officer shall
receive compensation for serving the Corporation in any other capacity unless
such additional compensation be authorized by the board of directors.
SECTION 4. RESIGNATION AND REMOVAL: An officer may resign at any time
by communicating his resignation to the Corporation. A resignation is effective
when it is communicated unless it specifies in writing a later date. If a
resignation is made effective as of a later date and the Corporation accepts the
future effective date, the board of directors may fill the pending vacancy
before the effective date if the board provides that the successor does not take
office until the effective date. An officer's resignation does not affect the
Corporation's contract rights, if any, with the officer.
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Any officer or agent appointed by the board of directors may be removed by the
board at any time, with or without cause, but such removal shall be without
prejudice to the contract rights, if any, of the person so removed.
SECTION 5. BONDS: The board of directors may by resolution require any
officer, agent, or employee of the Corporation to give bond to the Corporation,
with sufficient sureties, conditioned on the faithful performance of the duties
of his respective office or position, and to comply with such other conditions
as may from time to time be required by the board of directors.
SECTION 6. CHIEF EXECUTIVE OFFICER: The chief executive officer shall
have general authority and supervision over the officers and employees of the
Corporation, and shall perform such other duties as may be prescribed from time
to time by the board of directors. All officers shall report to him except to
the extent specifically required by the board of directors. He shall consult
with the president as to matters within the scope of the authority of the
president. He shall have the authority to sign certificates for shares, as well
as any deeds, mortgages, contracts, or other instruments which the board of
directors has authorized to be executed, except in cases where the signing and
execution of such contracts or instruments shall be expressly delegated by the
board of directors or by these bylaws to some other officer or agent of the
Corporation, or shall be required by the Act to be otherwise signed or executed.
SECTION 7. PRESIDENT: The president shall be the chief operating
officer of the Corporation and shall have general charge of the operation of the
business of the Corporation. The president shall perform such duties and have
such powers as the board of directors from time to time may assign. He shall
have the authority to sign certificates for shares, as well as any deeds,
mortgages, contracts, or other instruments which the board of directors has
authorized to be executed, except in cases where the signing and execution of
such contracts or instruments shall be expressly delegated by the board of
directors or by these bylaws to some other officer or agent of the Corporation,
or shall be required by the Act to be otherwise signed or executed.
SECTION 8. VICE PRESIDENTS: In the absence of the president, the vice
presidents in the order of their length of service as vice presidents, unless
otherwise determined by the board of directors, shall perform the duties of the
president, and when so acting shall have all the powers of and be subject to all
the restrictions upon that office. Any vice president may sign certificates for
shares, as well as any deeds, mortgages, contracts, or other instruments which
the board of directors has authorized to be executed, except in cases where the
signing and execution of such documents or instruments shall be expressly
delegated by the board of directors or these bylaws to some other officer or
agent of the Corporation or shall be required by the Act to be otherwise signed
or executed. A vice president shall perform such other duties as from time to
time may be assigned to him by the chief executive officer, the president, or
the board of directors.
SECTION 9. SECRETARY: The secretary shall: (i) keep the minutes of the
meetings of shareholders, of the board of directors, and of all committees of
the board in one or more books provided for that purpose; (ii) see that all
notices are duly given in accordance with the provisions of these bylaws or as
required by law; (iii) be custodian of the seal of the Corporation and see that
the seal of the Corporation is affixed to all documents the execution of which
on behalf of the Corporation under its seal is duly authorized; (iv) keep a
register of the mailing address of each shareholder which shall be furnished to
the secretary by such shareholder; (v) sign, with the chief executive officer,
the president, or a vice president, certificates for shares, the issuance of
which shall have been authorized by resolution of the board of directors; (vi)
have general charge of the stock transfer books of the Corporation; (vii) keep
or cause to be kept in the State of North Carolina at the Corporation's
principal office a record of the Corporation's shareholders, giving the names
and addresses of all shareholders and the number and class of shares held by
each, and prepare or cause to be prepared a shareholder
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list prior to each meeting of shareholders as required by the Act; (viii)
maintain and authenticate the books and records of the Corporation; (ix) with
the assistance of the treasurer and other officers, prepare and deliver to the
Corporation's shareholders such financial statements, notices, and reports as
may be required by N.C. Gen. Stat. Sections 55-16-20 and 55-16-21 (or their
successors); (x) prepare and file with the North Carolina Secretary of Revenue
the annual report required by N.C. Gen. Stat. Section 55-16-22 (or its
successor); and (xi) in general perform all duties incident to the office of
secretary and such other duties as from time to time may be assigned to him by
the chief executive officer, the president or the board of directors.
SECTION 10. ASSISTANT SECRETARIES: In the absence of the secretary, the
assistant secretaries in the order of their length of service as assistant
secretary, unless otherwise determined by the board of directors, shall perform
the duties of the secretary, and when so acting shall have all the powers of and
be subject to all the restrictions upon the secretary. They shall perform such
other duties as may be assigned to them by the secretary, the chief executive
officer, the president, or the board of directors. Any assistant secretary may
sign, with the chief executive officer, the president or a vice president,
certificates for shares.
SECTION 11. TREASURER: The treasurer shall be the chief financial
officer of the Corporation and shall: (i) have charge and custody of and be
responsible for all funds and securities of the Corporation; (ii) receive and
give receipts for monies due and payable to the Corporation from any source
whatsoever, and deposit all such monies in accordance with the provisions of
Section 4 of Article VII; (iii) prepare, or cause to be prepared, an annual
financial statement in accordance with Section 3 of Article IX; and (iv) in
general, perform all of the duties incident to the office of treasurer and such
other duties as from time to time may be assigned to him by the chief executive
officer, the president or the board of directors. The treasurer may sign, with
the chief executive officer, the president or a vice president, certificates for
shares.
SECTION 12. ASSISTANT TREASURERS: In the absence of the treasurer, the
assistant treasurers, in the order of their length of service as assistant
treasurer, unless otherwise determined by the board of directors, shall perform
the duties of the treasurer, and when so acting shall have all the powers of and
be subject to all the restrictions upon the treasurer. They shall perform such
other duties as may be assigned to them by the treasurer, the chief executive
officer, the president, or the board of directors. Any assistant treasurer may
sign, with the chief executive officer, the president or a vice president,
certificates for shares.
SECTION 13. ACTION RE: SECURITIES OF OTHER CORPORATIONS: Unless
otherwise directed by the board of directors, the President shall have power to
vote and otherwise act on behalf of the Corporation, in person or by proxy, at
any meeting of shareholders of or with respect to any action of shareholders of
any other corporation in which this Corporation may hold securities and
otherwise to exercise any and all rights and powers which this Corporation may
possess by reason of its ownership of securities in such other corporation.
ARTICLE VII
CONTRACTS, LOANS, CHECKS AND DEPOSITS
SECTION 1. CONTRACTS: The board of directors may authorize any officer
or agent to enter into any contract or to execute and deliver any instrument on
behalf of the Corporation, and such authority may be general or confined to
specific instances.
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SECTION 2. LOANS: No loans shall be contracted on behalf of the
Corporation and no evidences of indebtedness shall be issued in its name unless
authorized by a resolution of the board of directors. Such authority may be
general or confined to specific instances.
SECTION 3. CHECKS AND DRAFTS: All checks, drafts or other orders for
payment of money issued in the name of the Corporation shall be signed by such
officers or agents of the Corporation and in such manner as shall from time to
time be determined by resolution of the board of directors.
SECTION 4. DEPOSITS: All funds of the Corporation not otherwise
employed shall be deposited from time to time to the credit of the Corporation
in such depositories as the board of directors shall direct.
ARTICLE VIII
CERTIFICATES FOR SHARES AND THEIR TRANSFER
SECTION 1. CERTIFICATES FOR SHARES: Shares may, but need not, be
represented by certificates. If certificates are issued, they shall be in such
form as the board of directors shall determine; provided that, at a minimum,
each certificate shall state on its face: (i) the name of the Corporation and
that it is organized under the laws of North Carolina; (ii) the name of the
person to whom issued; and (iii) the number and class of shares and the
designation of the series, if any, the certificate represents. If the
Corporation issues certificates for shares of preferred stock, the designations,
relative rights, preferences, and limitations applicable to that class, and the
variations in rights, preferences, and limitations for each series within that
class (and the authority of the board of directors to determine variations for
future series) must be summarized on the front or back of each certificate;
alternatively, each certificate may state conspicuously on its front or back
that the Corporation will furnish the shareholder this information in writing
and without charge. These certificates shall be signed, either manually or in
facsimile, by the chief executive officer, the president, or any vice president,
and the secretary or any assistant secretary, the treasurer or any assistant
treasurer. They shall be consecutively numbered or otherwise identified and the
name and address of the persons to whom they are issued, with the number of
shares and date of issue, shall be entered on the stock transfer books of the
Corporation.
SECTION 2. TRANSFER OF SHARES: Transfer of shares of the Corporation
shall be made only on the stock transfer books of the Corporation by the holder
of record, by his legal representative (who shall furnish proper evidence of
authority to transfer) or by his attorney (whose authority shall be evidenced by
a power of attorney duly executed and filed with the secretary), and only upon
surrender for cancellation of the certificates for such shares.
SECTION 3. FIXING RECORD DATE: For the purpose of determining
shareholders entitled to receive notice of a meeting of shareholders, to demand
a special meeting, to vote, to take any other action, or to receive payment, or
for any other purpose, the board of directors may fix in advance a date as the
record date for any such determination of shareholders, such record date in any
case to be not more than seventy (70) days, and, in case of a meeting of
shareholders, not less than ten (10) days, before the date on which the
particular action requiring such determination of shareholders is to be taken.
If no record date is fixed for the determination of shareholders entitled to
notice of or to vote at a meeting of shareholders, or of shareholders entitled
to receive a distribution, the day before the first notice of the meeting is
mailed or the day on which the board of directors authorize the distribution, as
the case may be, shall be the record date for such determination of
shareholders.
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When a determination of shareholders entitled to notice of or to vote
at any meeting of shareholders has been made as provided in this Section, such
determination shall apply to any adjournment of such meeting unless the board of
directors fixes a new record date, which it must do if the meeting is adjourned
to a date more than 120 days after the date fixed for the original meeting.
SECTION 4. LOST CERTIFICATES: The board of directors may authorize the
issuance of a new share certificate in place of a certificate claimed to have
been lost or destroyed, upon receipt of an affidavit of such fact from the
person claiming the loss or destruction. When authorizing the issuance of a new
certificate, the board of directors may require the claimant to give the
Corporation a bond in such sum as it may direct to indemnify the Corporation
against loss from any claim with respect to the certificate claimed to have been
lost or destroyed; or the board of directors may, by resolution reciting that
the circumstances justify such action, authorize the issuance of the new
certificate without requiring such a bond.
SECTION 5. REACQUIRED SHARES: The Corporation may acquire its own
shares and shares so acquired constitute authorized but unissued shares.
ARTICLE IX
GENERAL PROVISIONS
SECTION 1. DISTRIBUTIONS: The board of directors may from time to time
declare, and the Corporation may make, distributions on its outstanding shares
in the manner and subject to the terms and conditions provided by the Act and by
the articles of incorporation.
SECTION 2. SEAL: The corporate seal of the Corporation shall consist of
two concentric circles between which is the name of the Corporation and in the
center of which is inscribed "CORPORATE SEAL" or "SEAL," and which shall have
such other characteristics as the board of directors may determine.
SECTION 3. RECORDS AND REPORTS: All of the Corporation's records shall
be maintained in written form or in another form capable of conversion into
written form within a reasonable time. The Corporation shall keep as permanent
records minutes of all meetings of its incorporators, shareholders, and board of
directors, a record of all actions taken by the shareholders or board of
directors without a meeting, and a record of all actions taken by a committee of
the board of directors in place of the board of directors.
The Corporation shall keep a copy of the following records at its
principal office: (i) the articles of incorporation and all amendments to them
currently in effect; (ii) these bylaws and all amendments to them currently in
effect; (iii) resolutions adopted by its board of directors creating one or more
classes or series of shares and fixing their relative rights, preferences, and
limitations (if shares issued pursuant to those resolutions are outstanding);
(iv) the minutes of all meetings of shareholders and records of all actions
taken by shareholders without a meeting during the past three years; (v) all
written communications to shareholders generally within the past three years;
(vi) the annual financial statements described below, prepared during the past
three years; (vii) a list of the names and business addresses of its current
directors and officers; and (viii) its most recent annual report delivered to
the North Carolina Secretary of Revenue (or Secretary of State, if applicable).
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The Corporation shall prepare and make available to its shareholders
annual financial statements for the Corporation and its subsidiaries that: (i)
include a balance sheet as of the end of the fiscal year, an income statement
for that year, and a statement of cash flows for the year; and (ii) are
accompanied by either (x) a report of a public accountant on the annual
financial statements, or (y) a statement by the treasurer stating his reasonable
belief whether the annual financial statements were prepared on the basis of
generally accepted accounting principles (and, if not, describing the basis of
preparation) and describing any respects in which the statements were not
prepared on a basis of accounting consistent with the statements prepared for
the preceding year. These annual financial statements, or a written notice of
their availability, shall be mailed to each shareholder within 120 days after
the close of each fiscal year of the Corporation. On written request from a
shareholder who was not mailed the annual financial statements, the Corporation
shall mail to him the latest such statements.
The Corporation shall also prepare and file with the North Carolina
Secretary of Revenue an annual report in such form as required by N.C. Gen.
Stat. Section 55-16-22, or its successor.
SECTION 4. INDEMNIFICATION: Any person who at any time serves or has
served as a director or officer of the Corporation, or at the request of the
Corporation is or was serving as an officer, director, agent, partner, trustee,
administrator, or employee for any other foreign or domestic corporation,
partnership, joint venture, trust, employee benefit plan, or other enterprise,
shall be indemnified by the Corporation to the fullest extent from time to time
permitted by law in the event he is made, or is threatened to be made, a party
to any threatened, pending or completed civil, criminal, administrative,
investigative or arbitrative action, suit or proceeding and any appeal therein
(and any inquiry or investigation that could lead to such action, suit or
proceeding), whether or not brought by or on behalf of the Corporation, seeking
to hold him liable by reason of the fact that he is or was acting in such
capacity. In addition, the board may provide such indemnification for the
employees and agents of the Corporation as it deems appropriate.
The rights of those receiving indemnification hereunder shall, to the
fullest extent from time to time permitted by law, cover (i) reasonable
expenses, including without limitation all attorneys' fees actually and
necessarily incurred by him in connection with any such action, suit or
proceeding, (ii) all reasonable payments made by him in satisfaction of any
judgment, money decree, fine (including an excise tax assessed with respect to
an employee benefit plan), penalty, or settlement for which he may have become
liable in such action, suit or proceeding; and (iii) all reasonable expenses
incurred in enforcing the indemnification rights provided herein.
Expenses incurred by anyone entitled to receive indemnification under
this Section in defending a proceeding may be paid by the Corporation in advance
of the final disposition of such proceeding as authorized by the board of
directors in the specific case or as authorized or required under any provisions
in the bylaws or by any applicable resolution or contract upon receipt of an
undertaking by or on behalf of the director to repay such amount unless it shall
ultimately be determined that he is entitled to be indemnified by the
Corporation against such expenses.
The board of directors of the Corporation shall take all such action as
may be necessary and appropriate to authorize the Corporation to pay the
indemnification required by this bylaw, including without limitation, to the
extent needed, making a good faith evaluation of the manner in which the
claimant for indemnity acted and of the reasonable amount of indemnity due him.
Any person who at any time serves or has served in any of the aforesaid
capacities for or on behalf of the Corporation shall be deemed to be doing or to
have done so in reliance upon, and as consideration for, the right of
indemnification provided herein. Any repeal or modification of these
13
<PAGE>
indemnification provisions shall not affect any rights or obligations existing
at the time of such repeal or modification. The rights provided for herein shall
inure to the benefit of the legal representatives of any such person and shall
not be exclusive of any other rights to which such person may be entitled apart
from the provisions of this bylaw.
The rights granted herein shall not be limited by the provisions
contained in N.C. Gen. Stat. Section 55-8-51 (or its successor), provided,
however, that the Corporation shall not indemnify or agree to indemnify a
potential indemnitee against liability or expenses he may incur on account of
his activities which were at the time taken known or believed by the potential
indemnitee to be clearly in conflict with the best interests of the Corporation.
The Corporation may purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee or agent of the Corporation,
or is or was serving at the request of the Corporation as a director, officer,
employee or agent for any other foreign or domestic corporation, partnership,
joint venture, trust, employee benefit plan, or other enterprise, against any
liability asserted against him and incurred by him in any such capacity, or
arising out of his status as such, whether or not the Corporation would have the
power to indemnify him against such liability under the provisions of the Act or
these bylaws.
SECTION 5. FISCAL YEAR: The fiscal year of the Corporation shall be
fixed by the board of directors.
SECTION 6. AMENDMENTS: (a) The board of directors may amend or repeal
these bylaws, except to the extent otherwise provided in the articles of
incorporation, a bylaw adopted by the shareholders, or the Act, and except that
a bylaw adopted, amended or repealed by the shareholders may not be readopted,
amended or repealed by the board of directors if neither of the articles of
incorporation nor a bylaw adopted by the shareholders authorizes the board of
directors to adopt, amend, or repeal that particular bylaw or the bylaws
generally.
(b) The Corporation's shareholders may adopt, amend, alter,
change, or repeal any of these bylaws consistent with the provisions of Section
11 of Article III.
(c) A bylaw that fixes a greater quorum or voting requirement
for the board of directors may be amended or repealed: (i) if originally adopted
by the shareholders, only by the shareholders, unless the bylaw permits
amendment or repeal by the board of directors; or (ii) if originally adopted by
the board of directors, either by the shareholders or by the board of directors.
(d) A bylaw referred to in Subsection (c) above: (i) may not
be adopted by the board of directors by a vote of less than a majority of the
directors then in office; and (ii) may not itself be amended by a quorum or vote
of the directors less than the quorum or vote therein prescribed or prescribed
by a bylaw adopted or amended by the shareholders.
(e) A bylaw adopted or amended by the shareholders that fixes
a greater voting or quorum requirement for the board of directors may provide
that it may be amended or repealed only by a specified vote of either the
shareholders or the board of directors.
SECTION 7. TIME PERIODS: In applying any provision of these bylaws
which requires an act to be done or not done a specified number of days prior to
an event or that an act be done during a period of a specified number of days
prior to an event, calendar days shall be used, the day of the doing of the act
shall be excluded and the day of the event shall be included.
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<PAGE>
SECTION 8. OPT-OUT OF NORTH CAROLINA SHAREHOLDER PROTECTION ACT: The
provisions of the North Carolina Shareholder Protection Act, N.C. Gen.
Stat.ss.ss.55-9-01 - 05, as presently enacted or hereafter amended, shall not be
applicable to the Corporation.
SECTION 9. OPT-OUT OF NORTH CAROLINA CONTROL SHARE ACQUISITION ACT: The
provisions of the North Carolina Control Share Acquisition Act, N.C. Gen.
Stat.ss.ss.55-9A-01 - 09, as presently enacted or hereafter amended, shall not
be applicable to the Corporation.
SECTION 10. EMERGENCIES: In anticipation of or during an emergency, the
board of directors may: (i) modify lines of succession to accommodate the
incapacity of any director, officer, employee, or agent; and (ii) relocate the
principal office or designate alternative principal or regional offices, or
authorize the officers to do so.
During an emergency: (i) notice of a meeting of the board of directors
need be given only to those directors whom it is practicable to reach and may be
given in any practicable manner, including by publication and radio; and (ii)
one or more officers present at a meeting of the board of directors may be
deemed to be directors for the meeting, in order of rank and within the same
rank in order of seniority, as necessary to achieve a quorum.
SECTION 11. SEVERABILITY: Should any provision of these bylaws become
ineffective or be declared to be invalid for any reason, such provision shall be
severable from the remainder of these bylaws and all other provisions of these
bylaws shall continue to be in full force and effect.
THESE RESTATED BYLAWS CONSIST OF THE AMENDED AND RESTATED BYLAWS
ADOPTED AT A MEETING OF THE BOARD OF DIRECTORS OF THE CORPORATION ON MARCH 27,
1998 WITH THE ADDITION OF THE AMENDMENT IN ITS ENTIRETY OF SECTION 2 OF ARTICLE
IV ADOPTED AT A MEETING OF THE SHAREHOLDERS ON MAY 21, 1998 AND THE AMENDMENT IN
ITS ENTIRETY OF SECTION 4 OF ARTICLE III ADOPTED AT A MEETING OF THE BOARD OF
DIRECTORS ON APRIL 16, 1999.
ATTESTED:
/s/ Don T. Seaquist
- ----------------------------- Dated: February 28, 2000
Don T. Seaquist
Secretary
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EXHIBIT 10.9
SUBLEASE AGREEMENT
THIS SUBLEASE (the "Sublease") dated for reference purposes October 1,
1999, is entered into by and between Wandel & Goltermann Technologies, Inc., a
North Carolina corporation, hereinafter referred to as "Sublandlord", and
Embrex, Inc., a North Carolina corporation, hereinafter referred to as
"Subtenant".
