<PAGE>
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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-11303
SYNBIOTICS CORPORATION
(Exact name of small business issuer as specified in its charter)
California 95-3737816
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11011 Via Frontera
San Diego, California 92127
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (619) 451-3771
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [_]
As of August 4, 1998, 9,003,041 shares of Common Stock were outstanding.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
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<PAGE>
SYNBIOTICS CORPORATION
INDEX
Page
----
Part I. Condensed Consolidated Statement of Operations and
Comprehensive Income - Three and six months ended
June 30, 1998 and 1997 3
Condensed Consolidated Balance Sheet - June 30, 1998
and December 31, 1997 4
Condensed Consolidated Statement of Cash Flows -
Six months ended June 30, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6
Management's Discussion and Analysis or Plan of Operation 9
Part II. Other Information 16
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<PAGE>
PART I. FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements
--------------------
Synbiotics Corporation
Condensed Consolidated Statement of Operations and Comprehensive Income
- -----------------------------------------------------------------------
(unaudited)
- -----------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
1998 1997 1998 1997
------------------------ ------------------------
<S> <C> <C> <C> <C>
Net sales $ 8,936,000 $ 4,840,000 $17,737,000 $11,781,000
Cost of sales 3,859,000 2,877,000 7,905,000 6,259,000
----------- ----------- ----------- -----------
Gross profit 5,077,000 1,963,000 9,832,000 5,522,000
----------- ----------- ----------- -----------
Operating expenses:
Research and development 592,000 306,000 1,113,000 613,000
Selling and marketing 1,572,000 1,025,000 3,163,000 2,324,000
General and administrative 880,000 700,000 2,119,000 1,364,000
Patent litigation settlement 4,601,000 4,601,000
----------- ----------- ----------- -----------
7,645,000 2,031,000 10,996,000 4,301,000
----------- ----------- ----------- -----------
(Loss) income from operations (2,568,000) (68,000) (1,164,000) 1,221,000
Other income (expense):
License fees and other 65,000 76,000 139,000 154,000
Interest, net (258,000) 47,000 (515,000) 106,000
----------- ----------- ----------- -----------
(Loss) income before income taxes (2,761,000) 55,000 (1,540,000) 1,481,000
(Benefit from) provision for income taxes (1,148,000) 41,000 (618,000) 637,000
----------- ----------- ----------- -----------
Net (loss) income (1,613,000) 14,000 (922,000) 844,000
Cumulative translation adjustment 188,000 (60,000)
----------- ----------- ----------- -----------
Comprehensive (loss) income $(1,425,000) $ 14,000 $ (982,000) $ 844,000
=========== =========== =========== ===========
Basic net (loss) income per share $ (.19) $ .00 $ (.12) $ .11
=========== =========== =========== ===========
Diluted net (loss) income per share $ (.19) $ .00 $ (.12) $ .11
=========== =========== =========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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<PAGE>
Item 1. Financial Statements (continued)
--------------------
Synbiotics Corporation
Condensed Consolidated Balance Sheet
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ -------------
(unaudited) (audited)
<S> <C> <C>
Assets
Current assets:
Cash and equivalents $ 3,168,000 $ 2,190,000
Securities available for sale 3,527,000 3,394,000
Accounts receivable 6,126,000 4,396,000
Inventories 5,534,000 5,187,000
Deferred tax assets 407,000 303,000
Other current assets 568,000 359,000
------------ -------------
Total current assets 19,330,000 15,829,000
Property and equipment, net 1,611,000 1,102,000
Goodwill 13,937,000 11,542,000
Deferred tax assets 6,976,000 6,417,000
Deferred debt issuance costs 757,000 905,000
Other assets 5,507,000 5,832,000
------------ ------------
$ 48,118,000 $ 41,627,000
============ ============
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 5,140,000 $ 3,546,000
Current portion of long-term debt 2,000,000 1,000,000
Income taxes payable 25,000
Other current liabilities 2,600,000
------------ ------------
Total current liabilities 9,740,000 4,571,000
------------ ------------
Long-term debt 7,116,000 7,543,000
Other liabilities 1,322,000
------------ ------------
8,438,000 7,543,000
------------ ------------
Mandatorily redeemable common stock 2,810,000 2,756,000
------------ ------------
Non-mandatorily redeemable common stock and
other shareholders' equity:
Common stock, no par value, 24,800,000 shares
authorized, 8,670,000 and 7,426,000 shares
issued and outstanding at June 30, 1998 and
December 31, 1997 37,085,000 35,659,000
Common stock warrants 1,003,000 1,003,000
Accumulated other comprehensive income (211,000) (151,000)
Accumulated deficit (10,747,000) (9,754,000)
------------ ------------
Total non-mandatorily redeemable common
stock and other shareholders' equity 27,130,000 26,757,000
------------ ------------
$ 48,118,000 $ 41,627,000
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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<PAGE>
Item 1. Financial Statements (continued)
--------------------
Synbiotics Corporation
Condensed Consolidated Statement of Cash Flows (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------
1998 1997
------------------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (922,000) $ 844,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 929,000 527,000
Changes in assets and liabilities:
Accounts receivable (1,680,000) (1,760,000)
Inventories (15,000) 1,001,000
Deferred taxes (664,000) 595,000
Other assets (177,000) 64,000
Accounts payable and accrued expenses 833,000 (480,000)
Income taxes payable (91,000)
Other liabilities 3,922,000 (650,000)
----------- -----------
Net cash provided by operating activities 2,135,000 141,000
----------- -----------
Cash flows from investing activities:
Acquisition of property and equipment (252,000) (96,000)
Investment in securities available for sale (133,000)
Proceeds from sale of securities available for sale 691,000
Acquisition of Prisma Acquisition Corp. (1,133,000)
----------- -----------
Net cash (used for) provided by investing activities (1,518,000) 595,000
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 1,133,000
Payments of long-term debt (633,000)
Mandatorily redeemable common stock issuance costs (16,000)
Proceeds from issuance of common stock, net (63,000) (134,000)
----------- -----------
Net cash provided by (used for) financing activities 421,000 (134,000)
----------- -----------
Net increase in cash and equivalents 1,038,000 602,000
Effect of exchange rates on cash (60,000)
Cash and equivalents - beginning 2,190,000 3,050,000
----------- -----------
Cash and equivalents - ending $ 3,168,000 $ 3,652,000
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-5-
<PAGE>
Item 1. Financial Statements (continued)
--------------------
Synbiotics Corporation
Notes to Condensed Consolidated Financial Statements (unaudited)
- --------------------------------------------------------------------------------
Note 1 - Interim Financial Statements:
The accompanying consolidated balance sheet as of June 30, 1998 and the
consolidated statements of operations and comprehensive income and of cash flows
for the three and six month periods ended June 30, 1998 and 1997 have been
prepared by Synbiotics Corporation (the "Company") and have not been audited.
The consolidated financial statements of the Company include the accounts of its
wholly-owned subsidiary Synbiotics Europe SAS ("SBIO-E"). All significant
intercompany transactions and accounts have been eliminated in consolidation.
These financial statements, in the opinion of management, include all
adjustments (consisting only of normal recurring accruals) necessary for a fair
presentation of the financial position, results of operations and cash flows for
all periods presented. The financial statements should be read in conjunction
with the financial statements and notes thereto included in the Company's Annual
Report on Form 10-KSB filed for the year ended December 31, 1997. Interim
operating results are not necessarily indicative of operating results for the
full year.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Note 2 - Acquisition:
On March 6, 1998 the Company acquired by merger Prisma Acquisition Corp.
("Prisma"), a privately-held company located in Rome, NY, which develops,
manufactures and markets instruments and reagents used by veterinarians to
measure blood chemistry information at the point-of-care. The consideration
paid to the stockholders of Prisma was a $1,000,000 convertible note, 458,000
newly issued, unregistered shares of the Company's common stock valued at
$1,490,000 (based on the average closing price of Synbiotics' common stock for
the thirty trading days prior to March 6, 1998, which was $3.25) and the
issuance of options to purchase 157,000 shares of the Company's common stock for
$.0016 per share in replacement of Prisma's outstanding stock options. The
157,000 stock options were valued at $609,000 using the Black-Scholes option
pricing model.
The convertible note (which was issued to only one of the Prisma stockholders)
is due March 5, 1999, bears interest at the rate of 5% per year and is
unsecured. The note is convertible at any time, at the option of the Company,
into a number of unregistered shares of the Company's common stock equal to the
outstanding principal and accrued interest divided by the average closing price
of the Company's common stock for the thirty trading days immediately prior to
the conversion. The note is subordinate to the Company's notes payable to
Banque Paribas, which were issued in conjunction with the July 1997 acquisition
of the veterinary diagnostics business of Rhone-Merieux, S.A.S.
The transaction was accounted for as a purchase. Goodwill arising from the
transaction totalled $2,848,000 which is being amortized over an estimated
useful life of 15 years utilizing the straight-line method. $2,499,000,
representing the common stock and common stock option portion of the of the
purchase price and liabilities assumed, is considered a non-cash financing
activity for purposes of the statement of cash flows.
-6-
<PAGE>
Item 1. Financial Statements (continued)
--------------------
Synbiotics Corporation
Notes to Condensed Consolidated Financial Statements (unaudited)
- --------------------------------------------------------------------------------
Note 3 - Securities Available for Sale:
Included in current assets are securities available for sale which consist
primarily of short-term commercial paper.
Note 4 - Inventories:
Inventories consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---- ----
<S> <C> <C>
Raw materials $ 2,907,000 $ 2,639,000
Work in process 871,000 1,235,000
Finished goods 1,756,000 1,313,000
----------- -----------
$ 5,534,000 $ 5,187,000
=========== ===========
</TABLE>
Note 5 - Earnings per Share:
The following is a reconciliation of net income and share amounts used in the
computations of earnings per share:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------------------------ ---------------------------
1998 1997 1998 1997
---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net (loss) income used:
Net (loss) income $ (1,613,000) $ 14,000 $ (922,000) $ 844,000
Less accretion of mandatorily
redeemable common stock (37,000) (72,000)
------------ ------------ ------------ ------------
Net income used in computing
basic and diluted net (loss)
income per share (1,650,000) 14,000 (994,000) 844,000
============ ============ ============ ============
</TABLE>
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<PAGE>
Item 1. Financial Statements (continued)
--------------------
Synbiotics Corporation
Notes to Condensed Consolidated Financial Statements (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------------------------ ---------------------------
1998 1997 1998 1997
---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Shares used:
Weighted average common shares
outstanding used in computing
basic net income per share $ 8,669,000 $ 7,394,000 $ 8,508,000 $ 7,393,000
Weighted average options and warrants
to purchase common stock as
determined by application of the 133,000 133,000
treasury method ------------ ------------ ------------ ------------
Shares used in computing diluted net
income per share 8,669,000 7,527,000 8,508,000 7,526,000
============ ============ ============ ============
</TABLE>
Weighted average options and warrants to purchase common stock as determined by
the application of the treasury method and weighted average shares of common
stock issuable upon assumed conversion of debt totalling 680,000 shares and
674,000 shares have been excluded from the shares used in computing diluted net
loss for the three and six months ended June 30, 1998, respectively, as their
effect is anti-dilutive. In addition, warrants to purchase 284,000 shares of
common stock at $4.54 per share have been excluded from the shares used in
computing diluted net loss per share for the three and six months ended June 30,
1998 and 1997 as their exercise price is higher than the weighted average market
price for those periods, as well as their effect is anti-dilutive.
