<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 September 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 October 31, 1998, 9,005,420 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 - Financial Information
Item 1. Financial Statements
Condensed Consolidated Statement of Operations and Comprehensive
Income - Three and nine months ended September 30, 1998 and 1997 2
Condensed Consolidated Balance Sheet - September 30, 1998 and
December 31, 1997 3
Condensed Consolidated Statement of Cash Flows - Nine months
ended September 30, 1998 and 1997 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis or Plan of Operation 8
Part II - Other Information 15
-1-
<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 Nine Months Ended
September 30, September 30,
----------------------- -------------------------
1998 1997 1998 1997
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $6,735,000 $6,146,000 $24,472,000 $17,929,000
Cost of sales 3,820,000 3,387,000 11,725,000 9,648,000
---------- ---------- ----------- -----------
Gross Profit 2,915,000 2,759,000 12,747,000 8,281,000
---------- ---------- ----------- -----------
Operating expenses:
Research and development 590,000 541,000 1,703,000 1,154,000
Selling and marketing 1,428,000 1,058,000 4,591,000 3,382,000
General and administrative 1,546,000 774,000 3,665,000 2,138,000
Patent litigation settlement 4,601,000
---------- ---------- ----------- -----------
3,564,000 2,373,000 14,560,000 6,674,000
---------- ---------- ----------- -----------
(Loss) income from operations (649,000) 386,000 (1,813,000) 1,607,000
Other income (expense):
License fees and other 89,000 79,000 229,000 234,000
Interest, net (358,000) (324,000) (873,000) (218,000)
---------- ---------- ----------- -----------
(Loss) income before income taxes (918,000) 141,000 (2,457,000) 1,623,000
(Benefit from) provision for income taxes (175,000) 261,000 (792,000) 898,000
---------- ---------- ----------- -----------
Net (loss) income (743,000) (120,000) (1,665,000) 725,000
Cumulative translation adjustment 616,000 (753,000) 556,000 (753,000)
---------- ---------- ----------- -----------
Comprehensive (loss) $ (127,000) $ (873,000) $(1,109,000) $ (28,000)
========== ========== =========== ===========
Basic net (loss) income per share $ (.09) $ (.02) $ (.21) $ .09
========== ========== =========== ===========
Diluted net (loss) income per share $ (.09) $ (.02) $ (.21) $ .09
========== ========== =========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-2-
<PAGE>
Item 1. Financial Statements (continued)
--------------------
Synbiotics Corporation
Condensed Consolidated Balance Sheet
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(unaudited) (audited)
<S> <C> <C>
Assets
Current assets:
Cash and equivalents $ 4,507,000 $ 2,190,000
Securities available for sale 1,615,000 3,394,000
Accounts receivable 4,097,000 4,396,000
Inventories 5,490,000 5,187,000
Deferred tax assets 218,000 303,000
Other current assets 732,000 359,000
------------ -----------
Total current assets 16,659,000 15,829,000
Property and equipment, net 1,614,000 1,102,000
Goodwill 14,028,000 11,542,000
Deferred tax assets 7,356,000 6,417,000
Deferred debt issuance costs 701,000 905,000
Other assets 5,644,000 5,832,000
------------ -----------
$ 46,002,000 $41,627,000
============ ===========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 4,889,000 $ 3,546,000
Current portion of long-term debt 2,000,000 1,000,000
Income taxes payable 25,000
------------ -----------
Total current liabilities 6,889,000 4,571,000
------------ -----------
Long-term debt 6,920,000 7,543,000
Other liabilities 1,341,000
------------ -----------
8,261,000 7,543,000
------------ -----------
Mandatorily redeemable common stock 2,847,000 2,756,000
------------ -----------
Non-mandatorily redeemable common stock and other
shareholders' equity:
Common stock, no par value, 24,800,000 shares authorized,
9,005,000 and 7,426,000 shares issued and outstanding at
September 30, 1998 and December 31, 1997, respectively 38,123,000 35,659,000
Common stock warrants 1,003,000 1,003,000
Cumulative translation adjustment 405,000 (151,000)
Accumulated deficit (11,526,000) (9,754,000)
------------ -----------
Total non-mandatorily redeemable common stock and other
shareholders' equity 28,005,000 26,757,000
------------ -----------
$ 46,002,000 $41,627,000
============ ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-3-