WHEREAS, W&G Instruments, Incorporated, a predecessor in interest of
Sublandlord, as Tenant, and W&G Associates, a North Carolina Limited
Partnership, as Landlord, hereinafter referred to as "Prime Landlord", entered
into that certain Lease Agreement dated October 1, 1984, which Lease has been
amended by instruments dated January 31, 1986, October 1, 1989, January 24,
1994, February 23, 1999, and October 1, 1999 (said Lease as amended being
referred to herein as the "Prime Lease") pertaining to the rental of certain
premises on Swabia Court, Durham, NC, more particularly described as Lot S-5B,
containing 10 acres as shown on plat of survey recorded in Plat Book 131, Page
87, Durham County Registry (the "Premises");
WHEREAS, Sublandlord desires to sublet a portion of the Premises to
Subtenant (defined herein as the "Sublease Premises"), subject to the written
consent of the Prime Landlord, and Subtenant desires to sublet the Sublease
Premises from Sublandlord, all on the terms and conditions set forth in this
Sublease;
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, the Sublandlord and Subtenant agree as follows:
1. Unless otherwise defined in this Sublease, all capitalized terms
used herein that are defined in the Prime Lease shall have the meaning ascribed
to such terms in the Prime Lease.
2. The Prime Lease is attached hereto and by reference made a part
hereof as Exhibit C. Except as otherwise expressly provided herein, this
Sublease is subject to and made upon all the terms, covenants and conditions of
the Prime Lease, with the same force and effect as if fully set forth therein.
It is the intention of the parties hereto that, except as otherwise expressly
provided in this Sublease, and except as inapplicable hereto or inconsistent
herewith, the relationship between Sublandlord and Subtenant with respect to the
Sublease Premises shall be governed by the provisions of the Prime Lease as if
they have been set forth in full in this Sublease with the term "Sublandlord"
replacing the term "Landlord" and the term "Subtenant " replacing the term
"Tenant".
3. All of the non-monetary obligations contained in the Prime Lease
conferred and imposed upon Sublandlord (as Tenant therein) with respect to the
Sublease Premises, except as modified and amended by this Sublease, and all
rights and privileges conferred upon Sublandlord (as Tenant therein) with
respect to the Sublease Premises, are hereby conferred and imposed upon
Subtenant. Except as expressly modified and amended by this Sublease or
inconsistent herewith, Subtenant covenants and agrees fully and faithfully to
perform the non-monetary obligations and conditions of the Prime Lease with
respect to the Sublease Premises on Sublandlord's part to be performed.
Subtenant further agrees, as an express inducement for
<PAGE>
Sublandlord executing this Sublease, that, with respect to the Sublease
Premises, if there is any conflict between the provisions of this Sublease and
the provisions of the Prime Lease which would permit Subtenant to do or cause to
be done or suffer or permit any act or thing to be done which is prohibited by
the Prime Lease, then, except to the extent expressly agreed by Prime Landlord
in consenting to this Sublease, the provisions of the Prime Lease shall prevail
with respect to the Sublease Premises. Except as expressly provided to the
contrary in this Sublease, the remedies of the parties, as Subtenant and
Sublandlord hereunder, shall be the same as the respective remedies of the
"Landlord" and "Tenant" under the Prime Lease.
Subtenant shall pay to Sublandlord, within five (5) days after demand therefor
by Sublandlord, any and all sums (except rent under the Prime Lease) due
pursuant to the Prime Lease with respect to the Sublease Premises; provided,
however (and as an express departure from the terms of the Prime Lease), except
as set forth in or determined by Section 6 of this Sublease, through and
including December 31, 2000, Subtenant shall have no liability for Sublandlord's
obligations under Section 3.2 of the Prime Lease and through and including
December 31, 2000, Subtenant shall have no liability under Section 5.1 of the
Prime Lease. Notwithstanding the foregoing but subject to any agreement of
Sublandlord and Subtenant pursuant to Section 6 hereof with respect to an
allocation of responsibility between them with respect to certain conditions of
the Sublease Premises, Tenant shall comply with all laws, ordinances, and
regulations of any lawful authority with respect to Subtenant's particular use
and occupancy of the Sublease Premises provided that such compliance does not
require any repairs, reconstruction, or improvements that are not expressly the
result of Subtenant's particular use and occupancy of the Sublease Premises.
Notwithstanding anything to the contrary herein, Sublandlord shall have no duty
itself to perform any obligations of Prime Landlord, including, without
limitation, constructing any improvements to the Sublease Premises, nor shall
such default of Prime Landlord affect this Sublease or waive or defer the
performance of any of Subtenant's obligations hereunder.
Notwithstanding anything to the contrary herein, Sublandlord expressly agrees
that through and including December 31, 2000, Subtenant, except as set forth in
or determined by Section 6, shall have no obligation or liabilities with respect
to the roof, foundation, load-bearing walls, fire and safety systems, and
parking lot except to the extent directly attributable to the intentional acts
or negligence of Subtenant, its employees, agents, representatives, invitees,
and contractors. The foregoing is an allocation of responsibility of certain
obligations with respect to the Sublease Premises between Sublandlord and
Subtenant and shall not affect the obligations owed by Sublandlord to Prime
Landlord under the Prime Lease.
4. Subject to the terms of the second and third paragraphs of Section 5
of this Sublease, Sublandlord hereby subleases to Subtenant and Subtenant hereby
subleases from Sublandlord the Sublease Premises for a term of approximately
seventy-two (72) months (the "Initial Sublease Term") commencing on October 1,
1999 (the "Commencement Date") and expiring on September 30, 2005 (the
"Expiration Date"). Notwithstanding the occurrence of the Commencement Date on
October 1, 1999, Subtenant's only monetary obligation under this Sublease until
its actual occupancy of the Sublease Premises shall be to pay rent as set forth
in Section 6.
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5. Subject to a Right of First Refusal for additional space as set
forth in Section 7 hereof, the Sublease Premises shall be approximately 44,725
rentable square feet defined for purposes hereof as the combination of the
"Initial Sublease Premises" and the "Expansion Sublease Premises" as defined
below and as more particularly shown in the attached Exhibit B.
Effective from the Commencement Date until September 30, 2000, Subtenant shall
sublease from Sublandlord and Sublandlord shall sublease to Subtenant an area of
approximately 20,837 rentable square feet as shown on Exhibit B (the "Initial
Sublease Premises").
Effective October 1, 2000 and continuing through the remainder of the Initial
Sublease Term or any extension thereof, Subtenant shall sublease from
Sublandlord and Sublandlord shall sublease to Subtenant an additional area
totaling approximately 23,888 rentable square feet as shown on Exhibit B (the
"Expansion Sublease Premises"). Rent for the Expansion Sublease Premises is
incorporated into the Rent Schedule below.
6. Subtenant shall pay Sublandlord monthly rent throughout the Initial
Sublease Term or any extension thereof, in advance on the first day of each and
every month of the Initial Sublease Term or any extension thereof in the amounts
set forth in the Rent Schedule below. All rent and any other sums due to
Sublandlord shall be paid to Sublandlord at 1030 Swabia Court, P.O. Box 13585,
Research Triangle Park, NC 27709-3585, or at such other address directed by
Sublandlord to Subtenant in writing. The first monthly installment of rent,
Twenty-Two Thousand Five Hundred Seventy-Three Dollars and Forty-Two Cents
($22,573.42), shall be paid and delivered to Sublandlord at execution of this
Sublease by Subtenant, provided, however, that if the Commencement Date occurs
on a day other than the first day of the month, rent for the first month of the
Initial Sublease Term shall be pro-rated based on the number of days remaining
in the first month of the Initial Sublease Term. Notwithstanding the foregoing,
Subtenant shall not be obligated to pay rent to Sublandlord until Sublandlord
and Subtenant have agreed upon the repairs, replacements, or improvements
required to be made to the Sublease Premises or Building (as hereinafter
defined) as hereinafter set forth in this Section 6. If neither Sublandlord nor
Subtenant has terminated this Sublease pursuant to the terms of this Section 6,
Subtenant shall pay to Sublandlord rent from the Commencement Date to the date
of delivery to Subtenant of an amendment to this Sublease acceptable to
Sublandlord and Subtenant setting forth the repairs, replacements, or
improvements the parties have agreed each shall make to the Sublease Premises.
If this Sublease is terminated pursuant to the terms of this Section 6,
Subtenant shall pay to Sublandlord with its notice of termination or promptly
after receipt from Sublandlord of its notice of termination, as its total
obligation to pay rent under this Sublease, two and one-half (2 1/2) months'
installments of rent in the amount of Fifty-Six Thousand Four Hundred
Thirty-Three Dollars and Fifty-Five Cents ($56,433.55).
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RENT SCHEDULE:
-------------
RENT
PERIOD $/RSF/YR. MONTHLY RENT STRUCTURE
------------------------------------------------- --------------------
10/01/99 - 09/30/00 $13.00 $22,573.42 Full-Service
10/01/00 - 12/31/00 $13.39 $49,905.65 Full-Service
01/01/01 - 09/30/01 $ 9.14 $34,065.54 Triple-Net
10/01/01 - 09/30/02 $ 9.41 $35,087.51 Triple-Net
10/01/02 - 09/30/03 $ 9.70 $36,140.13 Triple-Net
10/01/03 - 09/30/04 $ 9.99 $37,233.56 Triple-Net
10/01/04 - 09/30/05 $10.29 $38,351.69 Triple-Net.
As per the Rent Schedule above, the rent during the Initial Sublease Term shall
adjust on January 1, 2001 from "Full-Service" to "Triple-Net". For purposes of
this Sublease, "Full-Service" shall be deemed to include the following expenses
and services to be provided at Sublandlord's sole cost and expense:
o JANITORIAL - regular trash removal, maintenance, dusting, vacuuming and
cleaning of lavatories but in no event at a lesser frequency than that
provided for Sublandlord's own facilities.
o EXTERIOR MAINTENANCE - pertains to landscaping, parking lots,
sidewalks, and windows.
o STRUCTURAL/INTERIOR MAINTENANCE - pertains to the building's structure
including foundation, walls, roof, floor, light fixtures and bulbs, and
all mechanical systems (including HVAC) and plumbing.
o PROPORTIONATE SHARE OF REAL ESTATE TAXES
o PROPORTIONATE SHARE OF REAL PROPERTY INSURANCE UNDER PRIME LEASE
o ALL UTILITIES - water for lavatory and drinking purposes, gas, sewer
and electricity. In regards to electric service, said service shall be
provided specifically to power Subtenant's lights, plugs and HVAC, at
the same level at which said services are available to Sublandlord.
Until that time that the rental structure becomes "triple-net" and
Subtenant's utilities are separately metered, Subtenant shall utilize
only normal, non-heat generating office equipment such as personal
computers, copiers, fax machines, printers, refrigerators, vending
machines and coffee makers.
o HVAC - heating and cooling for the Sublease Premises so as to maintain
an average temperature of 72 degrees Fahrenheit, plus or minus 2
degrees.
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o CARD READER SYSTEM - During the period in which the Rent is
"Full-Service", Sublandlord shall provide Subtenant with Card Reader
Access services, at the same level at which said services are available
to Sublandlord. Upon the Rent becoming "Triple-Net", to the extent that
Sublandlord continues to operate and share use of its Card Reader
Access System, Sublandlord agrees to continue to provide, at its
expense, Card Reader services to Subtenant.
Notwithstanding the foregoing, if Sublandlord notifies Subtenant that
Sublandlord will not make some or all of the repairs or replacements indicated
in the inspection report described in the third following paragraph,
"Triple-Net" shall not include such repairs or replacements.
"Proportionate Share" shall mean 41.08% (20,837 RSF/ 50,725 RSF) for the period
when Subtenant subleases the Initial Sublease Premises, 88.17% (44,725 RSF /
50,725 RSF) when Subtenant subleases the Initial Subleases Premises and the
Expanded Sublease Premises, and 100% should Subtenant sublease the entire
Premises.
Before Subtenant is permitted to occupy the Sublease Premises, the Sublease
Premises shall be inspected by a building inspector reasonably acceptable to
Sublandlord and Subtenant, whose report (the "Report") shall be delivered to
Sublandlord and Subtenant by January 20, 2000. The scope of the inspection, for
purposes of this Sublease, shall be limited to determining whether the structure
of the Sublease Premises and its HVAC, plumbing, mechanical, electrical and fire
protection systems are in good condition and working order and whether the
Sublease Premises currently comply with all applicable local, state, and federal
laws and regulations related to occupancy of the Sublease Premises by Subtenant
for its intended uses, it being understood that except as Sublandlord may
otherwise agree after its review of the Report, Subtenant is otherwise leasing
the Sublease Premises "as is." All costs and expenses incurred in connection
with this inspection shall be the sole responsibility of Subtenant. Sublandlord
shall deliver to Subtenant within ten (10) days after receipt of a copy of the
Report a statement indicating which, if any of the defects or non-complying
conditions noted in the Report, Sublandlord is willing to repair or replace at
its expense; provided, however, Sublandlord at its sole cost and expense shall
bear the cost of making the existing bathroom facilities serving the Sublease
Premises comply with the requirements of The Americans With Disabilities Act
("ADA") to the same extent that would be required if Sublandlord were to
continue its prior use of the Building. Subtenant shall then have ten (10) days
after receipt of Sublandlord's statement to accept Sublandlord's proposal with
respect to the repairs and replacements recommended in the Report, to reject
Sublandlord's statement in its entirety, or to propose an alternative
description of the repairs and replacements for which Sublandlord and Subtenant
would be responsible; provided, however, Subtenant shall be responsible at its
cost and expense for additions or improvements to the existing bathroom
facilities to accommodate its use beyond that for which Sublandlord is
responsible under the preceding sentence. If Sublandlord and Subtenant agree as
to the repairs and replacements for which each is responsible, Sublandlord and
Subtenant shall enter into the appropriate amendment to this Sublease to reflect
the allocation of their respective responsibilities for repairs or replacements
to the Sublease Premises. If, after good faith efforts to negotiate their
differences, Sublandlord and Subtenant have not agreed on such an allocation of
responsibility by March 1,
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2000, each shall have the right to terminate this Sublease upon written notice
to the other in which event neither party shall have any other or further
obligations to the other under this Sublease, except for any obligations which
accrued before the date of such termination and further except that Subtenant
shall pay to Sublandlord two and one-half (2 1/2) months' rent referenced in the
first paragraph of this Section 6 in consideration of Sublandlord keeping the
Premises off the market during the negotiation of this Sublease and the security
deposit shall be returned to Subtenant.
For purposes hereof, unless stated elsewhere herein to the contrary,
"Triple-Net" shall be defined as that rent structure and treatment of all those
expenses and services, including but not limited to, those services and
associated expenses outlined under the definition of "Full-Service" above, which
are required to occupy and conduct business in the Sublease Premises and as set
forth in the Prime Lease (but with respect to only the Sublease Premises or
Subtenant's Proportionate Share of the Building or the Premises), including, but
not limited to, the parking lot, walkways, exterior lighting, landscaping, and
all HVAC, mechanical, roof and structural maintenance and repair. Therefore, at
the effective date on which the rent adjusts from Full-Service to Triple-Net
(i.e., on January 1, 2001), in addition to the monthly rent stated in the Rent
Schedule above, Subtenant shall contract directly with service providers for its
utilities and other services used in the Sublease Premises, including, but not
limited to, janitorial services and trash removal services, and shall pay all
charges for said utilities and services directly to the relevant service
provider. Notwithstanding the foregoing, to the extent services with respect to
the parking lot, walkways, exterior lighting, and landscaping are currently
contracted by Sublandlord, Subtenant may meet its obligations under this
paragraph by paying to Sublandlord promptly after receipt of an invoice and
supporting documentation Subtenant's Proportionate Share of such expenses. To
the extent that the elements or components of the Building for which Subtenant
is responsible under this paragraph service space other than the Sublease
Premises, Subtenant shall only pay its Proportionate Share of such expenses. In
the event Subtenant assumes responsibility for any of the foregoing services
currently contracted by Sublandlord, Sublandlord shall pay to Subtenant promptly
after receipt of an invoice and supporting documentation Sublandlord's
proportionate share of such expenses, which proportionate share shall be 11.83%
unless Subtenant occupies the entire Building, in which event Sublandlord's
proportionate share shall be 0.
In addition, Subtenant shall reimburse Sublandlord Subtenant's Proportionate
Share of taxes and insurance expenses and any increase therein with respect to
the Premises required to be paid by Sublandlord under the Prime Lease, which
amounts shall be paid to Sublandlord along with Subtenant's monthly rent. The
first monthly reimbursement of said expenses shall be paid and delivered to
Sublandlord, together with the then escalated monthly rent under this Sublease,
in advance of the first day of the first month in which the rent becomes
Triple-Net, as per the Rent Schedule above. Sublandlord shall provide Subtenant
with a statement detailing such expenses no fewer than thirty (30) days before
the date when the Triple-Net rent becomes effective and at least thirty (30)
days before any escalation of such expenses.
After this Sublease converts to a "Triple-Net" lease on January 1, 2001,
Subtenant shall cause the exterior of the Sublease Premises to be maintained in
a manner consistent with the maintenance of the exterior of Sublandlord's leased
property on Swabia Court known as Lot S-5A containing
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five (5) acres as shown on plat of survey recorded in Plat Book 131, Page 87,
Durham County Registry (the "W&G Building"). Sublandlord shall provide to
Subtenant a schedule of exterior maintenance such as parking lot restriping,
parking lot sweeping, exterior painting, and window washing currently in place
(meaning as of the date Subtenant occupies the Sublease Premises) with respect
to the W&G Building. Subtenant shall not be obligated under this paragraph to
any level of service or maintenance with respect to the exterior of the Sublease
Premises greater than that in place for the W&G Building when Subtenant occupies
the Sublease Premises.
Throughout the Initial Sublease Term and any extension thereof, Sublandlord
shall notify Subtenant within thirty (30) days of any increase or decrease in
any reimbursable expenses once Sublandlord has received such information from
Prime Landlord. Sublandlord shall deliver to Subtenant such information
supporting or substantiating such expenses under the Prime Lease as Subtenant
may reasonably request.
Notwithstanding anything contained herein to the contrary, if, due to the gross
negligence or intentional misconduct of Prime Landlord or Sublandlord or their
respective employees, agents, representatives, or contractors, any of the
foregoing services is not continuously provided to Subtenant and such failure to
provide continues for ten (10) business days, rent shall abate until such
service is restored, Sublandlord agreeing to exercise best efforts to restore
such service. In no event, however, shall Prime Landlord or Sublandlord be
liable to Subtenant for consequential damages as a result of any failure to
provide such services or as a result of the interruption in such services. The
foregoing shall not affect in any way the obligations of Sublandlord to pay rent
to Prime Landlord under the Prime Lease, which does not allow abatement of rent.
7. Sublandlord intends to continue to occupy after the Commencement
Date a portion of the Premises comprising the cafeteria, kitchen, and adjacent
lab area, totaling approximately 6,000 rentable square feet, and as is more
particularly shown in the attached Exhibit B (the "Retained Space"). During the
Initial Sublease Term or any extension thereof, Subtenant shall have a
continuous, exclusive Right of First Refusal on that portion of the Retained
Space which Sublandlord may make available for sublet.
Space subleased by Subtenant by Right of First Refusal shall be sublet on the
same terms and conditions of the Sublease. All space subleased under the Right
of First Refusal shall be delivered in "as-is" condition with Sublandlord's
personal property first removed, space broom-cleaned, and all mechanical systems
in good working order with all regularly scheduled maintenance first completed.
Subtenant shall have fifteen (15) days after receipt by Subtenant of written
notice to refuse that portion of the Retained Space being made available for
sublease.
Notwithstanding the foregoing, if Sublandlord opts to cease operations of its
cafeteria and has no plans to reutilize that portion of the Retained Space for
other purposes of its own, Subtenant, together with its Right of First Refusal
for the space, shall have a right to operate its own cafeteria facility. In
conjunction therewith, Subtenant shall have a Right of First Offer on the
tables, chairs, and all kitchen equipment owned by Sublandlord, said offer to be
made within 15 days of receiving notice as to its availability.
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8. Sublandlord grants Subtenant an option to extend the Initial
Sublease Term for three (3) renewal periods of two (2) years each (individually
or collectively, the "Extended Sublease Term") commencing upon the expiration of
the Initial Sublease Term on the same terms and conditions as contained in this
Sublease except rent. This option shall be exercised only by delivery of written
notice to Sublandlord no later than two hundred ten days (210) before the
Expiration Date or the expiration of any Extended Sublease Term. Rent for the
first year of the first Extended Sublease Term shall be the escalated
"Triple-Net" rental payable in the last year of the Initial Sublease Term
increased by four percent (4%) and increased each year thereafter by four
percent (4%). If Sublandlord receives at least two hundred ten (210) days
advance written notice of Subtenant's exercise of its options to extend the
Initial Sublease Term, Sublandlord shall timely exercise its renewal terms under
the Prime Lease as necessary to provide Subtenant the renewal term or terms
provided in this Section 8.