In July 1998, the Company issued 333,000 newly issued and unregistered shares of
the Company's common stock in conjunction with the settlement of patent
litigation (Note 6).
Note 6 - Subsequent Event:
In September 1997, Barnes-Jewish Hospital of St. Louis (the "Hospital") filed a
lawsuit against the Company claiming that the Company infringes a patent owned
by the Hospital which covers the Company's canine heartworm diagnostic products.
On July 28, 1998, the Company entered into a settlement agreement with the
Hospital whereby the Company will pay the Hospital or its affiliates $1,600,000
in cash, 333,000 shares of the Company's common stock, and undisclosed future
payments and royalties. The Company recorded a one-time pre-tax charge of
approximately $3,922,000 in the quarter ended June 30, 1998, and reclassified
$463,000 and $679,000 of legal expenses related to the patent litigation during
the three and six months ended June 30, 1998, respectively, from general and
administrative expenses.
-8-
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation
---------------------------------------------------------
The information contained in this Management's Discussion and Analysis or Plan
of Operation and elsewhere in this Quarterly Report on Form 10-QSB contains both
historical financial information and forward-looking statements. Synbiotics
does not provide forecasts of future financial performance. While management is
optimistic about the Company's long-term prospects, the historical financial
information may not be indicative of future financial performance. In fact,
future financial performance may be materially different than the historical
financial information presented herein. Moreover, the forward-looking
statements about future business or future results of operations are subject to
significant uncertainties and risks, which could cause actual future results to
differ materially from what is suggested by the forward-looking information.
The following risk factors should be considered in evaluating the Company's
forward-looking statements:
Patent Litigation Involving the Company's Canine Heartworm Diagnostic Products
- ------------------------------------------------------------------------------
In October 1997, Barnes-Jewish Hospital of St. Louis (the "Hospital") filed a
lawsuit against the Company claiming that the Company infringes a patent owned
by the Hospital which covers the Company's canine heartworm diagnostic products.
On July 28, 1998, the Company entered into a settlement agreement with the
Hospital whereby the Company will pay the Hospital or its affiliates $1,600,000
in cash, 333,000 shares of the Company's common stock, and undisclosed future
payments and royalties. The Company recorded a one-time pre-tax charge of
approximately $3,922,000 in the quarter ended June 30, 1998. The charge will be
materially adverse to the Company's results of operations for the year ending
December 31, 1998.
No Assurance that Acquired Businesses Can Be Successfully Combined
- ------------------------------------------------------------------
There can be no assurance that the anticipated benefits of the 1998 acquisition
of Prisma, the 1997 acquisition of the veterinary diagnostics business of SBIO-
E, the 1996 acquisition of the business of ICG, or any other future
acquisitions (collectively, the "Acquired Business"') will be realized.
Acquisitions of businesses involve numerous risks, including difficulties in the
assimilation of the operations, technologies and products of the Acquired
Business, introduction of different distribution channels, potentially dilutive
issuances of equity and/or increases in leverage and risk resulting from
issuances of debt securities, the need to establish internally operating
functions which had been previously provided pre-acquisition by a corporate
parent, accounting charges, operating companies in different geographic
locations with different cultures, the potential loss of key employees of the
Acquired Business, the diversion of management's attention from other business
concerns and the risks of entering markets in which Synbiotics has no or limited
direct prior experience. In addition, there can be no assurance that the
acquisitions will not have a material adverse effect upon Synbiotics' business,
results of operations or financial condition, particularly in the quarters
immediately following the consummation of the acquisition due to operational
disruptions, unexpected expenses and accounting charges which may be associated
with the integration of the Acquired Business and Synbiotics, as well as
operating and development expenses inherent in the Acquired Business itself as
opposed to integration of the Acquired Business.
Competition
- -----------
Competition in the animal health care industry is intense. Many competitors,
such as Pfizer Animal Health, Merial Animal Health (the successor to Rhone
Merieux), Schering-Plough and IDEXX Laboratories, have substantially greater
financial, manufacturing, marketing and product research resources than the
Company. Large companies in particular have extensive expertise in conducting
pre-clinical and clinical testing of new products and in obtaining the necessary
regulatory approvals to market products. Competition is based on test
sensitivity, accuracy and speed; product price; and similar factors. IDEXX
Laboratories requires its distributors not to carry the products of competitors
such as Synbiotics. There can be no assurance that such competition will not
adversely affect Synbiotics' results of operations or ability to maintain or
increase sales and market share.
-9-
<PAGE>
History of Operating Losses; Accumulated Deficit
- ------------------------------------------------
Although the Company's operations were profitable for the years ended December
31, 1997 and 1996, the Company has had a history of losses. Synbiotics has
incurred a consolidated accumulated deficit of $10,747,000 at June 30, 1998,
even after the release in 1996 of a $7,158,000 valuation allowance related to
deferred tax assets. There can be no assurance that Synbiotics can generate
sufficient revenue to sustain profitability.
Reliance on Third Party Manufacturers
- -------------------------------------
Certain of Synbiotics' products (including its ICT Gold(TM), VetRED(R) and
WITNESS(R) diagnostic kits and all of its vaccines) are, and certain anticipated
new products are expected to be, manufactured by third parties under the terms
of distribution and/or manufacturing agreements. The ICT Gold(TM), VetRED(R) and
WITNESS(R) products and feline leukemia virus vaccine are licensed to Synbiotics
by their respective outside manufacturers. In the event that these third parties
are unable (due to operational, licensing, financial or other reasons) to supply
Synbiotics with sufficient finished products, Synbiotics would suffer
significant disruption of its business. Synbiotics has the right, under certain
circumstances, pursuant to the agreements to use alternate manufacturing
sources. In some circumstances, however, the Company would lack such a right.
If Synbiotics should encounter delays or difficulties in its relationships with
manufacturers, the resulting problems could have a material adverse effect on
Synbiotics. In fact, a majority of the Company's vaccine products (exclusive of
its feline leukemia vaccine products) are manufactured using bulk antigen fluids
that have been supplied by a third party. The supply agreement has expired and
the Company is currently seeking a replacement supplier for these fluids. The
Company believes it has adequate levels of these bulk fluids to meet its
manufacturing requirements through the third quarter of 1998. In the event that
the Company is unable to locate a replacement supplier, sales of the Company's
private label vaccine products, beginning in the fourth quarter of 1998, will be
materially adversely affected.
Sales and Marketing
- -------------------
The Company's product distribution strategy results in a large percentage of
sales being to only a few customers. During the year ended December 31, 1997,
sales to two distributors totalled 40% of the Company's net sales. In addition,
SBIO-E's small animal products are presently sold through distributors, while
its large animal products are sold directly to laboratories. There can be no
assurance that Synbiotics will be able to establish an adequate sales and
marketing capability in any or all targeted markets or that it will be
successful in gaining market acceptance of its products. To the extent
Synbiotics enters into distributor arrangements, any revenues received by
Synbiotics will be dependent on the efforts of third parties and there can be no
assurance that such efforts will be successful. IDEXX Laboratories' requirement
that its distributors not carry the products of competitors such as Synbiotics
has induced certain distributors to stop doing business with Synbiotics in order
to carry IDEXX products instead. In addition, Synbiotics' sales of products, on
a private-label basis, toward the over-the-counter market may cause an adverse
reaction among Synbiotics' regular distributor and veterinarian customers.
Attraction of Key Employees
- ---------------------------
The success of Synbiotics is highly dependent, in part, on its ability to retain
highly qualified personnel, including senior management and scientific
personnel. Competition for such personnel is intense and the inability to
retain additional key employees or the loss of one or more current key employees
could adversely affect Synbiotics. Although Synbiotics has been successful in
retaining required personnel to date, there can be no assurance that Synbiotics
will be successful in the future.
-10-
<PAGE>
Reliance on New and Recent Products
- -----------------------------------
Synbiotics relies to a significant extent on new and recently developed
products, and expects that it will need to continue to introduce new products to
be successful in the future. There can be no assurance that Synbiotics will
obtain and maintain market acceptance of its products. With respect to future
products, there can be no assurance that such products will meet applicable
regulatory standards, be capable of being produced in commercial quantities at
acceptable cost or be successfully commercialized.
There can be no assurance that new products can be manufactured at a cost or in
quantities necessary to make them commercially viable. If Synbiotics were
unable to produce internally, or to contract for, a sufficient supply of its new
products on acceptable terms, or if it should encounter delays or difficulties
in its relationships with manufacturers, the introduction of new products would
be delayed, which could have a material adverse effect on Synbiotics.
Future Capital Needs; Uncertainty of Additional Funding
- -------------------------------------------------------
The development and commercialization of Synbiotics' products requires
substantial funds. Synbiotics' future capital requirements will depend on many
factors, including cash flow from operations, the need to finance further
acquisitions, if any, continued scientific progress in its products and
development programs, the cost of manufacturing scale-up, the costs involved in
preparing, filing, prosecuting, maintaining and enforcing patent claims, the
cost involved in patent infringement litigation, competing technological and
market developments, and the cost of establishing effective sales and marketing
arrangements. Synbiotics anticipates that its existing, available cash, cash
equivalents and short-term investments will be adequate to satisfy its current
capital requirements and fund its current operations, although any large
acquisition would require additional capital resources. There can be no
assurance that additional financing, if required, will be available on
acceptable terms or at all. If additional funds are raised by issuing equity
securities, further dilution to then existing shareholders may result. Debt
financing would result in increased leverage and risk.
In July 1997, the Company obtained $15,000,000 of debt financing from Banque
Paribas, of which $11,493,000 was used in connection with the acquisition of
SBIO-E. The $15,000,000 included a $5,000,000 revolving line of credit.
However, draws on the line of credit are subject to certain requirements and can
be used only for certain purposes. Additionally, Banque Paribas requires the
Company to maintain certain financial ratios and levels of tangible net worth
and also restricts the Company's ability to pay dividends and make loans,
capital expenditures or investments without the Bank's consent.
If adequate funds are not available, Synbiotics may be required, among other
things, to delay, scale back or eliminate one or more of its research and
development programs or seek to obtain funds through arrangements with
collaborative partners or others even if the arrangements would require
Synbiotics to relinquish certain rights to certain of its technologies, product
candidates or products that Synbiotics would not otherwise relinquish.