9. The Right of First Refusal belonging to Sublandlord per Section 7 of
the Third Amendment to Lease of the Prime Lease regarding the purchase of the
property on which the Sublease Premises is located shall not transfer under this
Sublease to Subtenant. Said First Right of Refusal shall remain valid, in force,
and available to Sublandlord.
10. Subtenant acknowledges that this Sublease shall not be effective
unless and until Prime Landlord's written consent is given.
11. Upon receiving any written notice, statement or other written
communication from Prime Landlord which pertains to the Premises or Sublease
Premises, the party receiving such notice shall promptly forward a copy of such
notice to the other.
12. It is understood and agreed by all parties hereto that neither the
sublease of the Sublease Premises nor anything contained in this Sublease shall
release Sublandlord from its duty and obligation to perform and be bound by all
the covenants, terms, and conditions contained in the Prime Lease with Prime
Landlord; provided, however, that Subtenant, except as expressly provided herein
to the contrary, shall perform all such duties and obligations and be bound by
such covenants, terms, and conditions in the first instance but only with
respect to the Sublease Premises.
13. Sublandlord agrees that if Subtenant pays all rents and other sums
due hereunder and performs all of the terms and conditions of this Sublease and
of the Prime Lease required hereunder, Subtenant's quiet enjoyment of the
Sublease Premises for the term of this Sublease shall not be disturbed or
interfered with by Sublandlord. Provided Subtenant pays all rents and other sums
due hereunder and performs all of the terms and conditions of this Sublease and
of the Prime Lease required hereunder, Sublandlord shall defend, indemnify, and
hold harmless Subtenant from all costs, expenses, liabilities, damages, actions,
and proceeding caused by Sublandlord's failure to pay the rent and other sums
due under the Prime Lease and to perform any obligations under the Prime Lease
that are the obligation of Sublandlord to perform.
14. Subtenant agrees that it will not assign this Sublease or sublet
the Sublease Premises without the prior written approval of Prime Landlord and
Sublandlord, which approval
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by Sublandlord will not be unreasonably withheld, conditioned, or delayed.
Acquisition of all or substantially all of the stock or assets of Subtenant by
an unrelated third party shall not be deemed an assignment or sublease or other
transfer of Subtenant's interest in this Sublease or the Sublease Premises
provided the following conditions are satisfied: (a) Subtenant shall give
Sublandlord written notice of such acquisition at least sixty (60) days before
the anticipated effective date of such acquisition (the "Effective Acquisition
Date"); (b) the acquirer of the stock or assets of Subtenant (the "Acquirer")
shall not be a competitor of Sublandlord or Prime Landlord in the reasonable
judgment of Sublandlord and Prime Landlord; (c) the Acquirer shall have a
creditworthiness equal to or greater than that of Subtenant as of the date
hereof in the reasonable judgment of Sublandlord and Prime Landlord; (d)
Subtenant shall not be in default hereunder as of the Effective Acquisition
Date; (e) the Acquirer shall execute and deliver to Sublandlord and Prime
Landlord a written acknowledgment of assumption of Subtenant's obligations under
this Sublease in form and substance acceptable to Sublandlord and Prime
Landlord; and (f) Subtenant shall not be released from its obligations hereunder
but shall continue to be liable for all obligations of Subtenant under this
Sublease. Subtenant shall provide to Sublandlord and Prime Landlord such
documents and information as may be reasonably requested in order to determine
whether the conditions in this Section 14 have been satisfied.
15. During the term of this Sublease, Subtenant, at its sole cost and
expense and for the mutual benefit of the Sublandlord, Prime Landlord and
Subtenant, shall carry and maintain casualty insurance for the full replacement
cost of the Sublease Premises and comprehensive public liability insurance,
including property damage, insuring Sublandlord, Prime Landlord, and Subtenant
against liability for injury to persons or property occurring in or about the
Sublease Premises arising out of the ownership, maintenance, use, or occupancy
thereof, and Subtenant shall name Sublandlord and Prime Landlord as additional
insureds hereunder. Said liability insurance shall be in amounts as called for
in the Prime Lease. On or before the Commencement Date, Subtenant shall deliver
to Sublandlord a copy of a Certificate of Insurance evidencing that such
insurance has been purchased and is in effect. Any insurance which Subtenant is
required to maintain under this Sublease shall include a provision which
requires the insurance carrier to give Prime Landlord and Sublandlord not fewer
than thirty (30) days' written notice before any cancellation or modification of
such coverage. Further, if Subtenant fails to maintain said liability insurance,
this act shall be a material breach of this Sublease, and Sublandlord may elect
any of its remedies under this Sublease, and, in addition, Sublandlord may
obtain such insurance on behalf of Subtenant, in which case Subtenant shall
reimburse Sublandlord for the costs thereof within fifteen (15) days after
receipt of a statement indicating the cost of such insurance. If Subtenant
cannot obtain casualty insurance for only the portion of the Premises containing
the Sublease Premises, Subtenant shall carry and maintain casualty insurance for
all of the Premises and Sublandlord, within fifteen (15) days after receipt of a
statement indicating Sublandlord's proportionate share of such premium, shall
reimburse Subtenant for the cost thereof. Sublandlord's proportionate share
shall be fifty-eight and ninety-two one hundredths percent (58.92%) when
Subtenant is leasing only the Initial Sublease Premises and eleven and eighty-
three one hundredths percent (11.83%) when Subtenant is leasing the Sublease
Premises. The casualty insurance to be maintained with respect to the Sublease
Premises (or with respect to the
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Premises if applicable) shall be payable to Sublandlord, and if such proceeds
shall be paid to Subtenant, Subtenant agrees to hold such proceeds in trust for
Sublandlord.
16. Subtenant shall not do or permit to be done or omit or permit to be
omitted any act or thing that will constitute or cause a breach or violation of
any of the terms, covenants, or conditions of the Prime Lease (to the extent
applicable to the Sublease Premises) or this Sublease. In addition, Subtenant is
expressly prohibited from using the Sublease Premises in a manner, or storing
materials therein, which would constitute an environmental violation under any
of the applicable laws, rules, or regulations. Each party will defend,
indemnify, and hold harmless the other from and against all losses, costs,
damages, expenses, liability, actions, orders, and proceedings, including
reasonable attorneys' fees actually incurred at standard hourly rates, which
such party may incur or pay out by reason of injuries to person or property
occurring in, on, or about the Sublease Premises, occasioned by the other
party's use, occupancy, negligence, or intentional acts or by reason of any
breach or default of this Sublease.
Sublandlord hereby represents that to the best of its knowledge ("Knowledge" is
defined for the purposes hereof as the actual knowledge of the officers of
Sublandlord who are directly engaged in the management of the sublease
transaction contemplated herein), Sublandlord knows of no facts or circumstances
related to environmental matters concerning the Sublease Premises that could
lead to any future environmental claims, liabilities, or responsibilities
against Subtenant. Sublandlord shall defend, indemnify, and hold Subtenant
harmless from all costs, expenses, losses, damages, liabilities, claims,
actions, orders, or proceedings (including attorney's fees) arising out of the
operations or activities or presence of Sublandlord on the Sublease Premises
relating to environmental matters.
17. Sublandlord makes no representation with respect to this
transaction or the Sublease Premises, except as specifically set forth herein,
and Subtenant expressly acknowledges that no such representations have been
made. Except as otherwise expressly provided in Exhibit A attached to and made a
part hereof and except as may be provided in any amendment to this Sublease ,
Subtenant takes possession of the Sublease Premises in their "as is" condition.
18. Any alterations, additions, or improvements made by Subtenant in
the Initial Sublease Premises or Expansion Sublease Premises, including those
contemplated to be made as set forth in Exhibit D attached hereto, shall be made
in compliance with the Prime Lease, performed in a good and workmanlike manner
by a bonded (if deemed necessary by Sublandlord and Prime Landlord in their
reasonable discretion, taking into account the cost and scope of the proposed
alterations, additions, or improvements), insured and reputable contractor, any
and all such work being subject to approval by Sublandlord and Prime Landlord,
which approval by Sublandlord and Prime Landlord shall not to be unreasonably
withheld, conditioned, or delayed in each case, and compliant with all relevant
building and fire codes. Subtenant shall permit no mechanic's liens to be placed
against the Sublease Premises or any portion thereof for services performed or
materials supplied at the request of or for the benefit of Subtenant; provided,
however, Subtenant shall have the right to contest the correctness or validity
of any such lien if, immediately upon demand by Sublandlord, Subtenant procures
and records a lien release bond in
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form and substance sufficient under the General Statutes of North Carolina to
release the Sublease Premises from such lien.
Notwithstanding anything contained herein to the contrary, except as expressly
contemplated by this Sublease with the consent of Prime Landlord and
Sublandlord, Subtenant shall not make any changes or take any actions which
would adversely affect the structural integrity of the Building, including
foundation, roof, and load-bearing walls, or the mechanical systems serving the
Building.
Notwithstanding anything contained herein to the contrary, the listing in
Exhibit D of certain work that Subtenant may desire to undertake does not
constitute Prime Landlord's or Sublandlord's approval of any of such items. No
alterations, additions, or improvements may be made without the prior approval
of Sublandlord and Prime Landlord, which approval shall not be unreasonably
withheld. Sublandlord and Prime Landlord reserve the right to approve or not
approve any work (subject to the foregoing reasonableness standard), including
the items hereinabove listed, after submission by Subtenant in good faith of
detailed plans and specifications which reasonably describe the scope and extent
of the proposed work, but Sublandlord and Prime Landlord shall have the burden
of showing beyond a commercially reasonable doubt that the improvements shown on
the submitted plans and specifications are not improvements contemplated by this
Sublease or are otherwise not in conformance with the Prime Lease or this
Sublease. Subtenant shall use reasonable efforts to deliver to Sublandlord and
Prime Landlord by July 1, 2000 the plans and specifications for the improvements
contemplated by Exhibit D.
19. Subtenant agrees at its expense to keep and maintain the Sublease
Premises in good repair and in a good, sanitary, and safe condition. If so
required by Prime Landlord or Sublandlord, and to the extent either Subtenant's
trade fixtures and equipment or the improvements, alterations, or additions
performed by Subtenant cannot be utilized in whole or in part by the next tenant
of the Sublease Premises, as determined by Sublandlord and Prime Landlord in
their reasonable discretion, upon expiration or sooner termination of the
Initial Sublease Term or any extension thereof, Subtenant shall remove its trade
fixtures and equipment and such alterations, improvements, or additions made by
Subtenant as required by Sublandlord and shall restore the Initial Sublease
Premises and Expansion Sublease Premises to the same condition and repair as
delivered to it at commencement, reasonable wear and tear and loss by insured
casualty excepted; provided that underground, under-floor, or behind-wall
elements or pipes or wiring are not required to be removed, Subtenant agreeing
that drains or other openings or apertures will be capped or filled as required
by Sublandlord or Prime Landlord.
20. In addition to funding and performing the Improvements outlined in
attached Exhibit A, upon (a) full-execution of this Sublease and receipt of
Consent of Prime Landlord to Sublease attached and (b) receipt of the Security
Deposit set forth in Section 25 hereof, Sublandlord shall pay Subtenant Thirty
Thousand Dollars ($30,000) (the "Cash Inducement"). The Cash Inducement may be
used by Subtenant for whatever purposes it pleases (e.g. telecommunication
expenses, signage, furniture, rent, other, etc.)
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21. Subtenant shall, at its sole cost and expense, provide all of its
own telecommunication and networking needs, including installation of systems
and wiring in the Initial Sublease Premises and Expansion Sublease Premises.
Subtenant's telecommunications and networking equipment shall be installed in a
mutually acceptable location not to be within Sublandlord's existing
telecommunications closet.
Expressly notwithstanding anything contained herein or in the Prime Lease to the
contrary, Subtenant shall not be required to remove that portion of its
telecommunications and networking equipment located underground, behind walls,
or under floors upon vacating the Sublease Premises other than at its own
discretion.
Sublandlord intends to continue to locate and operate its telecommunications
equipment in the existing telecommunications closet located within the Initial
Sublease Premises. From time to time and with reasonable advance notice,
Sublandlord reserves the right to access this telecommunications closet for
means of service and installations during Subtenant's business hours.
Subtenant, at its expense, shall have the right to run fiber optic cable from
its premises at 1035 Swabia Court to the Sublease Premises. Said right shall be
subject to the approval of Prime Landlord and all other relevant parties
requiring prior approval or permits. Subtenant shall promptly submit to
Sublandlord and Prime Landlord plans/schematics of said fiber optic
installations.
If so required by Prime Landlord or Sublandlord, upon expiration or sooner
termination of the Initial Sublease Term or any extension thereof, Subtenant
shall remove the entire length of fiber optic cable which may or may not include
that portion of cable running within the Sublease Premises. Upon said removal,
Subtenant shall reasonably repair and restore the ground and any part of the
structure impacted by said cable installation and removal.
22. Subtenant shall have the non-exclusive right to a maximum of one
hundred ten (110) parking spaces during the Initial Sublease Term and any
extension thereof, free of charge, which spaces shall be made available to
Subtenant on a non-exclusive basis in the area shown on Exhibit E attached
hereto.
23. Subtenant, at its sole cost and expense, may install signage on the
facade of the building on the Premises (the "Building") and at all monument and
directional sign locations which currently read or recently read "ATE". Before
the Commencement Date, Sublandlord, at its sole cost and expense, shall remove
the "WG" sign on the facade of the Sublease Premises. Said signage shall be
subject to the approval of Prime Landlord and Sublandlord, which approval by
Sublandlord shall not be unreasonably withheld, conditioned, or delayed, and
same shall be subject to all governmental permits and regulations as well as the
covenants of Imperial Center, the master-planned development in which the
Sublease Premises is located.
24. Subtenant shall have access to Sublandlord's on-site cafeteria.
Subtenant shall pay non-subsidized prices for all goods purchased and shall
comply with the rules, regulations,
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and hours of operation (6AM to 3PM) currently in place. Subtenant may not access
the cafeteria during planned corporate events of Sublandlord, which Sublandlord
shall make Subtenant aware of with reasonable advance written notice.
Access shall be limited only to those employees of Subtenant who are officed
within the Initial Sublease Premises or Expansion Sublease Premises, and their
guests. Subtenant shall require all of its employees and guests to comply with
the applicable rules and regulations of the cafeteria, with non-compliance
triggering Sublandlord's right to prohibit the violating individual or
individuals from further use of the cafeteria.
In good faith, Sublandlord is providing Subtenant with access to its cafeteria
as an amenity. However, Sublandlord shall have the right at any time during the
Initial Sublease Term or any extension thereof to cease operating a cafeteria
within the Building.
25. As security for Subtenant's obligations under this Sublease,
Subtenant shall deposit with Sublandlord, first, together with the payment made
at Sublease execution of the first monthly installment of rent, and if
applicable expenses and/or other personal property of Sublandlord purchased by
Subtenant, the sum of Forty-Five Thousand One Hundred Forty-Six Dollars and
Eighty-Four Cents ($45,146.84) AND second, together with the first payment of
monthly rent to be paid following the delivery of the Expansion Sublease
Premises, the sum of Forty-Nine Thousand Nine Hundred Five Dollars and
Sixty-Five Cents ($49,905.65). Sublandlord shall keep the security deposit
separate from its general funds and deposited in an interest-bearing account.
Subtenant shall be entitled to interest earned on the security deposit annually
or as accrued at the expiration of the Term or extension thereof.
The security deposit will not be a limitation on Sublandlord's damages or other
rights under this Sublease, or an advance on the payment of any amounts due from
Subtenant under this Sublease. If Subtenant pays all such due amounts and
performs all of its obligations under this Sublease, Sublandlord will return the
unused portion of the security deposit to Subtenant within thirty (30) days
after the end of the Initial Sublease Term or any extension thereof.
26. Subtenant shall not do or permit to be done or permit to be omitted
any act or thing in or with respect to the Sublease Premises which will
constitute or cause a breach or violation of any of the terms, covenants, or
conditions of the Prime Lease; provided, however, the foregoing shall not apply
to the obligation of Sublandlord to pay rent and other sums due under the Prime
Lease so long as Subtenant has fulfilled its obligations to Sublandlord
hereunder with respect to payment of rent and other sums reserved in this
Sublease.
27. The parties also agree that: (a) Subtenant shall use and occupy the
Sublease Premises for general office, manufacturing, research, and laboratory
purposes associated with the conduct of Subtenant's business, as is permitted
under the covenants of Imperial Center and all applicable zoning and other
governmental regulations; (b) Sublandlord's refusal to consent to or to approve
any matter or thing, whenever Sublandlord's consent or approval is required
under this Sublease or under the Prime Lease, shall be deemed reasonable if
Prime Landlord has refused to give such consent or approval, Sublandlord
agreeing to use reasonable efforts and
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good faith to assist Subtenant in obtaining Prime Landlord's consent; (c) if for
any reason the term of the Prime Lease shall be terminated prior to the
Expiration Date (Sublandlord, and Prime Landlord by its consent hereto, agreeing
that the Prime Lease may not be terminated for any reason other than a default
by Sublandlord or Prime Landlord or other event (such as condemnation or
casualty) which allows either party to terminate pursuant to the terms of the
Prime Lease without Subtenant's prior written consent), this Sublease shall
thereupon be automatically terminated, and Sublandlord shall not be liable to
Subtenant by reason thereof, unless such termination shall have been affected
because of the breach or default by Sublandlord under the Prime Lease not
occasioned by any breach or default by Subtenant, but Subtenant shall be
entitled to whatever rights and remedies against the Prime Landlord that may be
available to Sublandlord in connection with such termination, provided, however,
that Subtenant shall receive from Sublandlord prompt notice of any default under
the Prime Lease by Sublandlord and Subtenant shall have the right to cure such
default; and (d) Subtenant acknowledges and agrees that in the event Subtenant
fails to vacate the Sublease Premises when required hereunder, Sublandlord may
incur damages under the terms of the Prime Lease. In such event, Subtenant
agrees to indemnify and hold harmless Sublandlord from and against any and all
costs, expenses and liabilities (including reasonable attorneys' fees actually
incurred at standard hourly rates) incurred by Sublandlord arising out of such
failure.
28. Subtenant shall have no right or interest in, and shall make no
claim with respect to, any condemnation proceeds or other compensation awarded
upon a total or partial taking of the Sublease Premises.
29. Sublandlord shall have no obligation or liability to Subtenant in
the event that Prime Landlord fails to perform any of its obligations under the
Prime Lease, unless such failure arose as a result of Sublandlord's defaulting
in the performance of any of Sublandlord's obligations under the Prime Lease
beyond any applicable cure periods contained therein. If the Sublease Premises
shall be destroyed or if so much of the Sublease Premises shall be damaged that
Subtenant cannot conduct its business therein, and if in the reasonable opinion
of a contractor or architect mutually satisfactory to Sublandlord and Subtenant
the Sublease Premises cannot be repaired or reconstructed within 150 days after
the occurrence of the casualty, Sublandlord and Subtenant, upon written notice
to the other, shall each have the right to terminate this Sublease within ten
(10) business days after receipt of the written opinion of the approved
contractor or architect. Upon such termination, rent and additional rent due
under this Sublease shall be prorated to the date of the occurrence of the
casualty and any sums paid by Subtenant with respect to a period beyond the date
of the casualty shall be reimbursed to Subtenant by Sublandlord. In the event
the damage or destruction can be repaired or reconstructed in fewer than 150
days after the occurrence of the casualty, this Sublease shall continue in force
and effect and Sublandlord shall proceed with restoration of the Sublease
Premises (excluding Subtenant's furniture, furnishings, fixtures, and
equipment). For the period of reconstruction or restoration, rent shall abate as
of the date of the casualty, unless Subtenant is able to continue its occupancy
of the Sublease Premises for the normal conduct of its business during
restoration in which event rent shall be adjusted and prorated in the proportion
that the area of usable space bears to the area of the Initial Sublease Premises
or the Sublease Premises, as the case may be. Except for Sublandlord's gross
negligence or willful misconduct,
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Sublandlord shall not be liable for any inconvenience or annoyance to Subtenant,
injury to the business of Subtenant, loss of use of any part of the Sublease
Premises by Subtenant, or loss of Subtenant's personal property resulting in any
way from such damage or the repair thereof. Sublandlord and Subtenant agree to
cooperate in good faith in connection with any reconstruction or repair in order
efficiently to schedule repair or restoration of the Sublease Premises and the
installation of Subtenant's furniture, furnishings, fixtures or equipment.
Notwithstanding the foregoing, however, if the Prime Lease is terminated as a
result of any such damage or destruction, then Sublandlord shall have no
obligations hereunder to repair or reconstruct. Further, in no such event shall
Sublandlord be required to undertake such reconstruction or repair unless the
insurance proceeds received for such purpose are sufficient to cover the entire
cost thereof or, if insufficient, unless Subtenant or Prime Landlord has agreed
to pay the difference between the cost of reconstruction or repair and insurance
proceeds received. The provisions of this paragraph shall expressly control over
any provision of the Prime Lease that would otherwise be the obligation of
Subtenant pursuant to the terms of this Sublease.
30. Default and Remedies: If Subtenant
(a) fails to pay within five (5) days of when due any rent or
any other sum of money which Subtenant is obligated to pay as provided in this
Sublease; or
(b) defaults in observing, performing, or keeping any other
term, provision, agreement, covenant, or obligation herein set forth and such
default shall continue and not be remedied within ten (10) business days after
written notice from Sublandlord specifying the default, or if such default
cannot be cured completely within the 10-business day period, if Subtenant does
not promptly commence within such period and thereafter proceed and continue
with due diligence to cure the same within thirty (30) days after receipt of
said written notice from Sublandlord; or
(c) files (or has filed against it and not stayed or vacated
within ninety (90) days after filing) any petition or action for relief under
creditors' law (including bankruptcy, reorganization, or similar action), either
in state or Federal court; or
(d) makes any transfer in fraud of creditors as defined in
Section 548 of the United States Bankruptcy Code, has a receiver appointed for
its assets (and such appointment shall not have been stayed or vacated within 30
days), or makes an assignment for the benefit of creditors;
then Subtenant shall be in default hereunder, and, Sublandlord, in addition to
any other lawful right or remedy which it may have, may do any one or more of
the following:
(i) declare the rent for the balance of the term
immediately due and payable, and collect the same less all sums
received from any re-letting of the Sublease Premises by distress or
otherwise, or in the event the Sublease Premises is not re-let, the
difference, if any, between the rent reserved hereunder for the
remainder of the Initial Sublease Term or any exercised Extended
Sublease Term reduced to present value at a
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discount rate of eight percent (8%) per annum; provided, however, after
payment by Subtenant to Sublandlord of such sum, Sublandlord shall
remit to Subtenant any rent received from the re-letting of the
Sublease Premises with respect to the term of this Sublease for which
Subtenant paid Sublandlord accelerated rent, less any costs incurred by
Sublandlord in re-letting the Sublease Premises, including, but not
limited to, brokers' commissions and costs of readying the premises for
the third party's occupancy, the intent of the parties being that
Sublandlord shall not have a double recovery with respect to
accelerated rent paid by Subtenant. Sublandlord's obligation in the
preceding sentence shall survive termination of this Sublease;
(ii) with or without terminating this Sublease,
immediately or at any time thereafter, enter upon the Sublease
Premises, take possession thereof, and re-let the Sublease Premises or
any part thereof for such time or times and at such rental or rentals
and upon such other terms and conditions as Sublandlord, in
Sublandlord's sole discretion, may deem advisable, and Sublandlord may
make alterations or repairs to the Sublease Premises which Sublandlord
may deem necessary or proper to facilitate such re-letting; and
Subtenant shall pay all reasonable costs of such re-letting, including
the cost of any such reasonable repairs to the Sublease Premises,
together with all reasonable leasing commissions and other reasonable
expenses in seeking and obtaining a new tenant; and if this Sublease
shall not have terminated, Subtenant will continue to pay all rent due
under this Sublease up to and including the date of the beginning of
the payment of rent by any subsequent tenant of the Sublease Premises
and thereafter Subtenant shall pay monthly during the remainder of the
term of this Sublease the difference, if any, between the rent
collected from such subsequent subtenant or subtenants and the rent
reserved in this Sublease, but Subtenant shall not be entitled to
receive any excess of such rents collected over the rents reserved
therein;
(iii) immediately or at any time thereafter terminate
this Sublease (without demand to vacate the Sublease Premises) and this
Sublease shall be deemed to have been terminated upon the receipt by
Subtenant of such written notice of such termination and upon such
termination, Subtenant shall immediately vacate the Sublease Premises
and Sublandlord shall have and recover from Subtenant all damages
Sublandlord may suffer by reason of such termination, including,
without limitation, the inability of Sublandlord to re-let the Sublease
Premises, and the cost of any repairs to the Sublease Premises which
are necessary or proper to prepare the same for re-letting; and
(iv) re-enter the Sublease Premises, without notice,
either by summary proceedings or by any suitable action or proceeding
at law, and may have, hold, and enjoy the Sublease Premises, together
with all appurtenances thereto. Sublandlord's reasonable attorneys'
fees actually incurred at standard hourly rates in pursuing any of the
foregoing remedies or in collecting any rents due by Subtenant
hereunder shall be paid by Subtenant within five (5) days of demand
therefor.
31. Any notice, demand, request, direction, or other communication
required to be given by either party to the other shall be in writing and shall
be (a) delivered personally, and the
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giving of such notice shall be complete on the date of delivery; (b) sent by
reputable overnight delivery service, and the giving of such notice shall be
complete on the immediately succeeding business day after such notice is
deposited with such delivery service for pick up on the business day of deposit;
or (c) sent by United States registered or certified mail, postage prepaid,
return receipt requested, and the giving of such notice shall be complete on the
day received or on the day acceptance of delivery is first refused; at the
following addresses:
IF TO SUBLANDLORD:
Wandel & Goltermann Technologies, Inc.
1030 Swabia Court
P.O. Box 13585
Research Triangle Park, NC 27709-3585
ATTN: Chief Financial Officer
WITH COPY TO:
Moore & Van Allen, PLLC
220 West Main Street
Suite 800
Durham, NC 27705
ATTN: Reich L. Welborn
IF TO SUBTENANT:
Embrex, Inc.
1035 Swabia Court
P.O. Box 13989
Research Triangle Park, NC 27709-3989
ATTN: Vice President, Finance and Administration
WITH A COPY TO:
Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P
2500 First Union Capitol Center, NC 27601
P.O. Box 2611
Raleigh, NC 27602-2611
ATTN: Francis C. Bagbey
WITH A COPY TO PRIME LANDLORD:
W & G Associates, a North Carolina limited partnership c/o
Wavetech Wandel & Goltermann, Inc.
Muhleweg-5
D-72800 ENINGEN U.A.
Germany
ATTN: Frank Goltermann
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WITH COPY TO:
Maupin, Taylor & Ellis, P.A.
Highwoods Tower One
Suite 500
3200 Beechleaf Court
Raleigh, North Carolina 27604-1064
ATTN: Tony Tingen
Either party may change its address by written notice to the
other.
32. Sublandlord and Subtenant each represent and warrant to the other
that it had no dealings with any broker or agent in connection with this
Sublease except for Vector Properties, LLC. Sublandlord shall be responsible for
payment of any and all fees payable to Vector Properties, LLC as a result of
this Sublease.
33. This Sublease and the exhibits incorporated herein by reference set
forth all of the agreements, covenants, representations and warranties of
Sublandlord and Subtenant. No modification or amendment of this Sublease shall
be binding or effective unless in writing signed by Sublandlord and Subtenant.
34. This Sublease shall be governed by the laws of the State of North
Carolina.
35. Time is of the essence hereof.
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IN WITNESS WHEREOF, the parties hereto have executed this Sublease the
day and year first written above.
SUBLANDLORD:
WANDEL & GOLTERMANN TECHNOLOGIES,
INC., a North Carolina corporation
By: /s/ Bert Kuthe
---------------------------------
Its: Vice President
--------------------------------
SUBTENANT:
EMBREX, INC.
By: /s/ Randall L. Marcuson
---------------------------------
Its: President & CEO
--------------------------------
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EXHIBIT A
IMPROVEMENTS AND WORK
Sublandlord shall, at its sole cost and expense, on or before the Commencement
Date of this Sublease perform the following improvements and work to the Initial
Sublease Premises:
o FURNITURE - Sublandlord shall provide for use by Subtenant, free of
charge, any office and systems furniture ("Furniture") currently
located within the Initial Sublease Premises and which Sublandlord does
not intend to remove for its own purposes. Subtenant may offer to
purchase said Furniture at any time prior to or during the Initial
Sublease Term.
o CEILING TILES - Replace any stained or broken ceiling tiles. Replace
additional tiles displaced or impacted by the installation of the
fire-rated Demising Wall.
o LIGHT FIXTURES - Replace any burned-out bulbs and repair any
malfunctioning ballasts.
o DEMISING WALLS - Install fire-rated demising walls between the Initial
Sublease Premises and the Expansion Sublease Premises (the width of the
building) and as necessary to construct a corridor from the Initial
Sublease Premises to the cafeteria.
o ALL SYSTEMS - Sublandlord shall deliver all systems, including Card
Reader System, in good working order, with all regularly scheduled
maintenance first completed.
Prior to delivery of the Expansion Sublease Premises, Sublandlord shall remove
all of its personal property, unless agreed to otherwise, shall broom clean the
Expansion Sublease Premises, and shall deliver all relevant HVAC systems in good
working order, with regularly scheduled maintenance first completed.
When the rent structure is adjusted from "Full-Service" to "Triple-Net", should
the Sublease Premises not be separately metered for all relevant utilities,
Sublandlord and Subtenant agree to work in good faith to install the appropriate
meters and to split the cost of said installations on a 50%/50% basis.
(REMAINDER OF PAGE LEFT INTENTIONALLY BLANK)
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EXHIBIT B
SUBLEASE PREMISES
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EXHIBIT C
(PRIME LEASE AND AMENDMENTS)
NORTH CAROLINA
LEASE
DURHAM COUNTY LEASE
This LEASE AGREEMENT made and entered into as of the 1st day of October
1984, by and between W & G ASSOCIATES, a North Carolina general partnership with
its principal office in Durham County, North Carolina, hereinafter referred to
as "Landlord", and W & G INSTRUMENTS, INCORPORATED, a New Jersey corporation
with its principal office in Durham County, North Carolina, hereinafter referred
to as "Tenant."
WITNESSETH:
WHEREAS Landlord is the owner of a certain tract or parcel of land in
Durham County, North Carolina, commonly known as 1 Swabia Court, Durham, North
Carolina, and being more particularly described in Exhibit A attached hereto and
being hereinafter referred to as the "Premises"; and
WHEREAS, Landlord has financed the construction of the improvements on
the Premises (together with the cost of the land) through borrowing from The
Durham County Industrial Facilities and Pollution Control Financing Authority
(the "Authority"), said loan funds to be raised by the Authority issuing and
selling its industrial revenue bond in the principal amount of $2,600,000 (the
"Bond") pursuant to a Bond Purchase Agreement with Wachovia Bank & Trust
Company, N.A. ("Wachovia"); and
WHEREAS, the said funds borrowed or to be borrowed by the Landlord from
the Authority is pursuant to a Loan Agreement dated as of October 1, 1984,
between the Authority and the Landlord (the "Loan Agreement") and is or shall be
represented by )Landlord's promissory note given to the Authority (the "Note");
and
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WHEREAS Landlord desires to lease to Tenant and Tenant desires to lease
and hire from Landlord the Premises together with all improvements thereon, and
subject to all of the terms and conditions hereinafter set out;
NOW, THEREFORE, for and in consideration of the mutual covenants set
out herein and other good and valuable consideration, the parties covenant and
agree as follows:
1. DEMISE. Landlord hereby demises and leases to Tenant and Tenant
hereby takes and hires from Landlord the Premises, for the term and subject to
all the conditions hereof.
2. TERM.
2.1. Base Term. This lease shall commence on the date this
lease is executed and continue for fifteen (15) years thereafter.
2.2. Renewal Terms. Upon written notice given to Landlord by
Tenant at least ninety (90) days prior to the expiration of the term hereof or
any renewal term, Tenant may extend this Lease for five (5) additional
successive terms of two (2) years each; provided however, any such extended term
shall be subject to such terms and conditions, including, without limitation,
rents, as Landlord and Tenant may then mutually agree upon prior to expiration
of the original term or any renewal term. Any such extended term shall be
subject to all the terms and conditions hereof.
3. RENT.
3.1. Base Rent. During the initial term hereof Tenant shall
pay to Landlord an annual base rent of Three hundred and ninety thousand
($390,000.00) Dollars, payable in monthly installments of Thirty-two thousand
five hundred ($32,500.00) Dollars on or before the first (1st) day of each
month, in advance, without notice or demand therefor, throughout the term of
this Lease; provided, however, that if the aggregate of the monthly installments
paid by the
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Tenant for the three months immediately prior to the due date for each quarterly
payment by Landlord under the Note, as described on page 1 hereof, is
insufficient to cover such quarterly payment, then Tenant shall pay as
additional rent such excess amount as is required to equal such quarterly
payment. Notwithstanding anything contained herein, the Landlord shall have the
right to increase the annual base rent at any time during the term hereof in
order that the annual base rent to be paid hereunder shall be in an amount at
least equal to the debt service under Landlord's Note given to the Authority, as
described on page 1 hereof. If the Lease shall commence on any day other than
the first day of a month, the rent shall be prorated for that partial month and
paid on or before the commencement date.
3.2. Net, Net, Net Lease. It is mutually agreed and understood
that this lease is one which is known in commercial practices as a net, net, net
lease, and all payments due hereunder to Landlord are net payments to be made
without deduction for whatever cause.
4. PRO RATA RENT. If the Premises are occupied by Tenant for any
fraction of a month, Tenant shall pay to Landlord base rent for such fraction of
a month on a pro rata basis for each day of occupancy, based on the monthly base
rental herein reserved. If Tenant's occupancy of the Premises ends, for any
reason provided for in this agreement, before the end of a month, Tenant shall
pay to Landlord for those days of occupancy up to and including Tenant's final
day of occupancy minus an amount equaling the total base rental paid by Tenant
to Landlord for that part of the month in which Tenant occupied the Premises.
5. USE OF PREMISES. The Premises shall be used by Tenant only to
conduct Tenant's business activities. Any other business to be operated on the
Premises shall be done only after prior written approval is granted by Landlord.
Tenant shall operate the Premises in such a manner that the same will be a
"project" within the meaning of Chapter 800 of the 1975
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Session Laws of North Carolina, as amended, which as codified appears as Chapter
159C of the General Statutes of North Carolina.
5.1. Compliance with Laws. In occupying the Premises, Tenant
shall comply with all laws, ordinances, orders and regulations of any lawful
authority and shall keep the Premises in a neat and clean condition. Any failure
by Tenant to comply with the above mentioned requirements shall give Landlord
the option to terminate this lease by written notice to Tenant, without
prejudice to any other remedies Landlord may have for such breach.
5.2. Compliance with Bond Documents. Notwithstanding anything
contained herein, in the event that any of the terms or provisions of this Lease
conflict with any of the terms or provisions of the Bond Documents, as defined
in the Loan Agreement, then the latter shall control and Landlord and Tenant
shall comply with the applicable terms and provisions thereof.
5.3. Trade Fixtures. Tenant shall have the right to deliver to
and install in the Premises any equipment, trade fixtures, stock or other
material to be used by it in the operation of its business, and such delivery
and placing of trade fixtures, equipment or stock or other material in said
Premises shall constitute acceptance of the Premises by Tenant. All furnishings
and equipment used in the improvements and on the Premises and supplied and
installed at the sole cost and expense of Tenant at all times shall be the sole
property of Tenant.
5.4. Alterations. Tenant may, only with Landlord's written
consent, make improvements or alterations and additions to existing improvements
upon the Premises. Tenant shall have a continuing right, without Landlord's
consent, to erect, install, maintain. and operate on the Premises such
equipment, fixtures and signs as Tenant may deem advisable. It is mutually
agreed that with respect to the usual trade fixtures and equipment, including
without limitation, refrigerating equipment and interior signs which may be
installed in the Premises by Tenant prior
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to or during the term hereof, such trade fixtures shall not be deemed to become
part of the Premises but shall remain chattels and the sole and exclusive
property of Tenant.
5.5 Removal of Tenant's Property. Tenant shall have the right
at any time during the term, and for a period of thirty (30) days after the
termination of this lease, to enter upon and remove from the Premises any of the
Tenant's equipment or trade fixtures. All damage caused to the Premises by such
removal shall be repaired by Tenant within ten (10) days after removal;
provided, however, that no such property shall be removed if such removal would
cause permanent injury to the building structure.
6. LANDLORD'S RIGHT TO ENTER. Landlord may, at all reasonable times,
enter the Premises to inspect, repair, alter or add to the same; exhibit the
same to prospective tenants, purchasers or other persons; and, in the event
Tenant has vacated the Premises, to repair the same for re-occupancy by another
tenant. Such entry by Landlord shall not constitute an eviction of Tenant, or a
deprivation of any right of Tenant and shall not alter the obligations of Tenant
hereunder nor create any right in Tenant adverse to Landlord.
7. MAINTENANCE. Tenant, at its sole cost and expense, shall maintain
and keep in good repair the foundation, roof, exterior walls and the paved
parking lot. All maintenance, including, but not limited to, the interior of the
building, exterior doors, signs, windows, electrical, plumbing, heating and air
conditioning systems, etc., shall be the responsibility of the Tenant and shall
be done at Tenant's sole cost and expense. Upon the termination of this lease
Tenant shall surrender the Premises to Landlord in as good a condition as
existed at the time of its initial occupancy, ordinary wear and tear after
diligent maintenance and damage or destruction by fire or other casualty
excepted. If Tenant defaults in keeping or performing its obligations hereunder,
Landlord, shall have the right, after fifteen (15) days notice (except no
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notice need to be sent in cases of emergency) to keep or perform Tenant's
obligation in its behalf and the cost of same shall be additional rent and shall
be added to the next rent payment as the same becomes due.
8. UTILITIES. Tenant shall pay for all sewer, water, gas, electric,
telephone and other utilities used or consumed in or at the Premises.
9. TAXES. Tenant shall promptly pay as and when the same become due and
payable, all taxes and special assessments upon the Premises and all personal
property located thereon by the Tenant, except franchise, income, estate and
inheritance or other similar taxes which may be levied or assessed against the
Premises. If Tenant defaults in keeping or performing its obligations hereunder,
Landlord shall have the right after fifteen (15) days written notice to Tenant
to perform the same in Tenant's behalf and the cost of same shall be additional
rent and shall be added to the next rental installment as it becomes due.
10. TENANT'S RIGHT TO CONTEST. Tenant, at its option, shall have the
right, at its own cost and expense and for its sole benefit, to initiate and
prosecute any proceedings permitted by law for the purpose of obtaining an
abatement of or otherwise contesting the validity or amount of taxes or special
assessments assessed to or levied upon the demised Premises and required to be
paid by the Tenant hereunder and to defend any claims for liens that maybe
asserted against Landlord's estate; and, if required by law, the Tenant may take
such action in the name of the Landlord, who shall cooperate with Tenant to such
extent as the Tenant may reasonably require, to the end that such proceedings
may be brought to a successful conclusion; provided, however, that the Tenant
shall fully indemnify and save the Landlord harmless from all loss, cost, damage
and expense incurred by or to be incurred or suffered by the Landlord.
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11. INSURANCE. Tenant, at its sole cost and expense, shall keep the
Premises and the buildings and improvements thereon insured to the extent of the
full replacement value thereof against loss or damage by fire or other casualty,
with extended coverage. Tenant shall provide to Landlord evidence of such
insurance and, additionally, such policies shall name Landlord as an additional
insured thereunder and shall be non-cancellable absent thirty (30) days' prior
written notice to Landlord.
12. DAMAGE OR DESTRUCTION OF PREMISES. If the building on the Premises
shall be damaged by fire or other casualty, Tenant will, within ninety (90) days
from the date of said damage or destruction, repair, restore or replace said
building so that the same will thereafter be in as good a condition as existed
immediately prior to such fire or other casualty. It is further agreed that if
said building cannot be replaced, restored or repaired in ninety (90) days due
to the inability of Tenant to obtain materials and labor needed therefor because
of strikes, acts of God, or governmental restrictions that would prohibit, limit
or delay said construction, then the time for completion of such repair or
replacement shall be extended accordingly; provided, however, that in any event,
if the repair, restoration or replacement of the building has not been completed
within a period of six months from the date of said damage or destruction
Landlord or Tenant may, at its option, terminate this lease. Provided, further,
however, that if this lease is terminated under the provisions of this
paragraph, all insurance proceeds otherwise payable to Tenant for repair of said
damage or destruction shall be paid by Tenant to Landlord, except to the extent
that said insurance proceeds are for damage to Tenant's equipment and fixtures
on the Premises.
13. EMINENT DOMAIN. In the event the Premises are made subject to a
proceeding by which the right of eminent domain is exercised, or any like
proceedings, Landlord and Tenant shall join and cooperate in resisting such
proceeding if such resistance is feasible and desirable,
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and if it is not, shall join and cooperate in prosecuting their respective
claims for damages incurred from the successful exercise of such right or
proceeding. Tenant reserves unto itself all damages awarded which are based upon
its leasehold interest and ownership of trade fixtures, signs and equipment or
interruption of business.
If the whole of the demised Premises shall be taken or condemned by any
competent authority for any public use or purpose during the term of this lease,
all obligations of Tenant shall cease upon the date Tenant vacates the Premises
or upon the date of such taking, whichever is later, and any unearned rent paid
by Tenant shall be refunded.