Seasonality
- -----------
Synbiotics has experienced some seasonality in its business, with sales highest
in December to April, the time period in which distributors purchase canine
heartworm diagnostic products to sell to veterinarians for the heartworm season.
This seasonality may be somewhat reduced by the acquisition of SBIO-E, which is
relatively less seasonal. There can be no assurance that such seasonality will
not have a material adverse impact on Synbiotics' operations.
Patents and Proprietary Technology
- ----------------------------------
Synbiotics generally has sought and will continue to seek to protect its
interests by treating its particular variations in the production of monoclonal
antibodies as trade secrets. Synbiotics also has pursued and intends to
continue
-11-
<PAGE>
aggressively to pursue protection for new products, new methodological concepts,
and compositions of matter through the use of patents where obtainable. At
present, Synbiotics has been granted eleven U.S. patents and has three U.S.
patents pending..
There can be no assurance that Synbiotics will be issued any additional patents
or that, if any patents are issued, they will provide Synbiotics with
significant protection or will not be challenged. Even if such patents are
enforceable, Synbiotics anticipates that any attempt to enforce its patents
would be time consuming and costly. Moreover, the laws of some foreign
countries do not protect Synbiotics' proprietary rights in its products to the
same extent as do the laws of the United States.
The patent positions of biotechnology companies, including Synbiotics, are
uncertain and involve complex legal and factual issues. Additionally, the
coverage claimed in a patent application can be significantly reduced before the
patent is issued. As a consequence, there can be no assurance that any of
Synbiotics' future patent applications will result in the issuance of patents
or, if any patents issue, that they will provide significant proprietary
protection or will not be circumvented or invalidated. Because patent
applications in the United States are maintained in secrecy until patents issue
and publication of discoveries in the scientific or patent literature often lag
behind actual discoveries, Synbiotics cannot be certain that it was the first
inventor of inventions covered by its pending patent applications or that it was
the first to file patent applications for such inventions. Moreover, Synbiotics
may have to participate in interference proceedings declared by the U.S. Patent
and Trademark Office to determine priority of invention that could result in
substantial cost to Synbiotics, even if the eventual outcome is favorable to
Synbiotics. There can be no assurance that Synbiotics' patents would be held
valid by a court of competent jurisdiction. An adverse outcome of any patent
litigation could subject Synbiotics to significant liabilities to third parties,
require disputed rights to be licensed from or to third parties or require
Synbiotics to cease using the technology in dispute. In 1997, a patentholder
filed a lawsuit asserting that the Company's key canine heartworm diagnostic
tests infringe its patent. The lawsuit was settled in July 1998 (see above).
There can be no assurance that other third parties will not assert other
infringement claims against Synbiotics in the future or that any such assertions
will not result in costly litigation or require Synbiotics to obtain a license
to intellectual property rights of such parties. There can be no assurance that
any such licenses would be available on terms acceptable to Synbiotics, if at
all. Furthermore, parties making such claims may be able to obtain injunctive
or other equitable relief that could effectively block Synbiotics' ability to
further develop, or commercialize, its products in the United States and abroad.
Such claims could result in the award of substantial damages. Defense of any
lawsuit or failure to obtain any such license could have a material adverse
effect on Synbiotics. Finally, litigation, regardless of outcome, could result
in substantial cost to, and a diversion of efforts by, Synbiotics.
Government Regulation
- ---------------------
Synbiotics' business is subject to substantial regulation by the United States
government (see Item 1 - Business--Government Regulation of the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1997, which is hereby
incorporated by reference). In addition, Synbiotics' operations may be subject
to future legislation and/or rules issued by domestic or foreign governmental
agencies with regulatory authority relating to Synbiotics' business. There can
be no assurance that Synbiotics will be found in compliance with any of the
various regulations to which it is subject.
For marketing outside the United States, Synbiotics will be subject to foreign
regulatory requirements in such foreign jurisdictions, which vary widely from
country to country. There can be no assurance that Synbiotics will meet and
sustain compliance with any such requirements.
-12-
<PAGE>
Product Liability and Insurance
- -------------------------------
The design, development and manufacture of Synbiotics' products involve an
inherent risk of product liability claims and associated adverse publicity.
Synbiotics has obtained liability insurance for potential product liability
associated with the commercial sale of its products. There can be no assurance,
however, that Synbiotics will be able to obtain or maintain such insurance.
Although Synbiotics currently maintains general liability insurance, there can
be no assurance that the coverage limits of Synbiotics' insurance policies will
be adequate. Product liability insurance is expensive, difficult to obtain and
may not be available in the future on acceptable terms or at all. A successful
claim brought against Synbiotics in excess of Synbiotics' insurance coverage
could have a material adverse effect upon Synbiotics.
Hazardous Materials
- -------------------
Synbiotics' research and development involves the controlled use of hazardous
materials, chemicals and various radioactive compounds. Although Synbiotics
believes that its safety procedures for handling and disposing of such materials
comply with the standards prescribed by local state and federal regulations, the
risk of accidental contamination or injury from these materials cannot be
completely eliminated. In the event of such an accident, Synbiotics could be
held liable for any damages that result and any such liability could exceed the
resources of Synbiotics. Synbiotics may incur substantial costs to comply with
environmental regulations.
Results of Operations
Net sales for the second quarter of 1998 increased by $4,096,000 or 85% over the
second quarter of 1997. The increase in net sales is due to $1,650,000 in sales
of diagnostic products acquired in conjunction with the July 1997 acquisition of
SBIO-E, an increase in the sales of non-SBIO-E diagnostic products of $2,097,000
and an increase in vaccine product sales of $349,000. The increase in the sales
of non-SBIO-E diagnostic products is due to an increase in canine heartworm
diagnostics sales of 133% and an increase in feline diagnostics sales of 25%.
The increased canine heartworm diagnostics sales were due to sales of
VetRED(R), acquired in conjunction with the acquisition of SBIO-E and the fact
that the Company's average selling prices of its canine heartworm diagnostic
products were reduced by 10% during the second quarter of 1997 as a result of
severe price competition from IDEXX Laboratories, the Company's main diagnostic
competitor. In addition there was a non-recurrence of distributor promotional
programs which were in place during the first quarter of 1997, as well as a
general price increase in January 1998. Rather than continuing to use
promotional programs to provide incentive for distributors to buy in
anticipation of the heartworm season, in 1998 the Company implemented an
incentive program based on the growth of annual distributor sales. One object
of this incentive program, in addition to growing the Company's sales to its
distributors, is to reduce the seasonality of the sales of its heartworm
products. The increase in feline diagnostic sales was due to the introduction
of the Company's feline heartworm diagnostic test and WITNESS(R) feline
leukemia diagnostic test. The increased vaccine sales comprises an increase of
41% in sales of vaccines to private label partners and an increase of 35% in
sales of bulk feline leukemia vaccine (related to the timing of shipments as
requested by OEM customers), offset by an 89% decrease in sales of other vaccine
products resulting from the phase-out of sales of most Synbiotics-label
vaccines. Sales of vaccines have been negatively impacted by severe competition
from Pfizer, Fort Dodge and Solvay who manufacture their own vaccine products,
whereas the Company's vaccines are all manufactured by third parties. During
the fourth quarter of 1997, the Company stopped selling its vaccines (except for
its feline leukemia vaccines) to distributors and focused its efforts on selling
vaccines to private label partners for resale to the over-the-counter market and
through catalogs.
Net sales for the six months ended June 30, 1998 increased by $5,956,000 or 51%
over the six months ended June 30, 1997. The increase in net sales is due to
$3,970,000 in sales of diagnostic products acquired in conjunction with the July
1997 acquisition of SBIO-E, an increase in the sales of non-SBIO-E diagnostic
products of $1,540,000 and an increase in vaccine product sales of $218,000.
The increase in the sales of non-SBIO-E diagnostic products is
-13-
<PAGE>
due to an increase in canine heartworm diagnostics sales of 28% and an increase
in feline diagnostics sales of 32%, for substantially the same reasons as the
increases for the second quarter of 1998. The increased vaccine sales comprises
an increase of 43% in sales of vaccines to private label partners and an
increase of 14% in sales of bulk feline leukemia vaccine (related to the timing
of shipments as requested by OEM customers), offset by an 89% decrease in sales
of other vaccine products resulting from the phase-out of sales of most
Synbiotics-label vaccines.
A majority of the Company's vaccine products (exclusive of its feline leukemia
vaccine products) are manufactured using bulk antigen fluids that have been
supplied by a third party. The supply agreement has expired and the Company is
currently seeking a replacement supplier for these fluids. The Company believes
it has adequate levels of these bulk fluids to meet its manufacturing
requirements through the third quarter of 1998. In the event that the Company
is unable to locate a replacement supplier, sales of the Company's private label
vaccine products, beginning in the fourth quarter of 1998, will be materially
adversely affected.
The cost of sales as a percentage of net sales was 43% during the second quarter
of 1998 compared to 59% during the second quarter of 1997 (i.e., gross margin
increased to 57% from 41%). The higher gross margin is a direct result of two
factors: i) the fact that a high percentage of SBIO-E's sales relate to products
manufactured by SBIO-E rather than by third party manufacturers and ii) the
Company's domestic sales (i.e., exclusive of the SBIO-E sales) during the second
quarter of 1998 had a 57% gross margin as compared to 41% during the second
quarter of 1997. As discussed above, the increased margin on 1998 domestic
sales is due primarily to increases in the Company's average selling prices as a
result of the non-recurrence of the severe price competition encountered during
the second quarter of 1997, the non-recurrence of distributor promotional
programs and the general price increase in January 1998. The cost of sales as a
percentage of net sales was 45% during the six months ended June 30, 1998
compared to 53% during the six months ended June 30, 1997 (i.e., gross margin
increased to 55% from 47%). The higher gross margin is a direct result of two
factors: i) the fact that a high percentage of SBIO-E's sales relate to products
manufactured by SBIO-E rather than by third party manufacturers and ii) the
Company's domestic sales (i.e., exclusive of the SBIO-E sales) during the six
months end June 30, 1998 had a 56% gross margin as compared to 47% during the
six months ended June 30, 1997. The reasons for the improved margins during the
six months ended June 30, 1998 are substantially the same reasons as for the
increases for the second quarter of 1998. The Company's manufacturing costs are
predominantly fixed costs. Among the Company's major products, DiroCHEK(R)
canine heartworm diagnostic products are manufactured at Company facilities,
whereas ICT GOLD(TM) HW, VetRED(R), WITNESS(R) and all vaccines are manufactured
by third parties. In addition to affecting gross margins, outsourcing of
manufacturing renders the Company relatively more dependent on the third-party
manufacturers.