In the event that a part of the demised Premises shall be taken or
condemned, and:
(a) The part so taken includes the building on the demised
Premises or any part thereof; or
(b) Such partial taking shall result in cutting off access
from the demised Premises to any adjacent public street or
highway; or
(c) Such partial taking in any other way reduces or damages
the Premises to an extent that the same may not be
effectively used for the purposes hereof;
then, and in any such event, the Tenant may at any time, either prior to or
within a period of sixty (60) days after the date when possession of the
Premises shall be required by the condemning authority, elect to terminate this
lease. In the event that Tenant shall fail to exercise any such option to
terminate this lease, or in the event that a part of the demised Premises shall
be taken or condemned under circumstances under which the Tenant will have no
such option, then in either such event this lease shall continue in effect with
respect to the portion of the demised Premises not so taken, and Landlord will,
with all due diligence and at its own cost and expense, repair and
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restore the demised Premises or what may remain thereof to as near their former
condition as is practicable, in which event all proceeds shall belong to the
Landlord. Until the completion of such work, the obligation of the Tenant to pay
rent shall abate and, upon completion, the monthly rent due Landlord under this
lease shall be equitably adjusted to compensate Tenant for any loss sustained in
area and usability. If Tenant terminates this lease under the provision of
paragraph 13, then Landlord shall be entitled to all proceeds of the
condemnation award, subject to the provisions of paragraph 5.2 hereof.
14. INDEMNIFICATION OF LANDLORD. Tenant shall indemnify and save
Landlord harmless from all liability, expenses, claims, causes of action,
actions and judgment for personal injury, loss of life or property damage
suffered in, upon and about the Premises and Tenant shall provide to Landlord,
at Tenant's expense, a defense to such claims, except such as may be result of
the negligence of Landlord. In addition to, and not in lieu of the foregoing
indemnification, Tenant shall provide and keep in force during the term of this
lease and any extension of said term for the benefit of Landlord, a
comprehensive general public liability insurance policy insuring Landlord
against loss resulting from any of the foregoing; said policy to provide minimum
coverage in the amount of $1,000,000 per occurrence with respect to bodily
injury to any one or more persons and $500,000 per occurrence with respect to
property damage. Such insurance may be carried under a blanket policy covering
the Premises and other locations of Tenant, but such policy shall bear an
endorsement making it non-cancellable absent ten (10) days prior written notice
to Landlord. Tenant shall also provide and keep in force during the term of this
Lease and any extensions of said term, workers compensation insurance as
required by applicable law.
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<PAGE>
15. DEFAULT OF TENANT. If Tenant shall fail to pay any installments of
rent when due after ten (10) days written notice of such default, or if Tenant
shall fail to keep and perform any other covenant of this lease and shall
continue in default for a period of thirty (30) days after Landlord has given
Tenant written notice of such default and demand of performance, or if any court
or tribunal shall commence any proceedings, whether voluntary or involuntary to
declare Tenant insolvent or unable to pay its debts; or if there is a filing by
or on behalf of or against Tenant of any petition or pleading to declare Tenant
a bankrupt under any bankruptcy law or act; or if there is an appointment by any
court under any law of a receiver, custodian or trustee of the business or
assets of Tenant; or the assignment by Tenant of all or any part of its property
or assets for the benefit of creditors, then Landlord may declare the term ended
and enter upon the Premises and expel Tenant therefrom without prejudice to
other remedies of Landlord. No such entry by Landlord shall bar Landlord from
the recovery of damages for the breach of any covenant hereof by Tenant.
Provided, however, if any default shall occur (other than in the payment of
rent) which cannot with due diligence be cured within a period of thirty (30)
days from and after the giving of notice as aforesaid, and Tenant commences to
eliminate such default and proceeds diligently to take steps to cure the same,
Landlord shall not have the right to declare the term ended by reason thereof.
Except for non-payment of rent, no liens upon the trade fixtures, equipment or
signs erected or placed on the Premises by Tenant shall arise or be erected in
Landlord's favor by virtue of any default by Tenant hereunder.
16. COVENANT OF QUIET ENJOYMENT. Landlord covenants and warrants that
Landlord alone has full right and authority to enter into this lease for the
full term hereof; and that at all times when Tenant is not in default hereunder
in its covenants and during the term of
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this lease, Tenant's quiet and peaceful enjoyment of the Premises shall not be
disturbed or interfered with by anyone.
17. HOLDING OVER. In the event Tenant remains in possession of the
Premises after the expiration of the initial term hereof or any extension Tenant
shall occupy the Premises as a tenant from month to month, subject to all the
conditions of this lease insofar as consistent with such a tenancy.
18. SUBORDINATION. This Lease Agreement is specifically and in all
respects subordinate to any and all deeds of trust encumbering the demised
Premises whether now existing or hereafter arising, and Tenant agrees from time
to time, upon demand, to execute any and all instruments as may be required to
evidence such subordination.
Landlord agrees to utilize its best efforts to obtain at Tenant's
request a non-disturbance agreement executed by any mortgagees on deeds of trust
covering the Premises providing that so long as the Tenant is not in default in
the performance of its obligations hereunder that such mortgagees will not
interfere with the leasehold interest of Tenant.
19. MONETARY CURE. Any default by the Tenant hereunder which is
susceptible to monetary cure by Landlord may be so cured and the cost thereof
shall be additional rent due and payable with the next due monthly installment
of base rent.
20. PROHIBITION AGAINST ASSIGNMENT. Tenant may not, without the written
consent of Landlord, sublet, assign, or encumber this lease to any person,
natural or corporate, whomsoever. In the event of such written consent by
Landlord, Tenant shall remain primarily liable for the keeping and performance
of all its covenants hereunder, including but not limited to, the prompt and due
payment of rent.
-11-
<PAGE>
21. BINDING EFFECT; CONSTRUCTION. Each and every provision of this
lease shall bind and inure to the benefit of the parties hereto, their legal
representatives, heirs, successors and assigns. Feminine or neuter pronouns
shall be substituted for those of the masculine form and the plural for the
singular number in any place or places herein in which the context may require
the same. This agreement is made in the State of North Carolina and is to be
construed in accordance with and take effect under the laws of the State of
North Carolina. The captions and headings throughout this lease are inserted for
the convenience and reference of the parties only and in no way shall they be
held or deemed to limit, define, modify, amplify or add to the interpretation,
construction or meaning of any provision of or intent of this lease, nor in any
other way affect this lease.
22. NOTICE. Any notice necessary to be given hereunder for whatever
reason shall be deemed duly given if delivered personally, on the date of
delivery, or by certified mail, postage prepaid, return receipt requested, upon
the date of mailing, to the Landlord:
W & G Associates
c/o W. Travis Porter
P. O. Box 3843
Durham, North Carolina 27702
to the Tenant:
W & G Instruments, Incorporated
Attn:. Hans Marosfalvy, Executive Vice President
1 Swabia Court
Durham, North Carolina 27709
23. ENTIRE AGREEMENT. This lease contains all of the agreements and
conditions made between the parties and no statement, promises or inducements
made by any party hereof, or agent or employee of either party hereto, which is
not contained in this written contract, shall be valid or binding; and this
lease may only be modified or amended by an agreement in writing
-12-
<PAGE>
signed by all parties hereto or their respective successors in interest and
appended hereto, and, so long as the Note shall remain outstanding, agreed to by
Wachovia as the Holder of the Bond, and the Authority.
24. MEMORANDUM OF LEASE. The parties hereto agree to execute a
Memorandum of Lease suitable for recording upon the request of either party.
IN WITNESS WHEREOF, Landlord and Tenant have executed or caused this
lease to be executed in their behalf in the manner prescribed by law on the day
and year first above written.
LANDLORD:
W & G ASSOCIATES
By:
--------------------------------
Managing Partner
WITNESS:
- ----------------------------
TENANT:
W & G INSTRUMENTS, INCORPORATED
By:
--------------------------------
President
ATTEST:
- ----------------------------
Secretary
[Corporate Seal]
-13-
<PAGE>
NORTH CAROLINA
DURHAM COUNTY
I, ______________________, a Notary Public of said state and county
certify that _____________ personally appeared before me this day and
acknowledged that he is Managing Partner of W & G Associates, a North Carolina
general partnership, and that he signed the foregoing Lease.
Witness my hand and notarial seal this the ___ day of ________________,
1984.
---------------------------
Notary Public
My Commission Expires:
- --------------------------
NORTH CAROLINA
DURHAM COUNTY
I, ______________________, a Notary Public of said state and county
certify that _____________ personally appeared before me this day and
acknowledged that he is Secretary of W & G Instruments, Incorporated and that by
authority duly given and as the act of the corporation, the foregoing Lease was
signed in its name by its _____ President, sealed with its corporate seal, and
attested by himself as its Secretary.
Witness my hand and notarial seal this the ___ day of ________________,
1984.
---------------------------
Notary Public
My Commission Expires:
- ---------------------------
-14-
<PAGE>
EXHIBIT A
BEGINNING at an iron pipe set located in the right-of-way line of a cul-de-sac
at the northern end of Swabia Court, said point having North Carolina Grid
Coordinates X=2,045,606.25 and Y=773,399.78; running thence North 01(degree) 33'
22" East 706.93 feet to a new iron pipe, said iron pipe being located South
88(degree) 26' 38" East 1,534.22 feet from an existing iron pipe in the eastern
right-of-way line of North Carolina Highway 54; thence South 88(degree) 26' 38"
East 749.96 feet to a Black Gum Tree, said tree being further identified with a
P. K. nail set in its tree trunk on the south side; thence South 01(degree) 33'
13" West 881.45 feet to a new iron pipe; thence North 88(degree) 26' 38" West
700.99 feet to a new iron pipe located in the eastern right-of-way line of
Swabia Court; thence North 09(degree) 34' 52" West 64.28 feet to a point; thence
along a curve to the right in a northeasterly direction having a radius of 25
feet an arc distance of 22.39 feet to a point; thence along a curve to the left
in a northwesterly direction having a radius of 55 feet an arc distance of
124.96 feet to an iron pipe, the point and place of BEGINNING, containing 15.00
acres, all according to that survey entitled W & G Associates dated October 5,
1984 and prepared by Kenneth Close, Inc., Registered Land Surveyor.
<PAGE>
NORTH CAROLINA
DURHAM COUNTY AMENDMENT TO LEASE AGREEMENT
This Amendment to Lease Agreement made and entered into as of the 31st
day of January, 1986, by and between W & G Associates, a North Carolina general
partnership with its principal office in Durham County, North Carolina,
hereinafter referred to as "Landlord" and Wandel & Goltermann, Inc. (formerly
W & G Instruments, Inc.), a New Jersey corporation with its principal office in
Durham County, North Carolina, hereinafter referred to as "Tenant".
WITNESSETH:
WHEREAS, Landlord and Tenant previously entered into a Lease Agreement
dated the 1st day of October, 1984, with respect to a certain tract or parcel of
land in Durham County, North Carolina, commonly known as One Swabia Court,
Durham, North Carolina, and being more particularly described in the exhibit
attached to said Lease Agreement; and
WHEREAS, Landlord has financed the cost of the leased premises through
borrowing from the Durham County Industrial Facilities and Pollution Control
Financing Authority, said loan represented by bonds issued by the authority and
purchased by Wachovia Bank & Trust Company, N.A.; and
WHEREAS, Wachovia Bank & Trust Company, N.A. as purchaser and holder of
the bonds has consented to the amendment as provided herein; and
WHEREAS, Landlord and Tenant mutually desire to amend the Lease
Agreement as provided herein;
-1-
<PAGE>
NOW, THEREFORE, for and in consideration the mutual promises set out
herein and other good and valuable consideration, the parties covenant and agree
as follows:
1. The Lease Agreement previously entered into by and between Landlord
and Tenant and dated October 1, 1984 is amended by the deletion of Paragraph 2
thereof and the insertion of the following in lieu thereof:
"2. TERM. The term of this lease shall extend to and including the 90th
day from and after the mailing of notice (registered mail, return
receipt requested) of termination of the lease by the Landlord or the
Tenant."
In all other respects, the Lease Agreement between the Landlord and
Tenant dated October 1, 1984 is hereby ratified and confirmed.
This the day and year first above written.
LANDLORD
W & G ASSOCIATES
By:
------------------------------
Managing Partner
TENANT
WANDEL & GOLTERMANN, INC.
(formerly W & G Instruments, Inc.)
By:
------------------------------
Executive Vice President
ATTEST:
- ------------------------------
Secretary
(Corporate Seal)
-2-
<PAGE>
NORTH CAROLINA
DURHAM COUNTY
I, LYNN F. PORTER , a Notary Public of said County and State do hereby
certify that FRANK GOLTERMANN BY W. TRAVIS PORTER, ATTY. IN FACT Managing
Partner of W & G Associates, personally appeared before me this day and
acknowledged the due execution of the foregoing instrument.
Witness my hand and notarial seal, this the 29th day of JANUARY , 1986.
------------------------------
Notary Public
My Commission Expires:
March 1, 1989
- ------------------------------
<PAGE>
NORTH CAROLINA
DURHAM COUNTY
I, _______________________, a Notary Public of said state and county
certify that ____________________________________, Secretary, of Wandel &
Goltermann, Inc. (formerly W & G Instruments, Inc.), personally appeared before
me this day and acknowledged that he is Secretary of such corporation and that
by authority duly given and as the act of the corporation, the foregoing
document was signed in its name by its Executive Vice President, sealed with its
corporate seal, and attested by himself as its Secretary.
Witness my hand and notarial seal this the ___ day of
___________________, 1986.
------------------------------
Notary Public
My Commission Expires:
- ------------------------------
<PAGE>
NORTH CAROLINA
DURHAM COUNTY AMENDMENT TO LEASE
THIS AMENDMENT TO LEASE (the "Amendment") effective as of the 1st day
of October, 1989, by and between Frank Goltermann, hereinafter referred to as
"Landlord" and Wandel & Goltermann Technologies, Inc., a New Jersey corporation
with its principal office in Durham, North Carolina, hereinafter referred to as
"Tenant".
WITNESSETH:
WHEREAS, W & G Associates, a North Carolina general partnership, and W
& G Instruments, Incorporated, a New Jersey corporation, entered into that
certain lease agreement (hereinafter the "Lease Agreement") as of the 1st day of
October, 1984 for a tract of land commonly known as 1 Swabia Court, Durham,
North Carolina (the "Premises"); and
WHEREAS, Frank Goltermann has succeeded to all of the interests of W &
G Associates and is now the sole owner of the Premises which is the subject of
the Lease Agreement; and
WHEREAS, W & G Instruments, Incorporated has changed its name to Wandel
& Goltermann Technologies, Inc.; and
WHEREAS, the parties desire to amend the Lease Agreement as hereinafter
set out, effective October 1, 1989;
NOW, THEREFORE, for and in consideration of the mutual agreements set
forth herein and other good and valuable consideration, the parties covenant and
agree as follows:
1. Rent. The annual base rent for the remainder of the Base Term (as
set forth in the Lease Agreement) shall be $8.00 per square foot, payable in
equal monthly installments as set forth in the Lease Agreement. The parties
agree and acknowledge that the Premises contains
-1-
<PAGE>
50,725 square feet. The base rent shall be adjusted annually on each October
1st, beginning October 1, 1990 for any increase in the Consumer Price Index for
Urban Consumers, U.S. City Average - All Items, published by the Bureau of Labor
Statistics of the United States Department of Labor (the "CPI Index"). The Base
CPI Index shall be the Index for the month of September, 1989, and the
corresponding Index number for the month of September of each subsequent year
shall be the then "Current Index Number" as applicable. Prior to each October 1,
the Current Index Number shall be divided by the Base Index Number. From the
quotient thereof, there shall be subtracted the integer one (1), and any
resulting positive number shall be deemed to be the percentage of increase in
the cost of living. The percentage of increase multiplied by $8.00 per square
foot, the original annual rental rate, shall be the increase in rent required to
be determined by this Amendment. The increase so determined shall be added to
the Base Rent of $8.00 per square foot and Tenant agrees to pay the larger rent
amount beginning on October 1st of each year during the term of the Lease
Agreement. The Landlord shall, within a reasonable time after obtaining the
appropriate data necessary for computing such increase, give the Tenant notice
of any increase so determined, and the Landlord's computation shall be
conclusive and binding upon the Tenant. This provision shall not preclude any
adjustment which may be required in the event of a published amendment of the
Index figures upon which the computation was based.
2. Amendment. The parties agree to record this Amendment or a
memorandum thereof in the Durham County Register of Deeds upon the request of
either party.
Except as set forth in this Amendment, the terms and conditions of the
Lease Agreement shall remain in full force and effect. Capitalized terms not
defined in this Amendment shall have the meaning set forth in the Lease
Agreement.
-2-
<PAGE>
IN WITNESS WHEREOF, Landlord and Tenant have executed this Amendment in
their behalf in the manner prescribed by law effective on the day and year first
above written.
LANDLORD:
(SEAL)
----------------------------
Frank Goltermann
TENANT:
WANDEL & GOLTERMANN TECHNOLOGIES,
INC.
By:
------------------------------
Attest: President
- ------------------------------
Secretary
[Corporate Seal]
-3-
<PAGE>
NORTH CAROLINA
_________ COUNTY
I, , a Notary Public of said County and State do hereby certify that
Frank Goltermann personally appeared before me this day and acknowledged the due
execution of the foregoing instrument.
Witness my hand and notarial seal, this the ___ day of _______________,
1991.
------------------------------
Notary Public
My Commission Expires:
- ------------------------------
<PAGE>
NORTH CAROLINA
_________ COUNTY
I, _______________________________, a Notary Public of said state and
county certify that ________________________________ personally appeared before
me this day and acknowledged that he is_________________ Secretary of Wandel &
Goltermann Technologies, Inc. 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 my hand and notarial seal, this the ___ day of _______________,
1991.
------------------------------
Notary Public
My Commission Expires:
- ------------------------------
<PAGE>
Kreisstadt Reutlingen
Land Baden-Wurttemberg
I, Wolfgang Wenz, a Notary Public of said County do hereby certify that Frank
Goltermann personally appeared before me this day and acknowledged the due
execution of the foregoing instrument.
Witness my hand and notarial seal, this the 19 day of August, 1991.
Notariat Reutlingen
My Commission Expires:
unlimited
(Wenz) Notar
<PAGE>
NORTH CAROLINA
DURHAM COUNTY THIRD AMENDMENT TO LEASE AGREEMENT
This Third Amendment to Lease Agreement (the "Third Amendment") made
and entered into as of the 24 day of January, 1994, by and between WANDEL &
GOLTERMANN ASSOCIATES, a North Carolina general partnership with its principal
office in Durham County, North Carolina ("Landlord") and WANDEL & GOLTERMANN
TECHNOLOGIES, INC., a North Carolina corporation with its principal office in
Durham County, North Carolina ("Tenant").
WITNESSETH:
WHEREAS, W & G Associates, a North Carolina general partnership, and W
& G Instruments, Incorporated, a New Jersey corporation, previously entered into
that certain Lease Agreement dated October 1, 1984 and amended January 1, 1986
and October 1, 1989 (collectively the "Lease Agreement") with respect to a
certain tract or parcel of land containing ten (10) acres in Durham County,
North Carolina, commonly known as One Swabia Court, Durham, North Carolina, and
more particularly described in Exhibit A, Book 1932, Page 293 of the Durham
county Registry, attached hereto (the "Premises");
WHEREAS, Wandel & Goltermann, Inc., a New Jersey corporation, fully
succeeded to all of the interests of W & G Instruments, Incorporated as the
tenant in said Lease Agreement;
WHEREAS, W & G Associates and Wandel & Goltermann, Inc., amended the
Lease Agreement on January 31, 1986;
WHEREAS, Frank Goltermann fully succeeded to all of the interests of W
& G Associates as the landlord in the Lease Agreement and became the sole owner
of the Premises which is the subject of the Lease Agreement;
WHEREAS, Wandel & Goltermann, Inc. changed its name to Wandel &
Goltermann Technologies, Inc.;
WHEREAS, Frank Goltermann and Wandel & Goltermann Technologies, Inc.
amended the Lease Agreement on October 1, 1989;
WHEREAS, Landlord has fully succeeded to all of the interests of Frank
Goltermann as the landlord in the Lease Agreement and is now the sole owner of
Premises which is the subject of the Lease Agreement;
WHEREAS, Landlord and Tenant mutually desire to amend the Lease
Agreement as provided herein, effective October 1, 1993.
-1-
<PAGE>
NOW, THEREFORE, for and in consideration of the mutual agreements as
set forth herein and other good and valuable consideration, the parties covenant
and agree as follows:
1. The Lease Agreement is amended by the deletion of paragraph 2
thereof and the insertion of the following in lieu thereof:
2. TERM. The term of this Lease Agreement shall extend to and including
September 30, 2005. Upon written notice (certified or registered mail,
return receipt requested) at least six (6) months prior to the
expiration of the term hereof or any renewal term, Tenant may extend
the Lease Agreement for three (3) successive renewal terms of two (2)
years each.
2. The Lease Agreement is amended by the deletion of the first sentence
of Paragraph 1 of the Amendment To Lease dated October 1, 1989 and the insertion
of the following in lieu thereof:
The annual base rent for the year beginning October 1, 1989 shall be
$8.00 per square foot, payable in equal monthly installments as set
forth in the Lease Agreement. The parties agree and acknowledge that
the Premises contains 50,725 square feet.
3. The Lease Agreement is amended by the addition of the following to
Paragraph I of the Amendment To Lease dated October 1, 1989:
If the Lease Agreement is renewed by Tenant, Tenant's rent to Landlord
shall be adjusted annually on each October 1st, to an amount equal to
the higher of: (a) the base rent of $8.00 plus additional rent
adjustments reflecting the increase in the Base CPI Index from
September, 1989 as provided herein or (b) the fair market rental value
as determined by an appraisal conducted by a mutually acceptable
realtor or appraiser. The appraisal to determine the fair market rental
value shall be at the Landlord's expense.