Research and development expenses during the second quarter of 1998 increased by
$286,000 or 93% over the second quarter of 1997, and increased during the six
months ended June 30, 1998 by $500,000 or 82% over the six months ended June 30,
1997. The increases are primarily due to the acquisitions of SBIO-E and Prisma,
which have its own research and development groups, as well as increased
contracted research and development expenses. Research and development expenses
as a percentage of net sales were 7% and 6% during the second quarter of 1998
and 1997, respectively, and were 6% and 5% during the six months ended June 30,
1998 and 1997, respectively,. The Company expects its research and development
expenses to increase during the remainder of 1998 due to further development of
Prisma's product line.
Selling and marketing expenses during the second quarter of 1998 increased by
$547,000 or 53% over the second quarter of 1997, and increased during the six
months ended June 30, 1998 by $839,000 or 36% over the six months ended June 30,
1997. The increases are due primarily to the acquisition of SBIO-E, which has
its own sales and marketing group. Selling and marketing expenses as a
percentage of net sales were 18% and 21% during the second quarter of 1998 and
1997, respectively, and were 18% and 20% during the six months ended June 30,
1998 and 1997, respectively.
General and administrative expenses during the second quarter of 1998 increased
by $180,000 or 26% over the second quarter of 1997, and increased during the six
months ended June 30, 1998 by $755,000 or 55% over the six
-14-
<PAGE>
months ended June 30, 1997. The increases are due primarily to amortization of
goodwill and additional payroll costs related to the acquisitions of SBIO-E and
Prisma. General and administrative expenses as a percentage of net sales were
10% and 14% during the second quarter of 1998 and 1997, respectively, and were
12% during the six months ended June 30, 1998 and 1997. The Company expects the
Prisma acquisition to increase its general and administrative expenses, without
commensurate sales increases, for the remainder of 1998.
On July 28, 1998, the Company entered into a settlement agreement with the
Hospital whereby the Company will pay the Hospital or its affiliates $1,600,000
in cash, 333,000 shares of the Company's common stock, and undisclosed future
payments and royalties. The Company recorded a one-time pre-tax charge of
approximately $3,922,000 in the quarter ended June 30, 1998, and reclassified
$463,000 and $679,000 of legal expenses related to the patent litigation during
the three and six months ended June 30, 1998, respectively, from general and
administrative expenses.
Other income (expense) during the second quarter of 1998 decreased by $316,000
from the second quarter of 1997, and decreased during the six months ended June
30, 1998 by $636,000 from the six months ended June 30, 1997, due primarily to
interest expense related to the debt incurred in conjunction with the
acquisition of SBIO-E.
The Company recognized a benefit from income taxes of $618,000 during the six
months ended June 30, 1998, as compared to a provision for income taxes of
$637,000 for the six months ended June 30, 19987. The benefit from income taxes
in 1998 is a result of a deferred tax asset related to the patent litigation
settlement and the reduction the utilization of net operating loss carryforwards
resulting from the patent litigation settlement charge, offset by an a decrease
in deferred state tax assets resulting from enacted tax rate changes, as well as
foreign income taxes related to the operations of SBIO-E.
Because SBIO-E is such a large part of the post-acquisition Company, and because
of the significant amount of long-term debt the Company incurred in connection
with the acquisition, historical results of operations will not necessarily be
comparable to results of operations in the near-term future.
Financial Condition
Management believes that the Company's present capital resources, which included
working capital of $9,590,000 at June 30, 1998, are sufficient to meet its
current working capital needs, pay the patent litigation settlement and service
the debt related to the acquisitions of SBIO-E and Prisma through 1998.
However, pursuant to a debt agreement with Banque Paribas, the Company is
required to maintain certain financial ratios and levels of tangible net worth
and is also restricted in its ability to pay dividends and make loans, capital
expenditures or investments without Banque Paribas' consent.
The Company's operations have become seasonal due to the success of its canine
heartworm diagnostic products. Sales and profits tend to be concentrated in the
December to April time period, as distributors prepare for the heartworm season
by purchasing diagnostic products for resale to veterinarians. This seasonality
may be somewhat reduced by the newly acquired European operations and later by
the Prisma instrumentation business, which are relatively less seasonal.
Impact of the Year 2000 Issue
- -----------------------------
The year 2000 issue is the result of computer programs being written using two
digits rather than four digits to define the applicable year. Any of the
Company's computer programs that have date-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculation causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices or engage in similar normal business activities.
-15-
<PAGE>
The Company has determined that the financial and manufacturing systems used in
its U.S. operations are not year 2000 compliant. However, the software
manufacturer has provided the necessary software to make the systems year 2000
compliant, and the Company plans on implementing the software changes in the
third quarter of 1998. As the Company has an ongoing maintenance agreement with
the software vendor, which includes the year 2000 software changes, the Company
does not expect to have a material impact on its results of operations related
to implementing the software changes.
The computer systems of SBIO-E are not affected by the year 2000 issue as new
systems had to be acquired subsequent to the acquisition and those systems were
already year 2000 compliant.
The Company is currently in the process of determining the year 2000 compliance
status of its major suppliers and customers. In the event that these suppliers
and customers fail to become year 2000 compliant, there could be a material
adverse impact on the Company's results of operations and financial condition
beginning in 2000.
PART II. OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings:
------------------
Barnes-Jewish Hospital v. Synbiotics Corporation - United States District Court
- -------------------------------------------------------------------------------
for the Eastern District of Missouri, Eastern Division
- ------------------------------------------------------
As previously reported by Synbiotics, Barnes-Jewish Hospital of St. Louis (the
"Hospital") is the owner of a patent which the Hospital alleges covers the
Company's canine heartworm diagnostic products. The Company is also the owner
of several patents which cover its canine heartworm diagnostic products. On
September 29, 1997, the Hospital sued the Company in the United States District
Court for the Eastern District of Missouri for patent infringement, seeking
unspecified damages. On July 28, 1998, the Company entered into a settlement
agreement with the Hospital whereby the Company will pay the Hospital or its
affiliates $1,600,000 in cash, 333,000 shares of the Company's common stock, and
undisclosed future payments and royalties. The Company recorded a one-time pre-
tax charge of approximately $3,922,000 in the quarter ended June 30, 1998.
Item 2. Changes in Securities:
----------------------
None.
Item 3. Defaults Upon Senior Securities:
--------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders:
----------------------------------------------------
None.
-16-
<PAGE>
Item 5. Other Information:
------------------
The Securities and Exchange Commission has amended Rule 14a-4, which governs the
Company's use of its discretionary proxy voting authority with respect to a non-
Rule 14a-8 shareholder proposal (i.e., where a shareholder has not sought
inclusion of the proposal in the Company's proxy statement). The amended rule
sets a 45-day advance notice requirement whereby if a proponent fails to notify
the Company at least 45 days prior to the anniversary of the date the prior
year's proxy statement was mailed, then the management proxyholders would be
allowed to use their discretionary voting authority when the proposal is raised
at the annual meeting, without any discussion of the matter in the proxy
statement.
In addition, shareholders are advised that the Company's Bylaws have been
amended to, among other things, require a shareholder to give advance notice to
the Company in order to be allowed to bring any matter before an annual meeting
of shareholders or to nominate a director candidate. Notice that a matter will
be brought before an annual meeting must be given between 60 and 90 days before
the anniversary of the prior year's annual meeting. Notice that a shareholder
will nominate a particular director candidate must be given at least 90 days
before the anniversary of the prior year's annual meeting.
Item 6. Exhibits and Reports on Form 8-K:
---------------------------------
(a) Exhibits
--------
3.2 Bylaws, as amended.
27 Financial Data Schedule (for electronic filing purposes only).
(b) Reports on Form 8-K
-------------------
None.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SYNBIOTICS CORPORATION
Date: August 14, 1998 /s/ Michael K. Green
-----------------------------------------------------
Michael K. Green
Vice President of Finance and Chief Financial Officer
(signing both as a duly authorized officer and as
principal financial officer)
-17-
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
EXHIBITS
TO
FORM 10-QSB
UNDER
SECURITIES EXCHANGE ACT OF 1934
SYNBIOTICS CORPORATION
<PAGE>
EXHIBIT INDEX
Exhibit No. Exhibit
- ----------- -------
3.2 By laws, as amended.
27 Financial Data Schedule (for electronic filing purposes only).
<PAGE>
Exhibit 3.2
-----------
AMENDED AND RESTATED BYLAWS
of
SYNBIOTICS CORPORATION
(a California corporation)
ARTICLE I
DIRECTORS; MANAGEMENT
---------------------
Section 1. Powers; Standard of Care
------------------------
(a) Subject to the provisions of the General Corporation Law of
California, effective January 1, 1977 (to which the various
Section numbers quoted herein relate) and subject to any
limitation in the Articles of Incorporation and the Bylaws
relating to action required to be approved by the Shareholders
(Sec. 153) or by the outstanding shares (Sec. 152), the
business and affairs of this corporation shall be managed by
and all corporate powers shall be exercised by or under
direction of the Board of Directors.
(b) Each Director shall exercise such powers and otherwise perform
such duties in good faith, in the manner such director
believes to be in the best interests of the corporation, and
with such care, including reasonable inquiry, using ordinary
prudence, as a person in a like position would use under
similar circumstances (Sec. 309).
Section 2. Number of Directors
-------------------
The authorized number of directors of the corporation shall be a
minimum of five (5), and a maximum of nine (9), until changed by a
duly adopted amendment to the articles of incorporation or by an
amendment to this bylaw adopted by the vote or written consent of
shareholders of a majority of the outstanding shares entitled to
vote; provided, however, that a bylaw reducing the maximum number
of directors to a number less than five cannot be adopted if the
votes cast against its adoption at a meeting of shareholders or the
shares not consenting in the case of action by written consent are
equal to more than sixteen and two-thirds (16-2/3) percent of the
outstanding shares entitled to vote. The number of directors within
the minimum to maximum range may be designated by the Board of
Directors by resolution from time to time.
Section 3. Election and Tenure of Office
-----------------------------
The directors shall be elected by ballot at the annual meeting of
the Shareholders, to serve for one year or until their successors
are elected and have qualified. Their term of office shall begin
immediately after election.
Section 4. Vacancies
---------
Vacancies in the Board of Directors may be filled by a majority of
the remaining Directors, though less than a quorum, or by a sole
remaining Director, and each Director so elected shall hold office
until his successor is elected at an annual meeting of Shareholders
or at a special meeting called
-1-
<PAGE>
for that purpose. The Shareholders may at any time elect a Director
to fill any vacancy not filled by the Directors, and may elect the
additional Directors at the meeting at which an amendment of the
Bylaws is voted authorizing an increase in the number of Directors.
A vacancy or vacancies shall be deemed to exist in case of the
death, resignation or removal of any Director, or if the
Shareholders shall increase the authorized number of Directors but
shall fail at the meeting at which such increase is authorized, or
at an adjournment thereof, to elect the additional Director so
provided for, or in case the Shareholders fail at any time to elect
the full number of authorized Directors.