4. The Lease Agreement is amended by the deletion of the first sentence
of Paragraph 5.4 and the insertion of the following in lieu thereof:
Tenant acknowledges that all upfit work on the Premises has been
completed and accepts the Premises "as is." Tenant may make alterations
and additions to the existing improvements on the Premises; provided,
however, that all additional tenant alterations and additions will be
performed by Tenant at Tenant's cost and that, prior to conducting any
alterations or additions, Tenant shall obtain Landlord's written
consent to such alterations or additions, which consent shall not be
unreasonably withheld. At the expiration of the lease term, if so
requested by Landlord, Tenant shall restore at its own cost the
Premises to the condition and repair as at the commencement of the
lease term, natural wear and tear excepted.
-2-
<PAGE>
5. The Lease Agreement is amended by the addition of the following to
Paragraph 5.4
Landlord may construct buildings or make other structural improvements
upon the Premises; provided, however, that all Landlord construction or
structural improvements will be performed by the Landlord at Landlord's
cost and that, prior to conducting any construction or structural
improvement, Landlord shall notify Tenant of such construction or
improvement activities. Landlord shall not unreasonably burden Tenant's
use of the Premises and, at no time, shall the sidewalks, office
entrances, parking or public areas be unreasonably blocked or
interfered with as a result of such construction activities.
6. The Lease Agreement is amended by the deletion of Paragraph 20
thereof and the insertion of the following in lieu thereof:
20. SUBLEASE AND ASSIGNMENT. Tenant may sublet all or portions of the
Premises for the remainder of the term or any renewal term, as the case
may be, with Landlord's approval, which shall not be unreasonably
withheld. No subletting by Tenant shall affect its obligations to
perform all of its covenants under this Lease Agreement. Landlord and
Tenant each may assign or transfer its respective right, title, and
interest in and to this Lease Agreement to an affiliate without the
other party's consent. No such assignment or transfer shall release the
assigning party of any obligation or liability hereunder unless the
other party specifically agrees in writing to such release.
7. The Lease Agreement is amended by the addition of the following as
Paragraph 25:
25. RIGHT OF FIRST REFUSAL. It is agreed that if Landlord, at any time
during the term of this Lease Agreement or any renewal term hereof,
receives any bona fide offer from a third party to purchase the
Premises, and any such offer is acceptable to Landlord, Landlord agrees
to notify Tenant in writing, giving name and address of the offeror and
the price, terms and conditions of such offer, and Tenant shall have
twenty (20) business days from and after the receipt of such notice
from Landlord in which to elect to purchase the Premises on the terms
and conditions contained in said bona fide offer. If Tenant does not
elect to purchase, and Landlord sells the Premises to the third party
making such offer, then the purchaser shall take the Premises subject
to and burdened with all the terms, provisions, and conditions of this
Lease, and the rights of Tenant under this Lease as against the new
owner shall not be lessened or diminished by reason of the change of
ownership. If Tenant purchases the Premises, then contemporaneously
with the conveyance of the property to Tenant, this Lease Agreement
shall become null and void, without further notice and Tenant shall
thereupon be released and discharged from all further rentals and other
obligations on the part of Tenant to be paid, kept and performed.
-3-
<PAGE>
8. The parties agree to record this Third Amendment To Lease Agreement
or a memorandum thereof in the Durham County Register of Deeds upon the request
of either party.
Except as set forth in this Amendment, the terms and conditions of this
Lease Agreement shall remain in full force and effect. Capitalized terms not
defined in this Amendment shall have the meaning set forth in the Lease
Agreement.
[SIGNATURES CONTAINED ON NEXT PAGE]
-4-
<PAGE>
IN WITNESS WHEREOF, Landlord and Tenant have executed this Amendment in
their behalf under seal and in the manner prescribed by law.
LANDLORD:
WANDEL & GOLTERMANN ASSOCIATES
By:
----------------------------------
Frank Goltermann, Managing Partner
NORTH CAROLINA
DURHAM COUNTY
I, _________________________________, a Notary Public of the aforesaid
County and State, do hereby certify that Frank Goltermann personally appeared
before me this day and acknowledged that he is the Managing Partner of Wandel &
Goltermann Associates, a North Carolina general partnership, and acknowledged
the execution of the foregoing instrument.
Witness my hand and notarial seal this ___ day of ____________________,
1994.
------------------------------
Notary Public
My Commission Expires:
- ------------------------------
-5-
<PAGE>
TENANT:
WANDEL & GOLTERMANN TECHNOLOGIES, INC.
By:
--------------------------------
Adelbert Kuthe
Vice-President
Attest:
- --------------------------------
Adelbert Kuthe, Secretary
[CORPORATE SEAL]
NORTH CAROLINA
MECKLENBURG COUNTY
I, ____________________________, a Notary Public of the aforesaid
County and State, do hereby certify that Adelbert Kuthe personally appeared
before me this day and acknowledged that he is the Secretary of Wandel &
Goltermann Technologies, Inc., a North Carolina corporation, and that by
authority duly given and as an act of the corporation, the foregoing instrument
was signed in its name by its President, and attested by himself as Secretary,
and sealed with its common corporate seal.
Witness my hand and notarial seal this ___ day of ____________________,
1994.
--------------------------------
Notary Public
My Commission Expires:
- --------------------------------
-6-
<PAGE>
EXHIBIT A
Beginning at an iron pipe found located in the northern boundary of the
right-of-way of Swabia Court, said iron pipe also being located in the eastern
line of property now or formerly belonging to Glaxo Inc. as described in Deed
Book 1664, Page 298, and shown on plat recorded in Plat Book 125, Page 110,
Durham County Registry; running thence along and with the eastern line of said
Glaxo Inc. North 01(degree) 34' 57" East 706.93 feet to an iron pipe found;
running thence along and with the southern line of property now or formerly
belonging to Imperial Center Partnership and Petula Associates, Ltd., as
described in Book 1660, Page 458, Durham County Registry, South 88(degree) 25'
03" East 749.96 feet to an iron pipe found; running thence along and with the
western line of property now or formerly belonging to Imperial Center
Partnership and Petula Associates, Ltd. as described in Book 1690, Page 537,
Durham County Registry, South 01(degree) 34' 48" West 265.00 feet to an iron
pipe found; running thence along and with the western line of property now or
formerly belonging to Imperial Center Partnership and Petula Associates, Ltd. as
described in Book 1660, Page 458, Durham County Registry, South 01(degree) 34'
48" West 291.55 feet to an iron pipe set; running hence along and with the
northern line of Lot S-5A as shown on the plat hereinafter referred to, North
88(degree) 25' 03" West 567.39 feet to an iron pipe set, and South 41(degree)
54' 51" West 220.10 feet to an iron pipe set in the boundary of the right-of-way
of Swabia Court; running thence along and with said right-of-way along and with
a curve in a counterclockwise direction, said curve having a Radius of 55.00
feet, an arc distance of 33.00 feet, and a chord bearing and distance of North
58(degree) 43' 40" West 32.51 feet to an iron pipe set; thence continuing along
said right-of-way along and with a curve in a counterclockwise direction, said
curve having a radius of 55.00 feet, an arc distance of 12.00 feet, and a chord
bearing and distance of North 82(degree) 10' 01" West 11.98 feet to an iron pipe
found, the point and. place of Beginning, and being Lot S-5B, containing 10.00
acres, more or loss, as shown on plat and survey thereof entitled "Subdivision
Map For Lot S-5A and Lot S-5B, Imperial Center", prepared by Kenneth Close,
Inc., dated 07-30-93, and recorded in Plat Book ___, Page ___, Durham County
Registry, to which plat reference is hereby made for a more particular
description of same.
<PAGE>
Prepared by and mail after recording to: Porter & Steel, PLLC; P.O. Box 13646,
Research Triangle Park, North Carolina 27709, Attn: Gerald A. Tingen
NORTH CAROLINA
DURHAM COUNTY FOURTH AMENDMENT TO LEASE AGREEMENT
THIS FOURTH AMENDMENT TO LEASE AGREEMENT (the "Fourth Amendment") made
and entered into as of the 23rd day of February 1999 by and between W & G
ASSOCIATES, A NORTH CAROLINA LIMITED PARTNERSHIP with its principal office in
Durham, North Carolina ("Landlord") and WANDEL & GOLTERMANN TECHNOLOGIES, INC.,
a North Carolina corporation with its principal office in Durham, North Carolina
("Tenant");
WHEREAS, W & G Associates, a North Carolina general partnership, and W
& G Instruments, Incorporated, a New Jersey Corporation previously entered into
that certain Lease Agreement dated October 1, 1984 and amended January 1, 1986,
October 1, 1989 and January 24, 1994 as ratified July 5, 1994 (collectively the
"Lease Agreement") with respect to a certain parcel of land more commonly known
as One Swabia Court, Durham, North Carolina; and
WHEREAS, Wandel & Goltermann, Inc., a New Jersey corporation, fully
succeeded to all of the interests of W & G Instruments, Incorporated as the
tenant in said Lease Agreement; and
WHEREAS, W & G Associates, a North Carolina general partnership, and
Wandel & Goltermann, Inc., amended the Lease Agreement on January 31, 1986; and
WHEREAS, Frank Goltermann fully succeeded to all of the interests of W
& G Associates as the landlord in the Lease Agreement and became the sole owner
of the Premises which is the subject of the Lease Agreement; and
WHEREAS, Wandel & Goltermann, Inc. changed its name to Wandel &
Goltermann Technologies, Inc.; and
WHEREAS, Frank Goltermann and Wandel & Goltermann Technologies, Inc.
amended the Lease Agreement on October 1, 1989; and
WHEREAS, Wandel & Goltermann Technologies, Inc., a New Jersey
corporation, merged into W & G Sub, Inc., a North Carolina corporation, with the
surviving corporation being Wandel & Goltermann Technologies, Inc., a North
Carolina corporation; and
WHEREAS, the real property subject to the Lease was conveyed from Frank
Goltermann and wife, Dorothea Goltermann to W & G Associates, a North Carolina
limited partnership by deed recorded in Book 1886, Page 784, Durham County
Registry, and Landlord has fully
-1-
<PAGE>
succeeded to all of the interests of Frank Goltermann as the landlord in the
Lease Agreement and is now the sole owner of Premises which is the subject of
the Lease Agreement; and
WHEREAS, a Third Amendment to Lease was made and entered into as of the
24th day of January, 1994 by Wandel and Goltermann Technologies, Inc. a North
Carolina corporation as Tenant and Wandel & Goltermann Associates, a North
Carolina general partnership as Landlord covering certain Premises located on
Lot S-5B as shown on Plat Book 131, Page 87, Durham County Registry; and
WHEREAS, a Memorandum of Lease referencing the Third Amendment to Lease
was recorded in Book 1972, Pages 855 through 860, Durham County Registry was
executed in the name of Wandel and Goltermann Associates, a North Carolina
general partnership as Landlord; and
WHEREAS, although the Third Amendment to Lease and the Memorandum of
Lease referencing the Third Amendment to Lease incorrectly named the Landlord as
"Wandel & Goltermann Associates, a North Carolina general partnership", both
documents have been ratified by W & G Associates, a North Carolina limited
partnership by Ratification recorded in Book 1999, Page 773, Durham County
Registry; and
WHEREAS, Landlord and Tenant mutually desire to amend the Lease
Agreement as provided herein;
NOW THEREFORE, for and in consideration of the mutual agreements as set
forth herein and for other good and valuable consideration exchanged between the
parties hereto, the receipt and sufficiency of which is hereby acknowledged, the
parties covenant and agree as follows:
1. The Lease Agreement is amended by the deletion of Exhibit A thereof and
the insertion of EXHIBIT A attached hereto in lieu thereof.
2. Subpart (a) of Paragraph 3 of the Third Amendment to Lease Agreement
which reads, "...(a) the base rent of $8.00 plus additional rent
adjustments reflecting the increase in the Base CPI Index from
September, 1989 as provided herein, or..." is deleted and replaced
with, "...(a) the base rent of $8.00 per square foot plus additional
rent adjustments reflecting the increase in the Base CPI Index from
September, 1989 as provided herein, or..."
3. The parties hereto agree to record a this Fourth Amendment or a
memorandum of the Lease as amended hereby in the Durham County Register
of Deeds upon the request of either party.
Except as set forth in this Fourth Amendment, the terms and conditions
of the Lease Agreement shall remain in full force and effect. Capitalized terms
not defined in this Fourth Amendment shall have the meaning set forth in the
Lease Agreement.
-2-
<PAGE>
IN WITNESS WHEREOF, Landlord and Tenant have executed this Fourth
Amendment under seat in the manner prescribed by law.
W & G ASSOCIATES, A NORTH CAROLINA
LIMITED PARTNERSHIP (SEAL)
By: (SEAL)
--------------------------
Frank Goltermann, General
Partner, by Bert Kuthe,
attorney-in-fact under
power of attorney recorded
in Book 1999, Page 771,
Durham County Registry.
WANDEL & GOLTERMANN
TECHNOLOGIES, INC. a North Carolina
corporation
------------------------------------
President
ATTEST:
- ------------------------------------
Secretary
(Corporate Seal)
-3-
<PAGE>
STATE OF NORTH CAROLINA
COUNTY OF DURHAM
I, ______________________, do hereby certify that Bert Kuthe,
attorney-in-fact for Frank Goltermann, General Partner of W & G Associates, a
North Carolina Limited Partnership, personally appeared before me this day, and
being by me duly sworn, says that he executed the foregoing and annexed
instrument for and in behalf of Frank Goltermann, as General Partner and as an
act and deed of the Partnership and that his authority to execute and
acknowledge said instrument is contained in an instrument duly executed,
acknowledged and recorded on the 5th day of July, 1994 in Book 1999, Page 771,
Durham County Registry, and that this instrument was executed under and by
virtue of the authority given by said instrument granting him power of attorney;
that the said Bert Kuthe acknowledged the due execution of the foregoing and
annexed instrument for the purposed therein expressed for and in behalf of the
said Frank Goltermann as General Partner and as an act and deed of the
Partnership.
Witness my hand and official seat, this 23 day of February, 1999.
------------------------------------
Notary Public
(Notary Seal)
My commission expires: CAROL F. JOHNSON
----------------
<PAGE>
STATE OF NORTH CAROLINA
COUNTY OF DURHAM
I, a Notary Public of the County and state aforesaid, certify that
_______________________, personally appeared before me this day and acknowledged
that (s)he is _____________ Secretary of WANDEL & GOLTERMANN TECHNOLOGIES, INC.
a North Carolina corporation, and that by authority duly given and as an act of
the corporation, the foregoing instrument was signed its name by its _______
President, sealed with its corporate seal and attested by him/herself as its
_________________ Secretary.
Witness my hand and official seal, this ____ day of __________________,
199_.
------------------------------------
Notary Public
(Notary Seal)
My commission expires: CAROL F. JOHNSON
----------------
<PAGE>
EXHIBIT A
Being all of Lot S-5B, containing 10.00 acres, more or less, as shown on plat
and survey thereof entitled, "Subdivision Map for Lot S-5A and Lot S-5B,
Imperial Center", prepared by Kenneth Close, Inc., dated 07-30-93, and recorded
in Plat Book 131, Page 87, Durham County Registry, to which plat reference is
hereby made for a more particular description thereof
TOGETHER WITH and SUBJECT TO all easements and rights appurtenant as set forth
in those certain Declaration of Covenants Containing Easements recorded in Book
1963, Page 190, Durham County Registry.
<PAGE>
Prepared by and mail after recording to: Maupin, Taylor & Ellis, P.O. Drawer
19764, Raleigh, North Carolina 27619-9764 Attn. Gerald A. Tingen
NORTH CAROLINA
DURHAM COUNTY
FIFTH AMENDMENT TO LEASE AGREEMENT
THIS FIFTH AMENDMENT TO LEASE AGREEMENT (the "Fifth Amendment") dated
for reference purposes October 1, 1999, by and between W & G ASSOCIATES, A NORTH
CAROLINA LIMITED PARTNERSHIP ("Landlord") and WANDEL & GOLTERMANN TECHNOLOGIES,
INC., a North Carolina corporation ("Tenant")
WHEREAS, W & G Associates, a North Carolina general partnership, and
W & G Instruments, Incorporated, a New Jersey Corporation previously entered
into that certain Lease Agreement dated October 1, 1984 and amended January 31,
1986, October 1, 1989 and January 24, 1994 as ratified July 5, 1994 and amended
as of February 23, 1999 (collectively the "Lease Agreement") with respect to a
certain parcel of land more commonly known as Lot 5-5B, containing 10.00 acres,
more or less as shown on plat and survey thereof entitled "Subdivision Map for
Lot S-5-A and Lot S-5B, Imperial Center", prepared by Kenneth Close, Inc. dated
July 30, 1993, and recorded in Plat Book 131, Page 87, Durham County Registry,
TOGETHER with certain easements set out in Book 1963, Page 190, Durham County
Registry.
WHEREAS, Wandel & Goltermann, Inc., a New Jersey corporation, fully
succeeded to all of the interests of W & G Instruments, Incorporated as the
tenant in said Lease Agreement; and
WHEREAS, W & G Associates, a North Carolina general partnership, and
Wandel & Goltermann, Inc. amended the Lease Agreement on January 31, 1986; and
WHEREAS, Frank Goltermann fully succeeded to all of the interests of W
& G Associates as the landlord in the Lease Agreement and became the sole owner
of the Premises which is the subject of the Lease Agreement; and
WHEREAS, Wandel & Goltermann, Inc. changed its name to Wandel &
Goltermann Technologies, Inc.; and
WHEREAS, Frank Goltermann and Wandel & Goltermann Technologies, Inc.
amended the Lease Agreement on October 1, 1989; and
WHEREAS, Wandel & Goltermann Technologies, Inc., a New Jersey
corporation, merged into W & G Sub, Inc., a North Carolina corporation, with the
surviving corporation being Wandel & Goltermann Technologies, Inc., a North
Carolina corporation; and
WHEREAS, the real property subject to the Lease was conveyed from Frank
Goltermann and wife, Dorothea Goltermann to W & G Associates, a North Carolina
limited partnership by
-1-
<PAGE>
deed recorded in Book 1886, Page 784, Durham County Registry, and Landlord has
fully succeeded to all of the interests of Frank Goltermann as the landlord in
the Lease Agreement and is now the sole owner of Premises which is the subject
of the Lease Agreement; and
WHEREAS, a Third Amendment to Lease was made and entered into as of the
24th day of January, 1994 by Wandel and Goltermann Technologies, Inc. a North
Carolina corporation as Tenant and Wandel & Goltermann Associates, a North
Carolina general partnership as Landlord covering certain Premises located on
Lot S-5B as shown on Plat Book 131, Page 87, Durham County Registry; and
WHEREAS, a Memorandum of Lease referencing the Third Amendment to Lease
was recorded in Book 1972, Page 855 through 860, Durham County Registry was
executed in the name of Wandel and Goltermann Associates, a North Carolina
general partnership as Landlord; and
WHEREAS, although the Third Amendment to Lease and the Memorandum of
Lease referencing the Third Amendment to Lease incorrectly name the Landlord as
"Wandel & Goltermann Associates, a North Carolina general partnership", both
documents have been ratified by W & G Associates, a North Carolina limited
partnership by Ratification recorded in Book 1999, Page 773, Durham County
Registry; and
WHEREAS, Landlord and Tenant entered into a Fourth Amendment to Lease
Agreement dated as of February 23, 1999; and
WHEREAS, Landlord and Tenant have agreed to amend the Lease Agreement
as more fully set out herein;
NOW THEREFORE, for and in consideration of the promises set out herein,
and for other good and valuable consideration exchanged between the parties
hereto, the receipt and sufficiency of which is hereby acknowledged, Landlord
and Tenant agree as follows:
1. Paragraph 12 of the Lease Agreement, "Damage or Destruction of
Premises" is hereby deleted and the following substituted in lieu thereof:
12. DAMAGE OR DESTRUCTION OF PREMISES. If the building or the
Premises shall be damaged or destroyed by fire or other casualty,
Tenant will, within one hundred fifty (150) days from the date of said
damage or destruction, repair, restore or replace said building or
Premises so that the same will thereafter be in as good a condition as
existed immediately prior to such fire or other casualty. If in the
reasonable opinion of a contractor or architect mutually agreeable to
Landlord and Tenant the building cannot be replaced, restored and
repaired within 150 days from the date of the casualty or damage,
Landlord or, so long as Tenant's unreasonable delay is not a factor in
such contractor's or architect's opinion that the Premises cannot be
replaced, restored and repaired within 150 days, Tenant, upon written
notice to the other, shall have the right to terminate this Lease
within fifteen (15) business days after receipt of the written opinion
of the approved contractor or architect. Provided, however, that if
this Lease is terminated
-2-
<PAGE>
pursuant to the provisions of this Paragraph, all insurance proceeds
otherwise payable to Tenant for repair, replacement or restoration of
said damage or destruction shall be paid to Landlord, except to the
extent that said insurance proceeds are for damage to Tenant's
equipment or fixtures on the Premises that are to remain the property
of Tenant.
2. Pursuant to Paragraph 2, TERM of the Lease Agreement, Tenant has the
option to extend the term of the Lease Agreement for three (3) successive
renewal terms of two (2) years each upon written notice to Landlord at least six
(6) months prior to the expiration of the then current term. It is agreed
between the parties that (i) once a renewal term is exercised it ceases to exist
and may not be exercised in a subsequent renewal term and (ii) subject to the
requirement to notify Landlord at least six (6) months prior to the expiration
of the then current term, Tenant may notify Landlord of the exercise of one or
more of the renewal terms at any one time. Notwithstanding the foregoing, upon
termination or earlier expiration of the term of the Lease Agreement, all
renewal terms and any unexercised right to renew shall be terminated.
3. The loan financing the construction of the improvements on the
Premises (together with the cost of the land) through borrowing from The Durham
County Industrial Facilities and Pollution Control Financing Authority (the
"Authority"), such loan funds having been raised by the Authority issuing and
selling its industrial revenue bonds in the principal amount of $2,600,000.00
and made pursuant to a Loan Agreement dated as of October 1, 1984, between the
Authority and Landlord, has been paid in full and cancelled of record.
Accordingly, Paragraph 5 of the Lease Agreement, USE, is hereby amended to
delete the requirements that Tenant operate the Premises in such a manner that
the same will be a "project" within the meaning of Chapter 800 of the 1975
Session Laws of North Carolina, as amended, which as codified appears as Chapter
159C of the General Statutes of North Carolina, and that Landlord and Tenant
comply with the applicable terms and provisions of the Bond Documents.
4. As modified by this Fifth Amendment, the Lease Agreement is
ratified, confirmed and continues in full force and effect. Capitalized terms
not defined herein shall have the meaning set forth in the Lease Agreement.
5. This Amendment is subject to the consent of First Union National
Bank, Landlord's lender whose consent has been granted in writing, a copy of
which consent is attached hereto.
[SIGNATURE PAGE ATTACHED]
-3-
<PAGE>
IN WITNESS WHEREOF, Landlord and Tenant have executed this Fifth
Amendment under seal in the manner prescribed by law.
W & G ASSOCIATES, A NORTH CAROLINA LIMITED PARTNERSHIP (SEAL)
By: (Seal)
---------------------------------
WANDEL & GOLTERMANN TECHNOLOGIES, INC., a North Carolina corporation
By:
---------------------------------
President
ATTEST:
By:
---------------------------------
Secretary
(Corporate Seal)
-4-
<PAGE>
IN WITNESS WHEREOF, Landlord and Tenant have executed this Fifth
Amendment under seal in the manner prescribed by law.
W & G ASSOCIATES, A NORTH CAROLINA LIMITED PARTNERSHIP (SEAL)
By: (Seal)
---------------------------------
WANDEL & GOLTERMANN TECHNOLOGIES, INC., a North Carolina corporation
By:
---------------------------------
President
ATTEST:
By:
---------------------------------
Secretary
(Corporate Seal)
-5-
<PAGE>
CONSENT OF LENDER
First Union National Bank executes this Fifth Amendment for the sole purpose of
evidencing its consent to the terms of such Fifth Amendment.
FIRST UNION NATIONAL BANK
(formerly, First Union National Bank of North Carolina)
By:
---------------------------------
President
ATTEST:
By:
---------------------------------
Secretary
(corporate seal)
-6-
<PAGE>
EXHIBIT D
DESCRIPTION OF POSSIBLE SUBTENANT ALTERATIONS OR ADDITIONS TO SUBLEASE PREMISES
Subtenant intends to make certain alterations or additions to the Sublease
Premises during the Initial Sublease Term and possibly the Extended Sublease
Term, which alterations or additions are contemplated to allow a continuation of
substantially the same uses and purposes of the improvements and equipment in
Subtenant's premises at 1035 Swabia Court, Durham, North Carolina. Such
alterations or additions may include, but are not limited to, the following:
o Fiber optic cable that will be laid underground from Prime Landlord's
property line with Glaxo Wellcome, Inc. up to and into the Sublease
Premises and into Subtenant's computer and telecommunications equipment
room.
o Possible removal from the Sublease Premises of existing coaxial cable and
various related attachments and installation of CAT-5 or equivalent wiring
and related attachments for connecting and operating Subtenant's computer
network.
o Telecommunications wiring, equipment, and related attachments to the extent
required in the event that Sublandlord's existing telecommunication wiring,
equipment, and related attachments cannot be utilized by Subtenant for
establishing both internal and external voice and data communications
within the Sublease Premises and with external third parties.
o The possible installation of non-load-bearing walls as may be required to
reconfigure the Sublease Premises to meet the requirements of Subtenant's
use.
o The construction of laboratory facilities typical of that used by
industrial researchers for biological research purposes equipped with
standard laboratory equipment, including: laboratory benches with hot and
cold running water, natural gas outlets and sinks with drains leading to
plumbing that will have been installed in the Sublease Premises and
connected to the Sublease Premises sewer system; additional lighting
fixtures, ventilation hoods with external venting and other such equipment
that is typical in a laboratory facility.
o The following specialized facilities will be required: a tissue culture
room(s) and associated ventilation and fume hoods; a pilot
manufacturing laboratory and clean room space, a Bio-level Safety 2
(BL-2) licensed laboratory for use with poultry specific pathogens, a
licensed radioactive use and associated storage area, an area(s)
designated for work with poultry embryos, a laboratory designed for use
with various poultry microbiological samples from the field, a dark
room, a storage room for supplies, dedicated space(s) with egg delivery
equipment and associated devices for use in testing biological
materials and for process
23
<PAGE>
optimization studies, bio-hazard waste storage facility, laundry,
autoclaves and dishwashing room.
o Specialized laboratory equipment includes -70oC freezers, walk-in
freezers for the storage of freeze-dried vaccines, high speed
centrifuges and specialized equipment for purification of biological
materials and production of recombinant materials by fermentation and
autoclaves.
o The ventilation and fume hoods will require anywhere from between six
and ten individual ventilation ducts that will penetrate the roof to
the outside of the Sublease Premises. Subtenant's R&D personnel and
outside consulting engineers have advised Subtenant that these hoods
must be vented vertically and not horizontally through the wall of the
Sublease Premises in order to ensure that the vented exhaust clears the
Sublease Premises "envelope" and is not drawn back into the building
through the HVAC units on the roof. The two autoclaves will also
require external venting, and the HVAC units for the walk in freezers
will most likely be mounted on the roof, also necessitating penetration
of the roof. Subtenant agrees that any penetrations of the roof will
only be performed by Sublandlord's contractor and only if Sublandlord's
contractor will affirm the continuing warranty given with respect to
the roof after installation of the roof penetrations to accommodate
Subtenant's vents.
o The construction of manufacturing facilities, including: steel-framed
mezzanine storage areas, compressed air and related compressed air outlets
connected to an external compressor, 220-volt electrical power outlets,
additional lighting fixtures, power lift assists on the loading docks and
plumbing outlets similar to those installed in the laboratory facilities.
o The requirements for specialized facilities will require a number of
individual rooms, possibly needing individual air handling and temperature
controls for controlling the atmosphere, the quality of air, and the air
pressure variance with respect to the rest of the Sublease Premises. The
air would in all probability be HEPA filtered, both coming in and being
exhausted, and may require individual HVAC equipment to be positioned on
top of the rooms or on the roof of the Sublease Premises. The walls for
these rooms will in all probability be self-contained and may be
prefabricated, similar to clean rooms used to manufacture silicon wafers
for the semiconductor industry.
o The manufacturing area will perform the following activities:
o Receive Subtenant's INOVOJECT(R) vaccination system from its outsourced
manufacturer approximately 85% complete.
24
<PAGE>
o Complete the other 15% of the INOVOJECT(R)system's construction,
including the programming, installation and testing of
electro-mechanical controls, and the attachment of vaccination tubing,
injection head tooling and sterilization system.
o Test the INOVOJECT(R) system. This requires either a 110-volt or a
220-volt power source and compressed air supply of approximately 100
pounds per square inch. Subtenant has a compressor located outside its
present facility which it would relocate outside of the Sublease
Premises if unable to use Sublandlord's compressed air supply.
o Rebuild and refurbish used INOVOJECT(R)systems and components. This
will require disassembly, some cleaning with a portable steam generator
outside and beyond the loading dock area, and reassembly with new or
rebuilt components such as pumps, vacuum motors and air and
electrically actuated controls. Very little if any cleaning solvents
are used (possibly some de-greasing agents) and the sterilization fluid
used during test cycles and system cleaning prior to shipment of the
INOVOJECT(R)system to the customer consists of a tap water and a
household bleach or isopropyl alcohol mixture which, as a non-hazardous
substance, is collected and discharged into a sink or other plumbed
drain outlet. Any recyclable materials would be deposited in specially
designated containers outside the Sublease Premises for removal by a
third party waste hauler as is currently done at Embrex's present
facility.
o Shipping and Receiving activities are predominantly the dispatching
(usually by Federal Express) of spare parts to INOVOJECT(R) system
customers or Subtenant's field service technicians.
Prior to the commencement of any alterations or additions, Subtenant will make a
videotaped record of that part of the Sublease Premises to which Subtenant
intends to make such alterations or additions and review said tape with
Sublandlord. The parties shall then agree in good faith to resolve any
differences of opinion with respect to the condition of the Sublease Premises.
Subtenant will make a copy of the videotaped record for Sublandord. The purpose
of the videotaped record is to facilitate Subtenant's compliance with its
obligations to restore the Initial Sublease Premises and Expansion Sublease
Premises in accordance with Section 19 of the Sublease.
(REMAINDER OF PAGE LEFT INTENTIONALLY BLANK)
25
<PAGE>
CONSENT OF PRIME LANDLORD TO SUBLEASE
(REMAINDER OF PAGE LEFT INTENTIONALLY BLANK)
26
EXHIBIT 10.10
FIRST AMENDMENT TO SUBLEASE
THE FIRST AMENDMENT TO SUBLEASE (the "First Amendment") made and
entered into as of the 29th day of February, 2000, by and among WANDEL &
GOLTERMANN TECHNOLOGIES, INC., a North Carolina corporation, hereinafter
referred to as "Sublandlord", EMBREX, INC., a North Carolina corporation,
hereinafter referred to as "Subtenant", and W & G ASSOCIATES, a North Carolina
partnership, hereinafter referred to as "Prime Landlord."
WHEREAS, Sublandlord and Subtenant are parties to that certain Sublease
Agreement dated as of October 1, 1999 (said Sublease being referred to herein as
the "Sublease"), pertaining to the rental of certain premises on Swabia Court,
Durham, North Carolina, as more particularly described in the Sublease (the
"Sublease Premises"); and
WHEREAS, pursuant to Section 6 of the Sublease, the Sublease Premises
have been inspected by O'Neal, Inc., whose report has been delivered to
Sublandlord and Subtenant (the "Inspection Report"), the purposes of said
inspection being to determine whether the structure of the Sublease Premises and
its HVAC, plumbing, mechanical, electrical and fire protection systems are in
good condition and working order and whether the Sublease Premises currently
comply with all applicable local, state and federal laws and regulations related
to the occupancy of the Sublease Premises by Subtenant for its intended uses;
and
WHEREAS, pursuant to Section 6 of the Sublease, based upon the
Inspection Report, Sublandlord and Subtenant desire to agree as to the repairs
and replacements for which each is responsible, and to enter into this First
Amendment to reflect the allocation of their respective responsibilities for
repairs or replacements to the Sublease Premises.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, the Sublandlord and Subtenant agree as follows:
1. Unless otherwise defined herein, all capitalized terms used herein
that are defined in the Sublease shall have the meaning ascribed to such terms
in the Sublease.
2. A copy of the Inspection Report is attached hereto and by reference
made a part hereof as EXHIBIT A.
3. Notwithstanding anything contained in the Sublease to the contrary,
Sublandlord agrees to be responsible for the following repairs and/or
replacements:
(a) HVAC:
(i) For the period beginning January 1, 2001 and
ending December 31, 2002, Sublandlord and Subtenant shall
share the cost of any necessary maintenance, repairs and
replacements to any of the existing rooftop HVAC units, with
Sublandlord agreeing to reimburse Subtenant for one-third
(1/3) of any such
<PAGE>
costs, and Subtenant being responsible for the remaining
two-thirds (2/3); subject, however, to a maximum aggregate
reimbursement from Sublandlord to Subtenant of $70,000.
(ii) In addition to the foregoing, Sublandlord agrees
to repair and place in good working order the economizer
cycles on two of the packaged rooftop units which are in need
of repair, as described on page 7 of 8 of the Inspection
Report, said repair and placement to be done promptly after
the execution of this First Amendment.
(iii) Sublandlord shall install smoke detectors in
the ducts of the HVAC units, as described on page 8 of 8 of
the Inspection Report, said installation to be done promptly
after the execution of this First Amendment.
(b) Parking Lot: The parties agree that the parking lot shall
be resealed and restriped as soon as practicable, weather permitting, with
Sublandlord being responsible for the cost of resealing the lot and Subtenant
being responsible for the cost of restriping the parking spaces, including
restriping as necessary to establish the appropriate number of handicapped
parking spaces, as required by applicable laws and regulations.
(c) Miscellaneous Items: Sublandlord assumes responsibility
for the following items to be done promptly at its expense after the execution
of this First Amendment, except as otherwise provided in (vii) below:
(i) The installation of railings on both sides of the
main door landing in the truck dock area, as described on page
3 of 8 of the Inspection Report.
(ii) Repair of the drain discharging water and oil at
the compressor room, as described on page 3 of 8 of the
Inspection Report.
(iii) Repair of the damage caused by the several
leaks observed along the far/west wall of the Sublease
Premises, which work will include resealing of the windows
along said wall, replacement of damaged ceiling tiles, and
appropriate repainting of the wall.
(iv) On page 5 of 8 of the Inspection Report, under
Building Code Issues, the Report addresses the fire separation
wall and the door located therein. Sublandlord shall install
45-minute rated doors in said fire separation wall.
(v) With respect to the observation of a potential
natural gas leak, as described on page 6 of 8 of the
Inspection Report, Sublandlord shall be responsible for the
identification and correction of this problem.
(vi) Sublandlord shall cause a guard to be placed
upon the air compressor in the mechanical room, as described
in page 7 of 8 of the Inspection Report.
-2-
<PAGE>
(vii) The current bathroom facilities in the Sublease
Premises are identified as rooms numbered 127, 128, 155 and
156 in the report prepared for Sublandlord by Dabney Gomes,
AIA, dated 13 February 2000, a copy of which is attached
hereto and by reference made a part hereof as Exhibit B. It
has been determined that, due to the amount otherwise being
expended to improve the parking areas and the amount to be
expended to revise and renovate the bathrooms numbered 127 and
128, the applicable laws, ordinances and regulations do not
require Sublandlord to revise or expand the bathrooms numbered
155 and 156. Sublandlord shall revise and expand bathrooms
numbered 127 and 128 as described in Exhibit B, or at
Subtenant's option, allow Subtenant to undertake such work at
a later date. If Subtenant elects to defer having said
bathroom renovations performed by Sublandlord and Subtenant
thereafter undertakes, at its expense, to have the bathrooms
within the Sublease Premises renovated in a manner in full
compliance with the applicable laws, ordinances and
regulations, then Sublandlord shall contribute to Subtenant's
cost for such work, subject to a maximum contribution of
$23,451 from Sublandlord.
4. Except for the responsibilities assumed by Sublandlord as
hereinabove described, and except as otherwise expressly provided in the
Sublease, Sublandlord shall have no other responsibilities with respect to
matters described in the Inspection Report. The allocation to Sublandlord of
responsibility for the matters hereinabove described and the execution of this
First Amendment extinguishes Subtenant's right to terminate the Sublease
pursuant to Section 6 thereof.
5. The amendments described in this First Amendment supersede any
provisions in the Sublease which are inconsistent with said amendments. As
hereby modified and amended, all of the terms and provisions of the Sublease
shall remain in full force and effect. All references in the Sublease shall
include the original Sublease and this First Amendment.
6. Prime Landlord consents to this First Amendment as requested, it
being understood that Prime Landlord is not a party to the Sublease and is
executing this First Amendment for the sole purpose of acknowledging its consent
thereto, to the extent that Prime Landlord's consent is required pursuant to the
Prime Lease.
7. This First Amendment may be executed in two or more counterparts,
all of which taken together shall constitute one original instrument.
-3-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this First
Amendment the day and year first above written.
SUBLANDLORD:
WANDEL & GOLTERMANN TECHNOLOGIES, INC.,
a North Carolina corporation
By /s/ Bert Kuthe
---------------------------------
Title: Vice President
--------------------------
SUBTENANT:
EMBREX, INC., a North Carolina corporation
By /s/ Randall L. Marcuson
---------------------------------
Title: President & CEO
--------------------------
PRIME LANDLORD:
W & G ASSOCIATES, a North Carolina partnership
By /s/ Frank Goltermann (SEAL)
----------------------------------
Frank Goltermann, General Partner
-4-
EMBREX, INC.
SUBSIDIARIES
Name Jurisdiction of Incorporation
- ---- -----------------------------
Embrex Europe Limited United Kingdom
Embrex Sales, Inc. North Carolina
Embrex BioTech Trade (Shanghai) Co., Ltd. People's Republic of China
Inovoject(R) do Brasil Ltda. Brazil
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion in the Annual Report (Form 10-K) of Embrex, Inc. of
our report dated February 15, 2000 with respect to the consolidated financial
statements and schedule of Embrex, Inc. and subsidiaries and of our report dated
March 20, 2000 with respect to the financial statements of Embrex, Inc. Employee
Stock Purchase Plan.
We also consent to the incorporation by reference in the Registration Statements
on Form S-3 (Nos. 333-18231 and 333-31811) and the Registration Statements on
Form S-8 (Nos. 33-51582, 33-63318, 333-04109, and 333-56279) of our report dated
February 15, 2000 with respect to the consolidated financial statements and
schedule of Embrex, Inc. and subsidiaries included in the Annual Report (Form
10-K) for the year ended December 31, 1999.
We also consent to the incorporation by reference in the Registration Statement
on Form S-8 (No. 33-63318) of our report dated March 20, 2000 with respect to
the financial statements of Embrex, Inc. Employee Stock Purchase Plan included
in the Annual Report (Form 10-K) for the year ended December 31, 1999.
/s/ Ernst & Young LLP
---------------------
Raleigh, North Carolina
March 22, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 5,074
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EXHIBIT 99
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN
THIS REPORT, YOU SHOULD CONSIDER THE FOLLOWING FACTORS CAREFULLY IN EVALUATING
US AND OUR BUSINESS BEFORE MAKING AN INVESTMENT DECISION. ADDITIONAL RISKS AND
UNCERTAINTIES NOT PRESENTLY KNOWN TO US, THAT WE CURRENTLY DEEM IMMATERIAL OR
THAT ARE SIMILAR TO THOSE FACED BY OTHER COMPANIES IN OUR INDUSTRY OR BUSINESS
IN GENERAL, SUCH AS COMPETITIVE CONDITIONS, MAY ALSO IMPAIR OUR BUSINESS
OPERATIONS. IF ANY OF THE FOLLOWING RISKS OCCUR, OUR BUSINESS, FINANCIAL
CONDITION, OR RESULTS OF OPERATIONS COULD BE MATERIALLY ADVERSELY AFFECTED. IN
THAT EVENT, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, IN WHICH CASE
THE VALUE OF YOUR INVESTMENT MAY DECLINE AS WELL. YOU SHOULD ALSO REFER TO
"FORWARD-LOOKING STATEMENTS" IN THIS REPORT AND OUR OTHER REPORTS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION.
OUR FUTURE GROWTH DEPENDS ON EXPANSION OF INTERNATIONAL REVENUES
We estimate that our Inovoject(R) system inoculates more than 80% of all eggs
produced for the North American broiler poultry market. Given this market
penetration, we expect diminished growth in the number of system installations
and only modest system revenue growth in this market. For this reason, we must
expand our Inovoject(R) system installations and product sales in markets
outside the United States and Canada in order to realize significant overall
revenue growth. In 1999, sales outside of the United States accounted for 23% of
our consolidated revenues, up from 20% in 1998 and 15% in 1997. Lack of market
acceptance of our Inovoject(R) system and in ovo ("in the egg") products in
these markets would adversely affect our revenue growth. Revenue growth outside
the United States and Canada depends on a number of factors, including the
following:
o gaining market acceptance of the Inovoject(R) system and in ovo
administration of biological products in markets outside the United
States and Canada to treat prevailing poultry diseases in those
markets;
o obtaining regulatory approval of the Inovoject(R)system and products in
those markets and the timing of such approval; and
o the extent of start-up costs required to enter new markets.
International sales are also subject to a variety of risks, including risks
arising from the following:
o currency fluctuations, trading restrictions, tariffs, trade barriers
and taxes; and
o economic and political conditions beyond our control, including
country-specific conditions.