If the Board of Directors accepts the resignation of a Director
tendered to take effect at a future time, the Board, or the
Shareholders, shall have power to elect a successor to take office
when the resignation shall become effective.
No reduction of the number of Directors shall have the effect of
removing any Director prior to the expiration of his term of
office.
Section 5. Removal of Directors
--------------------
The entire Board of Directors or any individual Director may be
removed from office as provided by Secs. 302, 303 and 304 of the
Corporations Code of the State of California. In such case, the
remaining Board members may elect a successor Director to fill such
vacancy for the remaining unexpired term of the Director so
removed.
Section 6. Notice, Place and Manner of Meetings
------------------------------------
Meetings of the Board of Directors may be called by the Chairman of
the Board, or the President, or any Vice President, or the
Secretary, or any two (2) Directors and shall be held at the
principal executive office of the corporation in the State of
California, unless some other place is designated in the notice of
the meeting. No notice need be given of organization meetings or
regular meetings held at the corporate offices at the time and date
set forth herein. Notice shall be given of other meetings as herein
provided. Members of the Board may participate in a meeting through
use of a conference telephone or similar communications equipment
so long as all members participating in such a meeting can hear one
another. Accurate minutes of any meeting of the Board, or any
committee thereof, shall be maintained as required by Sec. 1500 of
the Code by the Secretary or other Officer designated for that
purpose.
Section 7. Organization Meetings - Regular Meetings
----------------------------------------
The organization meetings of the newly elected Board of Directors
shall be held immediately following the adjournment of the annual
meetings of the Shareholders.
Other Regular Meetings
----------------------
Regular meetings of the Board of Directors shall be held at the
corporate offices, or such other place as may be designated by the
Board of Directors, as follows:
Time of Regular Meeting: 10:00 a.m.
Date of regular Meeting: First Thursday of April
-2-
<PAGE>
If said day shall fall upon a holiday, such meetings shall be held
on the next succeeding business day thereafter.
Section 8. Special Meetings - Notices
--------------------------
Special meetings of the Board may be called at any time by the
President or, if he is absent or unable or refuses to act, by any
Vice President or the Secretary or by any two Directors, or by one
Director if only one is provided.
At least forty-eight (48) hours notice of the time and place of
special meetings shall be delivered personally to the Directors or
personally communicated to them by a corporate Officer by telephone
or telegraph. If the notice is sent to a Director by letter, it
shall be addressed to him at his address as it is shown upon the
records of the corporation, (or if it is not so shown on such
records or is not readily ascertainable, at the place in which the
meetings of the Directors are regularly held). In case such notice
is mailed, it shall be deposited in the United States mail, postage
prepaid, in the place in which the principal executive office of
the corporation is located at least four (4) days prior to the time
of the holding of the meeting. Such mailing, telegraphing,
telephoning or delivery as above provided shall be due, legal and
personal notice to such Director.
Section 9. Waivers
-------
When (i) all of the Directors are present at any organizational,
regular or special meeting, however called or noticed, and sign a
written consent thereto on the records of such meeting, or, (ii) if
a majority of the Directors are present and if those not present
sign a waiver of notice of such meeting or a consent to holding the
meeting or an approval of the minutes thereof, whether prior to or
after the holding of such meeting, which said waiver, consent or
approval shall be filed with the corporate records or made a part
of the minutes of the meeting or (iii) if a Director attends a
meeting without notice but without protesting, prior thereto or at
its commencement, the lack of notice to him, then the transactions
thereof are as valid as if had at a meeting regularly called and
noticed.
Section 10. Sole Director Provided by Articles of Incorporation
---------------------------------------------------
In the event only one Director is required by the Bylaws or
Articles of Incorporation, then any reference herein to notices,
waivers, consents, meetings or other actions by a majority or
quorum of the Directors shall be deemed to refer to such notice,
waiver, etc., by such sole Director, who shall have all the rights
and duties and shall be entitled to exercise all of the powers and
shall assume all the responsibilities otherwise herein described as
given to a Board of Directors.
Section 11. Directors Acting by Unanimous Written Consent
---------------------------------------------
Any action required or permitted to be taken by the Board of
Directors may be taken without a meeting and with the same force
and effect as if taken by a unanimous vote of Directors, if
authorized by a writing signed individually or collectively by all
members of the Board. Such consent shall be filed with the regular
minutes of the Board.
Section 12. Quorum
------
A majority of the number of Directors as fixed by the Articles of
Incorporation or Bylaws shall be necessary to constitute a quorum
for the transaction of business, and the action of a majority of
the Directors present at any meeting at which there is a quorum,
when duly assembled, is valid
-3-
<PAGE>
as a corporate act; provided that a minority of the Directors, in
the absence of a quorum, may adjourn from time to time, but may not
transact any business. A meeting at which a quorum is initially
present may continue to transact business, notwithstanding the
withdrawal of Directors, if any action taken is approved by a
majority of the required quorum for such meeting.
Section 13. Notice of Adjournment
---------------------
Notice of the time and place of holding an adjourned meeting need
not be given to absent Directors if the time and place be fixed at
the meeting adjourned and held within twenty-four (24) hours, but
if adjourned more than twenty-four (24) hours, notice shall be
given to all Directors not present at the time of the adjournment.
Section 14. Compensation of Directors
-------------------------
Directors, as such, shall not receive any stated salary for their
services, but by resolution of the Board a fixed sum and expense of
attendance, if any, may be allowed for attendance at each regular
and special meeting of the Board; provided that nothing herein
contained shall be construed to preclude any Director from serving
the company in any other capacity and receiving compensation
therefor.
Section 15. Committees
----------
Committees of the Board may be appointed by resolution passed by a
majority of the whole Board. Committees shall be composed of two or
more members of the Board, and shall have such powers of the Board
as may be expressly delegated to it by resolution of the Board of
Directors, except those powers expressly made non-delegable by Sec.
311.
Section 16. Advisory Directors
------------------
The Board of Directors from time to time may elect one or more
persons to be Advisory Directors who shall not by such appointment
be members of the Board of Directors. Advisory Directors shall be
available from time to time to perform special assignments
specified by the President, to attend meetings of the Board of
Directors upon invitation and to furnish consultation to the Board.
The period during which the title shall be held may be prescribed
by the Board of Directors. If no period is prescribed, the title
shall be held at the pleasure of the Board.
Section 17. Resignations
------------
Any Director may resign effective upon giving written notice to the
Chairman of the Board, the President, the Secretary or the Board of
Directors of the corporation, unless the notice specifies a later
time for the effectiveness of such resignation. If the resignation
is effective at a future time, a successor may be elected to take
office when the resignation becomes effective.
ARTICLE II
OFFICERS
--------
Section 1. Officers
--------
The Officers of the corporation shall be a Chairman of the Board or
a President or both, a Secretary and a Chief Financial Officer. The
corporation may also have, at the discretion of the
-4-
<PAGE>
Board of Directors, one or more Vice Presidents, one or more
Assistant Secretaries and such other Officers as may be appointed
in accordance with the provisions of Section 3 of this Article. One
person may hold two or more offices.
Section 2. Election
--------
The Officers of the corporation, except such Officers as may be
appointed in accordance with the provisions of Section 3 or Section
5 of this Article shall be chosen annually by the Board of
Directors, and each shall hold his office until he shall resign or
shall be removed or otherwise disqualified to serve, or his
successor shall be elected and qualified.
Section 3. Subordinate Officers, Etc.
--------------------------
The Board of Directors may appoint such other Officers as the
business of the corporation may require, each of whom shall hold
office for such period, have such authority and perform such duties
as are provided in the Bylaws or as the Board of Directors may from
time to time determine.
Section 4. Removal and Resignation
-----------------------
Any Officer may be removed, either with or without cause, by a
majority of the Directors at the time in office, at any regular or
special meeting of the Board, or, except in case of an Officer
chosen by the Board of Directors, by any Officer upon whom such
power of removal may be conferred by the Board of Directors.
Any Officer may resign at any time by giving written notice to the
Board of Directors, or to the President, or to the Secretary of the
corporation. Any such resignation shall take effect at the date of
the receipt of such notice or at any later time specified therein;
and, unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
Section 5. Vacancies
---------
A vacancy in any office because of death, resignation, removal,
disqualification or any other cause shall be filled in the manner
prescribed in the Bylaws for regular appointments to such office.
Section 6. Chairman of the Board
---------------------
The Chairman of the Board, if there shall be such an Officer,
shall, if present, preside at all meetings of the Board of
Directors, and exercise and perform such other powers and duties as
may be from time to time assigned to him by the Board of Directors
or prescribed by the Bylaws.
Section 7. President
---------
Subject to such supervisory powers, if any, as may be given by the
Board of Directors to the Chairman of the Board, if there be such
an Officer, the President shall be the Chief Executive Officer of
the corporation and shall, subject to the control of the Board of
Directors, have general supervision, direction and control of the
business and Officers of the corporation. He shall preside at all
meetings of the Shareholders and in the absence of the Chairman of
the Board, or if there be none, at all meetings of the Board of
Directors. He shall be ex officio a member of all the standing
committees, including the Executive Committee, if any, and shall
have the general powers
-5-
<PAGE>
and duties of management usually vested in the office of President
of a corporation, and shall have such other powers and duties as
may be prescribed by the Board of Directors or the Bylaws.
Section 8. Vice President
--------------
In the absence or disability of the President, the Vice Presidents,
in order of their rank as fixed by the Board of Directors, or if
not ranked, the Vice President designated by the Board of
Directors, shall perform all the duties of the President, and when
so acting shall have all the powers of, and be subject to, all the
restrictions upon, the President. The Vice Presidents shall have
such other powers and perform such other duties as from time to
time may be prescribed for them respectively by the Board of
Directors or the Bylaws.
Section 9. Secretary
---------
The secretary shall keep, or cause to be kept, a book of minutes at
the principal office or such other place as the Board of Directors
may order, of all meetings of Directors and Shareholders, with the
time and place of holding, whether regular or special, and if
special, how authorized, the notice thereof given, the names of
those present at Directors' meetings, the number of shares present
or represented at Shareholders' meetings and the proceedings
thereof.
The Secretary shall keep, or cause to be kept, at the principal
office or at the office of the corporation's transfer agent, a
share register, or duplicate share register, showing the names of
the Shareholders and their addresses; the number and classes of
shares held by each; the number and date of certificates issued for
the same; and the number and date of cancellation of every
certificate surrendered for cancellation.
The Secretary shall give, or cause to be given, notice of all the
meetings of the Shareholders and of the Board of Directors required
by the Bylaws or by law to be given, and he shall keep the seal of
the corporation in safe custody, and shall have such other powers
and perform such other duties as may be prescribed by the Board of
Directors or by the Bylaws.
Section 10. Chief Financial Officer
-----------------------
This Officer shall keep and maintain, or cause to be kept and
maintained in accordance with generally accepted accounting
principles, adequate and correct accounts of the properties and
business transactions of the corporation, including accounts of its
assets, liabilities, receipts, disbursements, gains, losses,
capital, earnings (or surplus) and shares. The books of account
shall at all reasonable times be open to inspection by any
Director.
This Officer shall deposit all moneys and other valuables in the
name and to the credit of the corporation with such depositaries as
may be designated by the Board of Directors. He shall disburse the
funds of the corporation as may be ordered by the Board of
Directors, shall render to the President and Directors, whenever
they request it, an account of all of his transactions and of the
financial condition of the corporation, and shall have such other
powers and perform such other duties as may be prescribed by the
Board of Directors or the Bylaws.
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ARTICLE III
SHAREHOLDERS' MEETINGS
----------------------
Section 1. Place of Meetings
-----------------
Meetings of the Shareholders shall be held at the principal
executive office of the corporation, in the State of California,
unless some other appropriate and convenient location be designated
for that purpose from time to time by the Board of Directors.
Section 2. Annual Meetings
---------------
(a) The annual meeting of the Shareholders of the corporation for
the election of directors and for the transaction of such
other business as may properly come before the meeting shall
be held on such date and at such time and place as may be
determined each year by the Board of Directors.
(b) At the annual meeting of the Shareholders, only such business
shall be conducted as shall have been properly brought before
the meeting. To be properly brought before an annual meeting,
business must be: (A) specified in the notice of meeting (or
any supplement thereto) given by or at the direction of the
Board of Directors, (B) otherwise properly brought before the
meeting by or at the direction of the Board of Directors, or
(C) otherwise properly brought before the meeting by a
Shareholder. For business to be properly brought before an
annual meeting by a Shareholder, the Shareholder must have
given timely notice thereof in writing to the Secretary of the
corporation. To be timely, a Shareholder's notice must be
delivered to or mailed and received at the principal executive
offices of the corporation not later than the close of
business on the sixtieth (60th) day nor earlier than the close
of business on the ninetieth (90th) day prior to the first
anniversary of the preceding year's annual meeting; PROVIDED,
HOWEVER, that in the event that no annual meeting was held in
the previous year or the date of the annual meeting has been
changed by more than thirty (30) days from the date
contemplated at the time of the previous year's proxy
statement, notice by the Shareholder to be timely must be so
received not earlier than the close of business on the
ninetieth (90th) day prior to such annual meeting and not
later than the close of business on the later of the sixtieth
(60th) day prior to such annual meeting or, in the event
public announcement of the date of such annual meeting is
first made by the corporation fewer than seventy (70) days
prior to the date of such annual meeting, the close of
business on the tenth (10th) day following the day on which
public announcement of the date of such meeting is first made
by the corporation. A Shareholder's notice to the Secretary
shall set forth as to each matter the Shareholder proposes to
bring before the annual meeting: (i) a brief description of
the business desired to be brought before the annual meeting
and the reasons for conducting such business at the annual
meeting, (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 the Shareholder,
(iv) any material interest of the Shareholder in such business
and (v) any other information that is required to be provided
by the Shareholder pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended (the "1934 Act"),
in his capacity as a proponent to a Shareholder proposal. In
addition to the foregoing, in order to include information
with respect to a Shareholder proposal in the proxy statement
and form of proxy for a Shareholders' meeting, Shareholders
must provide notice as required by the regulations promulgated
under the 1934 Act. Notwithstanding anything
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in these Bylaws to the contrary, no business shall be
conducted at any annual meeting except in accordance with the
procedures set forth in this paragraph (b). The chairman of
the annual meeting shall, if the facts warrant, determine and
declare at the meeting that business was not properly brought
before the meeting and in accordance with the provisions of
this paragraph (b), and, if he should so determine, he shall
so declare at the meeting that any such business not properly
brought before the meeting shall not be transacted.
Section 3. Special Meetings
----------------
Special meetings of the Shareholders may be called at any time by
the Board of Directors, the Chairman of the Board, the President, a
Vice President, the Secretary, or by one or more Shareholders
holding not less than one-tenth (l/10) of the voting power of the
corporation. Except as next provided, notice shall be given as for
the annual meeting.
Upon receipt of a written request addressed to the Chairman,
President, Vice President, or Secretary, mailed or delivered
personally to such Officer by any person (other than the Board)
entitled to call a special meeting of Shareholders, such Officer
shall cause notice to be given, to the Shareholders entitled to
vote, that a meeting will be held at a time requested by the person
or persons calling the meeting, not less than twenty-five nor more
than sixty days after the receipt of such request. If such notice
is not given within twenty days after receipt of such request, the
persons calling the meeting may give notice thereof in the manner
provided by these Bylaws or apply to the Superior Court as provided
in Sec. 305(c).
Section 4. Notice of Meetings; Reports, Adjournment
----------------------------------------
Notice of meetings, annual or special, shall be given in writing
not less than ten nor more than sixty days before the date of the
meeting, to Shareholders entitled to vote thereat by the Secretary
or the Assistant Secretary, or if there be no such Officer, or in
the case of his neglect or refusal, by any Director or Shareholder.
Such notices or any reports shall be given personally or by mail or
other means or written communication as provided in Sec. 601 of the
Code and shall be sent to the Shareholder's address appearing on
the books of the corporation, or supplied by him to the corporation
for the purpose of notice, and in the absence thereof, as provided
in Sec. 601 of the Code.
Notice of any meeting of Shareholders shall specify the place, the
day and the hour of meeting, and (l) in case of a special meeting,
the general nature of the business to be transacted and no other
business may be transacted, or (2) in the case of an annual
meeting, those matters which the Board at date of mailing, intends
to present for action by the Shareholders. At any meetings where
Directors are to be elected, notice shall include the names of the
nominees, if any, intended at date of Notice to be presented by
management for election.
If a Shareholder supplies no address, notice shall be deemed to
have been given to him if mailed to the place where the principal
executive office of the company, in California, is situated, or
published at least once in some newspaper of general circulation in
the County of said principal office.
Notice shall be deemed given at the time it is delivered personally
or deposited in the mail or sent by other means of written
communication. The Officer giving such notice or report shall
prepare and file an affidavit or declaration thereof.
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<PAGE>
Any meeting of Shareholders, whether annual or special, may be
adjourned from time to time either by the chairman of the meeting
or by the vote of a majority of the shares casting votes, excluding
abstentions. When a meeting is adjourned to another time or place,
notice need not be given of the adjourned meeting if the time and
place thereof are announced at the meeting at which the adjournment
is taken. At the adjourned meeting, the corporation may transact
any business which might have been transacted at the original
meeting. If the adjournment is for more than thirty (30) days or if
after the adjournment a new record date is fixed for the adjourned
meeting, a notice of the adjourned meeting shall be given to each
Shareholder of record entitled to vote at the meeting.
Section 5. Validation of Shareholders' Meetings
------------------------------------
The transactions of any meeting of Shareholders, however called and
noticed, shall be valid as though had at a meeting duly held after
regular call and notice, if a quorum be present either in person or
by proxy, and if, either before or after the meeting, each of the
Shareholders entitled to vote, not present in person or by proxy,
sign a written waiver of notice, or a consent to the holding of
such meeting or an approval of the minutes thereof. All such
waivers, consents or approvals shall be filed with the corporate
records or made a part of the minutes of the meeting. Attendance
shall constitute a waiver of notice, unless objection shall be made
as provided in Sec. 601(e).
Section 6. Shareholders Acting Without A Meeting - Directors
-------------------------------------------------
Any action which may be taken at a meeting of the Shareholders may
be taken without a meeting or notice of meeting if authorized by a
writing signed by all of the Shareholders entitled to vote at a
meeting for such purpose and filed with the Secretary of the
corporation, provided further that while ordinarily Directors can
only be elected by unanimous written consent under Sec. 603(d), as
to vacancy created by death, resignation or other causes, if the
Directors fail to fill a vacancy, then a Director to fill that
vacancy may be elected by the written consent of persons holding a
majority of shares entitled to vote for the election of Directors.
Section 7. Other Actions Without A Meeting
-------------------------------
Unless otherwise provided in the GCL or the Articles, any action
which may be taken at any annual or special meeting of Shareholders
may be taken without a meeting and without prior notice if a
consent in writing, setting forth the action so taken, shall be
signed by the holders of outstanding shares having not less than
the minimum number of votes that would be necessary to authorize or
take such action at a meeting at which all shares entitled to vote
thereon were present and voted.
Unless the consents of all Shareholders entitled to vote have been
solicited in writing,
(1) Notice of any Shareholder approval pursuant to Secs. 310, 317,
1201 or 2007 without a meeting by less than unanimous written
consent shall be given at least 10 days before the
consummation of the action authorized by such approval, and
(2) Prompt notice shall be given of the taking of any other
corporate action approved by Shareholders without a meeting by
less than unanimous written consent, to each of those
Shareholders entitled to vote who have not consented in
writing.
Any Shareholder giving a written consent, or the Shareholder's
proxyholders, or a transferee of the shares of a personal
representative of the Shareholder or their respective proxyholders,
may revoke
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<PAGE>
the consent by a writing received by the corporation prior to the
time that written consents of the number of shares required to
authorize the proposed action have been filed with the Secretary of
the corporation, but may not do so thereafter. Such revocation is
effective upon its receipt by the Secretary.
Section 8. Quorum
------
The holders of a majority of the shares entitled to vote thereat,
present in person, or represented by proxy, shall constitute a
quorum at all meetings of the Shareholders for the transaction of
business except as otherwise provided by law, by the Articles of
Incorporation, or by these Bylaws. If, however, such majority shall
not be present or represented at any meeting of the Shareholders,
the Shareholders entitled to vote thereat, present in person, or by
proxy, shall have the power to adjourn the meeting from time to
time, until the requisite amount of voting shares shall be present.
At such adjourned meeting at which the requisite amount of voting
shares shall be represented, any business may be transacted which
might have been transacted at a meeting as originally notified.
If a quorum be initially present, the Shareholders may continue to
transact business until adjournment, notwithstanding the withdrawal
of enough Shareholders to leave less than a quorum, if any action
taken is approved by a majority of the Shareholders required to
initially constitute a quorum.
Section 9. Voting Rights; Shareholder Nominations; Cumulative Voting
---------------------------------------------------------
Only persons in whose names shares entitled to vote stand on the
stock records of the corporation on the day of any meeting of
Shareholders, unless some other day be fixed by the Board of
Directors for the determination of Shareholders of record, and then
on such other day, shall be entitled to vote at such meeting.