OUR FUTURE GROWTH ALSO DEPENDS ON THE DEVELOPMENT AND MARKET ACCEPTANCE OF NEW
PRODUCTS
In addition to international expansion, we need to develop and market
new products in order to continue to generate increased revenues and growth of
our business. We currently are developing, both independently and in
collaboration with others, various products which address poultry health and
performance needs. Some of these products are being designed to be delivered in
ovo through the Inovoject(R) system, and some may also be administered via
injection after hatching. These products are in various stages of development.
There is no guarantee that any new products will be successfully developed and
marketed. In addition, we have not initiated the regulatory approval process for
any of these potential products, and we cannot assure you that regulatory
approval will be obtained. Our inability to develop new products or any delay in
our development of them may adversely affect our revenue growth. Because of a
number of factors, a new product may not reach the market without lengthy
delays,
<PAGE>
if at all. Some of the factors which may affect our development and marketing of
new products include the following:
o our research and evaluations of compounds and new technologies may not
yield product opportunities;
o potential products may involve extensive clinical trials and the
results of such trials are uncertain;
o potential products may require collaborative partners and we may be
unable to identify partners or enter into arrangements on terms
acceptable to us;
o regulatory approval of these products may not be obtained or may be
obtained only with lengthy delays; and
o marketing products developed jointly with other parties may require
royalty payments or other payments by us to our co-developers, which
may adversely affect our profitability.
We have developed and commercialized a technology using our proprietary viral
neutralizing factor ("VNF(R)") which permits a single-dose immunization of an
egg embryo effective for the life of the bird. Our Bursaplex(R) product uses
this technology. The United States Department of Agriculture ("USDA") has
approved the Bursaplex(R) vaccine for in ovo and post-hatch use. Regulatory
approval for Bursaplex(R) has also been granted in nine countries besides the
United States and regulatory approval is temporary or pending in thirteen
countries. However, Bursaplex(R) has only recently been sold in commercial
quantities, and there is no assurance that the product will continue to be sold
in commercial quantities even if it is shown to be effective.
ECONOMIC FACTORS AFFECTING OUR CUSTOMERS MAY ADVERSELY AFFECT OUR FINANCIAL
RESULTS
Our revenues come from purchases by the poultry producing industry. If there is
a general economic decline in that industry, our operations and financial
condition could be materially and adversely affected. Also, domestic and global
economic factors beyond our control may adversely impact our customers and, as a
result, our revenues and earnings. Examples of these factors include the
following:
o fluctuations in the price of poultry feed;
o export demand for U.S. poultry products; and
o the extent to which our cost of products and operating expenses
increase faster than contractual price adjustments with our customers.
For example, if rising poultry feed prices increase the production costs of
commercial poultry producers, these producers may reduce production. This
decreased production could adversely impact our revenues, since a principal
component of our revenues is fees charged to customers for the number of eggs
injected by the Inovoject(R) system.
THE LOSS OF KEY CUSTOMERS COULD ADVERSELY AFFECT OUR FINANCIAL RESULTS
Historically, a significant portion of our revenues has come from a relatively
small number of customers. Tyson Foods, Inc. ("Tyson") accounted for
approximately 24% of our consolidated 1999 revenues. Our top three customers,
including Tyson, accounted for approximately 38% of our consolidated 1999
revenues, which is down from 42% in 1998. We expect a similar level of customer
concentration to continue in future years. The poultry market is highly
concentrated, with the largest poultry producers dominating the market. For
example, in 1999, Tyson supplied approximately 24% of all broilers grown in the
United States.
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The concentration of our revenues with these large customers makes us
particularly dependent on factors affecting those customers. If we lose a large
customer and fail to add new customers to replace lost revenues, our operating
results will be materially and adversely affected. Also, if these customers
reduce the number of eggs they produce at hatcheries, we will receive lower
Inovoject(R) system revenues since our fees our based on the number of eggs
injected.
IF WE LOSE THE PROTECTION OF OUR PATENTS AND PROPRIETARY RIGHTS, OUR FINANCIAL
RESULTS COULD SUFFER
Some of our products and processes used to produce our products involve
proprietary rights, including patents. Some of the technologies employed in
these processes are owned by us, and some are owned by others and licensed to
us. The Inovoject(R) system utilizes a process that was patented by the USDA. We
hold an exclusive license to this primary patent which expires in 2002. We have
supplemented the USDA patent with additional U.S. and foreign patents covering
specific design features of the Inovoject(R) system.
We believe that patent protection of materials or processes we develop and any
products that may result from the research and development efforts of us and our
licensors are important to the possible commercialization of our products. The
loss of the protection of these patents and proprietary rights could adversely
affect our business and our competitive position in the market.
The patent position of companies such as ours generally is highly uncertain and
involves complex legal and factual questions. Some of the reasons for this
uncertainty include the following:
o To date no consistent regulatory policy has emerged regarding the
breadth of claims allowed in biotechnology patents. So, there can be no
assurance that patent applications relating to our products or
technology will result in patents being issued or that, if issued, the
patents will afford protection against competitors with similar
technology;
o Some patent licenses held by us may be terminated upon the occurrence
of specified events or become non-exclusive after a specified period;
o Companies that obtain patents claiming products or processes that are
necessary for or useful to the development of our products could bring
legal actions against us claiming infringement, though we currently are
not the subject of any patent infringement claim;
o We may not have the financial resources necessary to enforce any patent
rights we may hold;
o We may be required to obtain licenses from others to develop,
manufacture or market our products. We may not be able to obtain these
licenses on commercially reasonable terms, and the patents underlying
the licenses may not be valid and enforceable; and
o We rely upon unpatented, proprietary technology, which we may not be
able to protect fully if others independently develop substantially
equivalent proprietary information or techniques, properly gain access
to our proprietary technology, or disclose this technology to others.
We attempt to protect our proprietary materials and processes by relying on
trade secret laws and non-disclosure and confidentiality agreements with our
employees and other persons with access to our proprietary materials or
processes or who have licensing or research arrangements with us. We plan to
continue to use these protections in the future. Despite these protections,
others may independently develop or obtain access to these materials or
processes that may adversely affect our competitive position.
3
<PAGE>
We have been involved in the patent litigation summarized below:
Embrex v. Service Engineering Corporation and Edward G. Bounds, Jr.
In September 1996, we filed a patent infringement suit against Service
Engineering Corporation and Edward G. Bounds, Jr. in the U.S. District Court for
the Eastern District of North Carolina. We made the following claims against the
defendants:
o Their development of an in ovo injection device, designed to compete
with our patented Inovoject(R)injection method, infringes at least one
claim of the U.S. Patent No. 4,458,630 exclusively licensed to us for
the in ovo injection of vaccines into an avian embryo (the "Sharma
Patent"); and
o They violated the terms of a Consent Judgment and Settlement Agreement
entered into with us in November 1995 in which prior litigation was
concluded with Service Engineering Corporation and Edward G. Bounds,
Jr. agreeing not to engage in future activities violating the Sharma
Patent.
o We sought injunctive relief to prevent infringement of the Sharma
Patent as well as monetary damages.
In November 1996, Service Engineering Corporation and Edward G. Bounds, Jr.
responded to our suit by asserting various affirmative defenses and denying the
substantive claims in our complaint.
This suit concluded on July 30, 1998 with a jury verdict in favor of us, which
verdict:
o fully upheld the validity of all claims of the Sharma Patent, finding
that the defendants had willingly infringed all asserted claims of the
patent;
o found that the defendants had breached the 1995 Consent Judgment and
Settlement Agreement and that the breach was not in good faith; and
o awarded us damages of $500,000 plus litigation expenses and court
costs.
The Court entered a Judgment in favor of us on September 28, 1998, which
included a monetary award of $2,612,885 and an injunction prohibiting the
defendants from practicing methods claimed in, or otherwise infringing, the
Sharma Patent. On October 28, 1998, Service Engineering Corporation and Edward
G. Bounds, Jr. filed a notice of appeal in the U.S. Court of Appeals for the
Federal Circuit seeking a reversal of the Judgment. We have opposed the appeal,
but there is no assurance that we will collect any or all of the monetary award.
Embrex v. IGI, Inc.
In November 1996, we filed a patent infringement suit against IGI, Inc. in the
U.S. District Court for the Eastern District of North Carolina, where we:
o Alleged that IGI, Inc., through its activities with Service Engineering
Corporation and Edward G. Bounds, Jr., was engaging in activities that
constituted infringement of the Sharma Patent; and
o Sought injunctive relief to prevent infringement of the Sharma Patent
and sought monetary damages.
In January 1997, IGI, Inc. responded to our patent infringement suit by
asserting various affirmative defenses and denying the substantive allegations
in our complaint. This suit concluded in January 1998 by agreement between us
and IGI, Inc. Pursuant to this agreement, we and IGI, Inc. dismissed all pending
4
<PAGE>
claims against each other, and IGI, Inc. agreed to abide by the terms of a
royalty-bearing sublicense to the Sharma Patent for avian vaccination.
Service Engineering Corporation and Edward G. Bounds, Jr. v. United States
Department of Agriculture
In March 1997, Service Engineering Corporation and Edward G. Bounds, Jr. filed
suit against the U.S. Department of Agriculture in the U.S. District Court for
the District of Maryland with respect to its grant to us of an exclusive license
for the Sharma Patent.
The complaint made the following claims:
o The USDA did not adequately comply with statutory and regulatory
requirements in making the grant to us of an exclusive license to the
Sharma Patent, the revision of the exclusive license in 1991 and again
in 1994, which extended the period of exclusivity, originally set to
terminate on December 31, 1996, through the patent expiration date;
o The USDA wrongly refused to grant Plaintiffs a license of the Sharma
Patent. The Plaintiffs claim this refusal occurred in December 1996
(after we filed the suit described above), and that the USDA refused to
do so because the USDA said that the license was not available and that
the Plaintiffs had no basis for relief; and
o The USDA wrongfully consented to our bringing suit against the
Plaintiffs.
Plaintiffs asked the Court for the following relief:
o To set aside the extension of the exclusive license, the USDA's grant
of permission for us to sue Service Engineering Corporation, Edward G.
Bounds, Jr. and IGI, Inc. for patent infringement, the USDA's refusal
to grant to Service Engineering Corporation a non-exclusive license to
the Sharma Patent and the USDA's refusal to act favorably upon Service
Engineering Corporation's appeal from the refusal to grant it a
non-exclusive license;
o To issue an order requiring the USDA, prior to granting any exclusive
license under the Sharma Patent, including by extending the term of a
pre-existing exclusive license, to observe the procedures set forth
under laws and regulations governing the grant of licenses to patents
owned by the USDA, and to remand the matter to the USDA to take action
in accordance with the order; and
o To recover attorneys' fees and costs from the USDA.
The USDA filed a motion for summary judgment. In March 1999, the U.S. District
Court for the District of Maryland granted the USDA's motion for summary
judgment, agreeing that "the plaintiff lacked standing to challenge the USDA's
actions in this matter and that the [USDA's] motion for summary judgment will be
granted."
Machining Technologies, Inc. v. Embrex
On April 15, 1999, Machining Technologies, Inc. of Hebron, Maryland served on us
a Complaint for Declaratory Judgment against us in the U.S. District Court for
the District of Maryland. Machining Technologies, Inc. seeks a declaration that
the Sharma Patent is not infringed, invalid and/or not enforceable. Machining
Technologies, Inc. was a manufacturer of egg injection machine parts to Edward
G. Bounds, Jr. and Service Engineering Corporation. We believed that this action
was without legal basis. On June 4, 1999, we filed a motion to dismiss this
action. On March 7, 2000, the U.S. District Court for the District of Maryland
granted our motion to dismiss this action and ordered this case closed.
5
<PAGE>
THE LOSS OF KEY COLLABORATORS, SUPPLIERS AND OTHER KEY PARTIES COULD ADVERSELY
AFFECT OUR FINANCIAL RESULTS
We currently conduct our operations with various third-party collaborators,
licensors or licensees. We plan to continue developing these relationships and
believe our present and future collaborators, licensors and licensees will
perform their obligations under their agreements with us, based on an economic
motivation to succeed. However, financial or other difficulties facing these
parties may affect the amount and timing of funds and other resources devoted by
the parties under these agreements. Thus, there is no assurance that we will
generate any revenues from these agreements.
We currently do not have large scale facilities for the production of our
Inovoject(R) system and biological products and do not plan to develop these
facilities in the foreseeable future. Therefore, we will rely principally upon
relationships with contract manufacturers. There can be no assurance that we can
maintain manufacture and supply agreements on terms and at costs acceptable to
us.
We have various relationships with manufacturers and suppliers, including those
described below. The loss of any of these relationships could adversely affect
our operating results, as described below:
Inovoject(R) System
o A manufacturer of Inovoject(R) systems, which is the sole contract
manufacturer of Inovoject(R) systems, with which we have a
relationship.
While other machine fabricators exist and have constructed limited
numbers of Inovoject(R) systems, a change in manufacturers could cause
a delay in manufacturing and a possible delay in the timing of future
Inovoject(R) installations and revenues from those installations.
VNF(R)Product -- Bursaplex(R)
o Merial Select, Inc., which has exclusive rights to manufacture
infectious bursal disease vaccines containing our proprietary
VNF(R)product marketed by us in North America, Latin America and Asia
under the trade name Bursaplex(R); and
o SPAFAS, Inc., the sole contract supplier of our VNF(R)product, which is
the only supplier that was included in the USDA's approval for in ovo
use of Bursaplex(R).
Infectious bursal disease vaccines, including the Bursaplex(R) product
and the Bursamune(R) product described below, and our VNF(R) product
generally must be manufactured in licensed facilities or under approved
regulatory methods. Although we believe that other manufacturers are
capable of manufacturing infectious bursal disease vaccines and
producing products such as VNF(R), a change of suppliers could
adversely affect our future operating results due to the time it would
take a new supplier to obtain regulatory approval of our production
process and/or manufacturing facilities.
VNF(R)Product -- Bursamune(R)
o Fort Dodge Animal Health ("Ft. Dodge"), a division of American Home
Products Corp., has rights to manufacture and market infectious bursal
disease vaccines containing our VNF(R)product to be marketed in Europe,
the Middle East and Africa under the trade name Bursamune(R).
To date, Bursamune(R) has received regulatory approval in South Africa
and Spain and, in October 1999, received temporary authorization from
French regulatory authorities for in ovo administration of
Bursamune(R). In June 1997, Ft. Dodge announced that our application
for U.K. in ovo regulatory approval of Bursamune(R) had been
provisionally refused, and that the U.K. regulatory authority requested
that further data be supplied. We have worked with Ft. Dodge,
6
<PAGE>
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 request for data with respect
to Bursamune(R). While we anticipate that the regulatory review process
will be completed during the first half of 2000, there can be no
assurances that this review will occur by this time.
WE MAY NEED ADDITIONAL FINANCING AND, IF THE FINANCING IS UNAVAILABLE, OUR
OPERATING RESULTS COULD SUFFER
From our inception in May 1985 through December 31, 1999, we had cumulative
operating losses (accumulated deficit) of $30.3 million. Until the first quarter
of 1996, we had incurred operating losses since our inception. Although we have
been profitable since 1996, we cannot assure you that we will continue to
operate profitably.
Our ability to generate revenues sufficient to meet our cash requirements for
operations depends upon several factors, including the following:
o continued market acceptance of the Inovoject(R)system;
o our leasing of Inovoject(R)systems on lease terms acceptable to us; and
o the successful development and commercialization of additional products
by us and other suppliers of in ovo products that will be delivered
through the Inovoject(R) system.
The extent of our future revenues derived from Inovoject(R) system fees is
subject to many variables, including the following:
o whether additional lease agreements for Inovoject(R)systems are reached
with customers;
o the timing of any lease agreements;
o whether existing or new installation schedules are met;
o the extent to which customers use the Inovoject(R)system; and
o the market acceptance and regulatory approval of in ovo products.
Although we anticipate that our existing funds, as well as revenues from
operations, will sustain our existing operations for the foreseeable future,
there are no assurances that these funds will be sufficient. If additional funds
become necessary to sustain existing operations or anticipated growth, we will
need to seek additional financing. There can be no assurance that any financing
will be obtainable or that, if available, the financing will be on terms
favorable or acceptable to us.
GOVERNMENT REGULATION AND THE NEED FOR REGULATORY APPROVAL MAY ADVERSELY AFFECT
OUR BUSINESS
Regulatory approval required in various areas of our business may adversely
affect our operations. While the use of the Inovoject(R) system is not subject
to regulatory approval in the United States, it may require regulatory approval
by foreign agencies. Also, research and development activities and the
investigation, manufacture and sale of poultry health and performance
enhancement products are subject to regulatory approval in the United States by
either the USDA or the United States Food & Drug Administration ("FDA") and
state agencies, as well as by foreign agencies.
Obtaining regulatory approval is a lengthy and costly process. Approval by the
USDA generally takes 1 to 3 years, while approval by the FDA generally takes 5
or more years. Various problems may arise during the regulatory approval process
and may have an adverse impact on our operations. Delays in obtaining
7
<PAGE>
approval may adversely affect the marketing of, and the ability to receive
revenues and royalties from, products developed by us. There is no assurance
that any future products developed by us will receive regulatory approval
without lengthy delays, if at all.
Pursuant to some of our licensing or joint development agreements, the licensees
or joint developers bear the costs associated with the regulatory approval
process for some products. We plan to continue to enter into these types of
agreements in the future. If we cannot generate sufficient funds from operations
or enter into licensing or joint development agreements to develop products, we
may not have the financial resources to complete the regulatory approval process
with respect to all or any of the products currently under development. Products
developed by us may not be marketed commercially in any jurisdiction in which
required approvals have not been obtained.
Other regulations apply or may apply to research and manufacturing activities,
including federal, state and local laws, regulations and recommendations
relating to the following:
o safe working conditions;
o laboratory and manufacturing practices; and
o use and disposal of hazardous substances used in conjunction with
research activities.
It is difficult to predict the extent to which these or other government
regulations may adversely impact the production and marketing of our products.
OUR INABILITY TO ATTRACT AND RETAIN KEY PERSONNEL COULD ADVERSELY AFFECT OUR
BUSINESS
We must continue to attract and retain experienced and highly educated
scientific and management personnel and advisors to be able to develop
marketable products and maintain a competitive research and technological
position. Competition for qualified employees among biotechnology companies is
intense, and the loss of key scientific or management personnel would adversely
affect us. There can be no assurance that we will be able to continue to attract
and retain qualified staff. Our inability to recruit and retain key personnel
could have an adverse affect on our business, results of operations or financial
condition. We have obtained insurance in the amount of $1,000,000 on the life of
Randall L. Marcuson, our President and Chief Executive Officer, of which we are
the sole beneficiary.
IF WE CANNOT CONTINUE TO PROVIDE TIMELY SUPPORT AND MAINTENANCE TO OUR
CUSTOMERS, OUR BUSINESS MAY SUFFER
We are required to supply, support, and maintain large numbers of Inovoject(R)
systems at our customers' hatcheries on a timely basis at a reasonable cost to
us. There can be no assurance that we will be able to continue to provide these
services on a cost-effective basis. If we are unable to do so, our customers may
reduce their use of our products, which could adversely affect operating
results.
WE FACE RISKS OF RAPIDLY CHANGING TECHNOLOGY AND COMPETITION
We are involved in areas of technology which are subject to rapid and
significant technological change. Competitors include independent companies that
specialize in biotechnology as well as major chemical and pharmaceutical
companies, universities, and public and private research organizations. Many of
our competitors are well established and have substantially greater marketing,
financial, technological and other resources than us. A competitive delivery
method, either within or outside the United States, may be developed and gain
commercial acceptance. Also, competitors may succeed in developing technologies
and products that are more effective than any which have been or are being
developed by us or which would render our technology and products obsolete or
non-competitive.
8
<PAGE>
THE ISSUANCE OF PREFERRED STOCK AND OUR SHAREHOLDER RIGHTS PLAN MAY DISCOURAGE A
TAKEOVER
The Board of Directors has the authority to issue up to 15,000,000 shares of
Preferred Stock in one or more series and to determine the designations,
preferences and relative rights and qualifications, limitations or restrictions
of the shares constituting any series of Preferred Stock, without any further
vote or action by the shareholders. The issuance of Preferred Stock by the Board
of Directors could affect the rights of the holders of Common Stock. For
example, an issuance could result in a class of securities outstanding that
would have preferences with respect to voting rights and dividends and in
liquidation over the Common Stock, and could (upon conversion or otherwise)
enjoy all of the rights applicable to Common Stock.
The authority of the Board of Directors to issue Preferred Stock potentially
could be used to discourage attempts by others to obtain control of us through
merger, tender offer, proxy contest or otherwise by making these attempts more
difficult to achieve or more costly. The Board of Directors may issue the
Preferred Stock without shareholder approval and with voting and conversion
rights which could adversely affect the voting power of the holders of Common
Stock. No agreements or understandings currently exist for the issuance of
Preferred Stock, and the Board of Directors has no present intention to issue
any Preferred Stock.
We adopted a shareholder rights plan which could have the effect of discouraging
a takeover of us. The rights plan, if triggered, would make it more difficult to
acquire us by, among other things, allowing existing shareholders to acquire
additional shares at a substantial discount, thus substantially inhibiting an
acquiror's ability to obtain control of us.
9