Subject to the rights of holders of any series of Preferred Stock,
if any, nominations for the election of Directors may be made by
the Board of Directors or a committee appointed by the Board of
Directors or by any Shareholder entitled to vote in the election of
Directors generally. However, any Shareholder entitled to vote in
the election of Directors generally may nominate one or more
persons for election as Directors at a meeting only if written
notice of such Shareholder's intent to make such nomination or
nominations has been received by the corporation, either by
personal delivery or by United States mail, postage prepaid, to the
Secretary of the corporation not later than (A) with respect to the
election to be held at an annual meeting of Shareholders, ninety
days prior to the date one year from the date of the immediately
preceding annual meeting of Shareholders, and (B) with respect to
an election to be held at a special meeting of Shareholders for the
election of Directors, the close of business on the tenth day
following the date on which notice of such meeting is first given
to Shareholders. Each such notice shall set forth: (A) the name and
address of the Shareholder who intends to make the nomination and
of the person or persons to be nominated; (B) 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; (C) a description of all arrangements or
understandings between the Shareholder and each nominee and any
other person or persons (naming such person or persons) pursuant to
which the nomination or nominations are to be made by the
Shareholder, (D) such other information regarding each nominee
proposed by such Shareholder as would be required to be included in
a proxy statement filed pursuant to the proxy rules of the
Securities and Exchange Commission, had the nominee been nominated,
or intended to be nominated, by the Board of Directors; and (E) the
consent of each nominee to serve as a Director of the corporation
if so elected. The chairman of the meeting may in his discretion
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<PAGE>
determine and declare to the meeting that a nomination was not made
in accordance with the foregoing procedures, and if he should so
determine, he shall so declare to the meeting and the defective
nomination shall be disregarded.
Provided the candidate's name has been properly placed in
nomination prior to the voting and one or more Shareholders has
given notice at the meeting prior to the voting of the
Shareholder's intent to cumulate the Shareholder's votes, every
Shareholder entitled to vote at any election for Directors of any
corporation for profit may cumulate his votes and give one
candidate a number of votes equal to the number of Directors to be
elected multiplied by the number of votes to which his shares are
entitled, or distribute his votes on the same principle among as
many candidates as he thinks fit.
The candidates receiving the highest number of votes up to the
number of Directors to be elected are elected.
The Board of Directors may fix a time in the future not exceeding
sixty days preceding the date of any meeting of Shareholders or the
date fixed for the payment of any dividend or distribution, or for
the allotment of rights, or when any change or conversion or
exchange of shares shall go into effect, as a record date for the
determination of the Shareholders entitled to notice of and to vote
at any such meeting, or entitled to receive any such dividend or
distribution, or any allotment of rights, or to exercise the rights
in respect to any such change, conversion or exchange of shares. In
such case only Shareholders of record on the date so fixed shall be
entitled to notice of and to vote at such meeting, or to receive
such dividends, distribution or allotment of rights, or to exercise
such rights, as the case may be, notwithstanding any transfer of
any share on the books of the company after any record date fixed
as aforesaid. The Board of Directors may close the books of the
company against transfers of shares during the whole or any part of
such period.
Section 10. Proxies
-------
Every Shareholder entitled to vote, or to execute consents, may do
so, either in person or by written proxy, executed in accordance
with the provisions of Secs. 604 and 705 of the Code and filed with
the Secretary of the corporation.
Section 11. Organization
------------
The President (or, should the President so elect in his discretion,
the Chairman of the Board), or in the absence of the Chairman of
the Board, the President, any Vice President, shall call the
meeting of the Shareholders to order, and shall act as chairman of
the meeting. In the absence of the President and all of the Vice
Presidents, Shareholders shall appoint a chairman for such meeting.
The Secretary of the company shall act as Secretary of all meetings
of the Shareholders, but in the absence of the Secretary at any
meeting of the Shareholders, the presiding Officer may appoint any
person to act as Secretary of the meeting.
Section 12. Inspectors of Election
----------------------
In advance of any meeting of Shareholders the Board of Directors
may, if they so elect, appoint inspectors of election to act at
such meeting or any adjournments thereof. If inspectors of election
be not so appointed, the chairman of any such meeting may, and on
the request of any Shareholder or his proxy shall, make such
appointment at the meeting in which case the number of inspectors
shall be either one or three as determined by a majority of the
Shareholders represented at the meeting.
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ARTICLE IV
CERTIFICATES AND TRANSFER OF SHARES
-----------------------------------
Section 1. Certificates for Shares
-----------------------
A certificate or certificates for shares of the capital stock of
the corporation shall be issued to each shareholder when any of
these shares are fully paid, and the board of directors may
authorize the issuance of certificates or shares as partly paid
provided that these certificates shall state the amount of the
consideration to be paid for them and the amount paid. All
certificates shall be signed in the name of the corporation by the
chairman of the board or the president or vice president and by the
chief financial officer or an assistant treasurer or the secretary
or any assistant secretary, certifying the number of shares and the
class or series of shares owned by the shareholder. Any or all of
the signatures on the certificate may be facsimile. In case any
officer, transfer agent, or registrar who has signed or whose
facsimile signature has been placed on a certificate shall have
ceased to be that officer, transfer agent, or registrar before that
certificate is issued, it may be issued by the corporation with the
same effect as if that person were an officer, transfer agent or
registrar at the date of issue.
Section 2. Transfer on the Books
---------------------
Upon surrender to the Secretary or transfer agent of the
corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignment or
authority to transfer, it shall be the duty of the corporation to
issue a new certificate to the person entitled thereto, cancel the
old certificate and record the transaction upon its books.
Section 3. Lost or Destroyed Certificates
------------------------------
Any person claiming a certificate of stock to be lost or destroyed
shall make an affidavit or affirmation of that fact and shall if
the Directors so require give the corporation a bond of indemnity,
in form and with one or more sureties satisfactory to the Board, in
at least double the value of the stock represented by said
certificate, whereupon a new certificate may be issued in the same
tenor and for the same number of shares as the one alleged to be
lost or destroyed.
Section 4. Transfer Agents and Registrars
------------------------------
The Board of Directors may appoint one or more transfer agents or
transfer clerks, and one or more registrars, which shall be an
incorporated bank or trust company, either domestic or foreign, who
shall be appointed at such times and places as the requirements of
the corporation may necessitate and the Board of Directors may
designate.
Section 5. Closing Stock Transfer Books - Record Date
------------------------------------------
In order that the corporation may determine the Shareholders
entitled to notice of any meeting or to vote or entitled to receive
payment of any dividend or other distribution or allotment of any
rights or entitled to exercise any rights in respect of any other
lawful action, the Board may fix, in advance, a record date, which
shall not be more than sixty nor less than ten days prior to the
date of such meeting nor more than sixty days prior to any other
action.
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<PAGE>
If no record date is fixed:
(1) The record date for determining Shareholders entitled to
notice of or to vote at a meeting of Shareholders shall be at
the close of business on the business day next preceding the
day on which notice is given or, if notice is waived, at the
close of business on the business day next preceding the day
on which the meeting is held.
(2) The record date for determining Shareholders entitled to give
consent to corporate action in writing without a meeting, when
no prior action by the Board is necessary, shall be the day on
which the first written consent is given.
(3) The record date for determining Shareholders for any other
purpose shall be at the close of business on the day on which
the Board adopts the resolution relating thereto, or the 60th
day prior to the date of such other action, whichever is
later.
Section 6. Legend Condition
----------------
In the event any shares of this corporation are issued pursuant to
a permit or exemption therefrom requiring the imposition of a
legend condition the person or persons issuing or transferring said
shares shall make sure said legend appears on the certificate and
on the stub relating thereto in the stock record book and shall not
be required to transfer any shares free of such legend unless an
amendment to such permit or a new permit be first issued so
authorizing such a deletion.
ARTICLE V
CORPORATE RECORDS AND REPORTS; INSPECTION
-----------------------------------------
Section 1. Records
-------
The corporation shall maintain, in accordance with generally
accepted accounting principles, adequate and correct accounts,
books and records of its business and properties. All of such
books, records and accounts shall be kept at its principal
executive office in the State of California, as fixed by the Board
of Directors from time to time.
Section 2. Inspection of Books and Records
-------------------------------
All books and records provided for in Sec. 1500 shall be open to
inspection of the Directors and Shareholders from time to time and
in the manner provided in said Sec. 1600 - 1602.
Section 3. Certification and Inspection of Bylaws
--------------------------------------
The original or a copy of these Bylaws, as amended or otherwise
altered to date, certified by the Secretary, shall be kept at the
corporation's principal executive office and shall be open to
inspection by the Shareholders of the company, at all reasonable
times during office hours, as provided in Sec. 213 of the
Corporations Code.
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<PAGE>
Section 4. Checks, Drafts, Etc.
--------------------
All checks, drafts or other orders for payment of money, notes or
other evidences of indebtedness, issued in the name of or payable
to the corporation, shall be signed or endorsed by such person or
persons and in such manner as shall be determined from time to time
by resolution of the Board of Directors.
Section 5. Contracts, Etc. - How Executed
------------------------------
The Board of Directors, except as in the Bylaws otherwise provided,
may authorize any Officer or Officers, agent or agents, to enter
into any contract or execute any instrument in the name of and on
behalf of the corporation. Such authority may be general or
confined to specific instances. Unless so authorized by the Board
of Directors, no Officer, agent or employee shall have any power or
authority to bind the corporation by any contract or agreement, or
to pledge its credit, or to render it liable for any purpose or to
any amount, except as provided in Sec. 313 of the Corporations
Code.
ARTICLE VI
ANNUAL REPORTS
--------------
Section 1. Due Date, Contents
------------------
The Board of Directors shall cause an annual report or statement to
be sent to the Shareholders of this corporation not later than 120
days after the close of the fiscal or calendar year in accordance
with the provisions of Secs. 1500 - 1501. Such report shall be sent
to Shareholders at least fifteen days prior to the annual meeting
of Shareholders. Such report shall contain a balance sheet as of
the end of the fiscal year, an income statement and a statement of
changes in financial position for such fiscal year, accompanied by
any report thereon of an independent accountant, or if there is no
such report, a certificate of the Chief Financial Officer or
President that such statements were prepared without audit of the
books and records of the corporation.
Section 2. Waiver
------
The foregoing requirement of an annual report may be waived by the
Board so long as this corporation shall have less than 100
Shareholders.
ARTICLE VII
AMENDMENTS TO BYLAWS
--------------------
Section 1. By Shareholders
---------------
New Bylaws may be adopted or these Bylaws may be repealed or
amended at their annual meeting, or at any other meeting of the
Shareholders called for that purpose, by a vote of Shareholders
entitled to exercise a majority of the voting power of the
corporation, or by written assent of such Shareholders.
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<PAGE>
Section 2. Powers of Directors
-------------------
Subject to the right of the Shareholders to adopt, amend or repeal
Bylaws, as provided in Section 1 of this Article VII, and the
limitations of Sec. 204(a)(5) and Sec. 212, the Board of Directors
may adopt, amend or repeal any of these Bylaws.
Section 3. Record of Amendments
--------------------
Whenever an amendment or new Bylaw is adopted, it shall be copied
in the book of Bylaws with the original Bylaws, in the appropriate
place. If any Bylaw is repealed, the fact of repeal with the date
of the meeting at which the repeal was enacted or written assent
was filed shall be stated in said book.
ARTICLE VIII
MISCELLANEOUS
-------------
Section 1. References to Code Sections
---------------------------
"Sec." references herein refer to the equivalent Sections of the
General Corporation Law effective January 1, 1977, as amended.
Section 2. Representation of Shares in Other Corporations
----------------------------------------------
Except as provided in Sec. 703, shares of other corporations
standing in the name of this corporation may be voted or
represented and all incidents thereto may be exercised on behalf of
the corporation by the Chairman of the Board, the President or any
Vice President and the Secretary or an Assistant Secretary.
Section 3. Subsidiary Corporations
-----------------------
Shares of this corporation owned by a subsidiary shall not be
entitled to vote on any matter. A subsidiary for these purposes is
defined in Sec. 189 (a) and (b).
Section 4. Indemnification of Agents of the Corporation; Purchase of Liability
-------------------------------------------------------------------
Insurance
---------
(a) For the purposes of this Section 4, "agent" means any person
who (i) is or was a director, officer, employee or other agent
of the Corporation, (ii) is or was serving at the request of
the Corporation as a director, officer, employee or agent of
another foreign or domestic corporation, partnership, joint
venture, trust or other enterprise, or (iii) was a director,
officer, employee or agent of a foreign or domestic
corporation which was a predecessor corporation of the
Corporation or of another enterprise at the request of such
predecessor corporation; "proceeding" means any threatened,
pending or completed action or proceeding, neither civil,
criminal, administrative or investigative; and "expenses"
included, without limitation, attorney's fees and any expenses
of establishing a right to indemnification under paragraph (d)
or (e)(3) of this Section 4.
(b) The Corporation shall have the power to indemnify any person
who was or is a party, or is threatened to be made a party, to
any proceeding (other than an action by or in the right of the
Corporation to procure a judgment in its favor) by reason of
the fact that such
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<PAGE>
person is or was an agent of the Corporation against expenses,
judgments, fines, settlements and other amounts actually and
reasonably incurred in connection with such proceeding if such
person acted in good faith and in a manner such person
reasonably believed to be in the best interests of the
Corporation and, in the case of a criminal proceeding, had no
reasonable cause to believe the conduct of such person was
unlawful. The termination of any proceeding by judgment,
order, settlement, conviction or upon a plea of nolo
contendere or its equivalent shall not, of itself, create a
presumption that the person did not act in good faith and in a
manner which the person reasonably believed to be in the best
interests of the Corporation or that the person had reasonable
cause to believe that the person's conduct was unlawful.
(c) The Corporation shall have the power to indemnify any person
who was or is a party, or is threatened to be made a party, to
any threatened, pending or completed action by or in the right
of the Corporation to procure a judgment in its favor by
reason of the fact that such person is or was an agent of the
Corporation against expenses actually and reasonably incurred
by such person in connection with the defense or settlement of
such action if such person acted in good faith, in a manner
such person believed to be in the best interests of the
Corporation and its shareholders. No indemnification shall be
made under this paragraph (c):
(1) in respect of any claim, issue or matter as to which such
person shall have been adjudged to be liable to the
Corporation in the performance of such person's duty to
the Corporation and its shareholders, unless and only to
the extent the court in which such proceeding is or was
pending shall determine upon application that, in view of
all the circumstances of the case, such person is fairly
and reasonably entitled to indemnity for expenses and
then only to the extent that the court shall determine;
or
(2) of amounts paid in settling or otherwise disposing of a
pending action without court approval; or
(3) of expenses incurred in defending a pending action which
is settled or otherwise disposed of without court
approval.
(d) To the extent that an agent of the Corporation has been
successful on the merits in defense of any proceeding referred
to in paragraphs (b) or (c) above, or in defense of any claim,
issue or matter therein, said agent shall be indemnified
against expenses actually and reasonably incurred by said
agent in connection therewith.
(e) Except as provided in paragraph (d) above, any indemnification
under this section shall be made by the Corporation only if
authorized in the specific case upon a determination that
indemnification of the agent is proper in the circumstances
because the agent has met the applicable standard of conduct
set forth in paragraph (b) or (c) above, by:
(1) a majority vote of a quorum consisting of directors who
are not parties to such proceeding;
(2) if such a quorum of directors is not obtainable, by
independent legal counsel in a written opinion;
-16-
<PAGE>
(3) approval by the affirmative vote of a majority of the
shares of this Corporation represented and voting at a
duly held meeting at which a quorum is present (which
shares voting affirmatively also constitute at least a
majority of the required quorum) or by the written
consent of holders of a majority of the outstanding
shares which would be entitled to vote at such meeting.
For such purpose, the shares owned by the person to be
indemnified shall not be considered outstanding or
entitled to vote thereon; or
(4) the court in which such proceeding is or was pending,
upon application made by the Corporation, the agent or
the attorney or other person rendering services in
connection with the defense, whether or not such
application by said agent, attorney or other person is
opposed by the Corporation.
(f) Expenses incurred in defending any Proceeding may be advanced
by the Corporation prior to the final disposition of such
proceeding upon receipt of an undertaking by or on behalf of
the agent to repay such amount if it shall be determined
ultimately that the agent is not entitled to be indemnified as
authorized in this section.
(g) The indemnification provided by this section shall not be
deemed exclusive of any other rights to which those seeking
indemnification may be entitled under any bylaw, agreement,
vote of shareholders or disinterested directors or otherwise,
both as to action in an official capacity and as to action in
another capacity while holding such office, to the extent such
additional rights to indemnification are authorized in the
Articles of Incorporation of the Corporation. The rights to
indemnity hereunder shall continue as to a person who has
ceased to be a director, officer, employee or agent and shall
inure to the benefit of the heirs, executors and
administrators of the person. Nothing contained in this
section shall affect any right to indemnification to which
persons other than such directors and officers may be entitled
by contract or otherwise.
(h) No indemnification or advance shall be made under this
section, except as provided in paragraphs (d) or (e)(3) above,
in any circumstance where it appears:
(1) that it would be inconsistent with a provision of the
Articles of Incorporation of the Corporation, Bylaws, a
resolution of the shareholders or an agreement in effect
at the time of the accrual of the alleged cause of action
asserted in the proceeding in which the expenses were
incurred or other amounts were paid which prohibits or
otherwise limits indemnification; or
(2) that it would be inconsistent with any condition
expressly imposed by a court in approving a settlement.
(i) Upon and in the event of a determination by the Board of
Directors of the Corporation to purchase such insurance, the
Corporation shall purchase and maintain insurance on behalf of
any agent of the Corporation against any liability asserted
against or incurred by the agent in such capacity or arising
out of the agent's status as such whether or not the
Corporation would have the power to indemnify the agent
against such liability under the provisions of this section.
The fact that the Corporation owns all or a portion of the
shares of the company issuing a policy of insurance shall not
render this subdivision inapplicable if either of the
following conditions are satisfied:
-17-
<PAGE>
(1) if authorized in the Articles of Incorporation of the
Corporation, any policy issued is limited to the extent
provided by subdivision (d) of Section 204 of the
California Corporations Code; or
(2) (a) the company issuing the insurance policy is
organized, licensed and operated in a manner that
complies with the insurance laws and regulations
applicable to its jurisdiction of organization;
(b) the company issuing the policy provides procedures
for processing claims that do not permit that
company to be subject to the direct control of the
corporation that purchased that policy; and
(c) the policy issued provides for some manner of risk
sharing between the issuer and purchaser of the
policy, on one hand, and some unaffiliated person or
persons, on the other, such as by providing for more
than one unaffiliated owner of the company issuing
the policy or by providing that a portion of the
coverage furnished will be obtained from some
unaffiliated insurer or reinsurer.
(j) If this section or any portion thereof shall be invalidated on
any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless have the power to indemnify
each director, officer, employee or other agent against
expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement with respect to any action, suit,
proceeding or investigation, whether civil, criminal or
administrative, and whether internal or external, including a
grand jury proceeding and an action or suit brought by or in
the right of the Corporation, to the full extent permitted by
any applicable portion of this section that shall not have
been invalidated or by any other applicable law.
(k) Upon, and in the event of, a determination of the Board of
Directors of the Corporation to do so, the Corporation is
authorized to enter into indemnification agreements consistent
with the provisions of this section with some or all of its
directors, officers, employees and other agents.
(1) The Corporation shall not retroactively repeal or amend this
section or any provision hereof, or any other provision of
these Bylaws relating to indemnification, in a way which
adversely affects any right or protection under this section
of an Indemnitee existing at the time of such repeal or
amendment.
-18-
<PAGE>
CERTIFICATE OF ADOPTION OF
AMENDED AND RESTATED BYLAWS OF
SYNBIOTICS CORPORATION
I, the undersigned, do hereby certify:
1. That I am the duly elected and acting Secretary of Synbiotics Corporation;
and
2. That the foregoing Amended and Restated Bylaws, comprising eighteen (19)
pages including this page, constitutes the Bylaws of said corporation, and
duly adopted and as amended from time to time by the Shareholders and the
Board of Directors of said Corporation through February 9, 1998.
3. That the Bylaws of said corporation have not been further amended or
modified since February 9, 1998.
IN WITNESS WHEREOF, I have subscribed my name and affixed the seal of the
corporation this 28th day of February, 1998.
/s/ Michael K. Green
- -------------------------------
Michael K. Green
Secretary
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<PAGE>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE AS OF JUNE 30, 1998 AND THE RELATED CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME AND OF CASH FLOWS
FOR THE SIX MONTHS THEN ENDED CONTAINED ELSEWHERE IN THIS FORM 10-QSB AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 3,168
<SECURITIES> 3,527
<RECEIVABLES> 6,240
<ALLOWANCES> 114
<INVENTORY> 5,534
<CURRENT-ASSETS> 19,330
<PP&E> 5,620
<DEPRECIATION> 4,009
<TOTAL-ASSETS> 48,118
<CURRENT-LIABILITIES> 9,740
<BONDS> 7,116
2,810
0
<COMMON> 37,085
<OTHER-SE> (10,958)
<TOTAL-LIABILITY-AND-EQUITY> 48,118
<SALES> 17,737
<TOTAL-REVENUES> 18,009
<CGS> 7,905
<TOTAL-COSTS> 18,901
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 648
<INCOME-PRETAX> (1,540)
<INCOME-TAX> (618)
<INCOME-CONTINUING> (922)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> (922)
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