<PAGE>
Item 1. Financial Statements (continued)
--------------------
Synbiotics Corporation
Condensed Consolidated Statement of Cash Flows (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------
1998 1997
----------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $(1,665,000) $ 725,000
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization 1,428,000 1,056,000
Changes in assets and liabilities:
Accounts receivable 299,000 (874,000)
Inventories (303,000) 1,811,000
Deferred taxes (854,000) 463,000
Other assets (301,000) 690,000
Accounts payable and accrued expenses 1,343,000 154,000
Income taxes payable (25,000) 274,000
Other liabilities 1,341,000 (650,000)
----------- ------------
Net cash provided by (used for) operating activities 1,263,000 3,649,000
----------- ------------
Cash flows from investing activities:
Acquisition of property and equipment (357,000) (224,000)
Investment in securities available for sale (188,000)
Proceeds from sale of securities available for sale 1,779,000
Acquisition of Prisma Acquisition Corp. (133,000)
Acquisition of Synbiotics Europe SAS (10,659,000)
----------- ------------
Net cash provided by (used for) investing activities 1,289,000 (11,071,000)
----------- ------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt, net 133,000 11,493,000
Payments of long-term debt (883,000) (1,743,000)
Debt issuance costs (949,000)
Mandatorily redeemable stock issuance costs (16,000) (493,000)
Proceeds from issuance of common stock, net (25,000) (151,000)
----------- ------------
Net cash provided by (used for) financing activities (791,000) 8,157,000
----------- ------------
Net increase in cash and equivalents 1,761,000 735,000
Effect of exchange rate changes on cash 556,000 (753,000)
Cash and equivalents - beginning of year 2,190,000 3,050,000
----------- ------------
Cash and equivalents - end of period $ 4,507,000 $ 3,032,000
=========== ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-4-
<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 September 30, 1998 and the
consolidated statements of operations and comprehensive income and of cash flows
for the three and nine month periods ended September 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 - Patent Litigation Settlement:
In September 1997, Barnes-Jewish Hospital of St. Louis (the "Hospital") filed a
lawsuit against the Company claiming that the Company infringed 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 calling for the Company to 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. $1,000,000, representing the common
stock portion of the settlement is considered a non-cash financing activity for
purposes of the statement of cash flows.
Note 3 - 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.
-5-
<PAGE>
Item 1. Financial Statements (continued)
--------------------
Synbiotics Corporation
Notes to Condensed Consolidated Financial Statements (unaudited)
- --------------------------------------------------------------------------------
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 convertible debt, common stock and common stock option portion
of the purchase price and liabilities assumed, is considered a non-cash
financing activity for purposes of the statement of cash flows.
Note 4 - Securities Available for Sale:
Included in current assets are securities available for sale which consist
primarily of short-term commercial paper.
Note 5 - Inventories:
Inventories consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Raw materials $2,921,000 $2,639,000
Work in process 778,000 1,235,000
Finished goods 1,791,000 1,313,000
---------- ----------
$5,490,000 $5,187,000
========== ==========
</TABLE>
-6-
<PAGE>
Item 1. Financial Statements (continued)
--------------------
Synbiotics Corporation
Notes to Condensed Consolidated Financial Statements (unaudited)
- --------------------------------------------------------------------------------
Note 6 - 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 Nine Months Ended
September 30, September 30,
------------------------ -------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net (loss) income used:
Net (loss) income $(743,000) $(120,000) $(1,665,000) $ 725,000
Less accretion of mandatorily
redeemable common stock (37,000) (36,000) (107,000) (36,000)
--------- --------- ----------- ---------
Net (loss) income used in computing
basic and diluted net (loss)
income per share $(780,000) $(156,000) $(1,772,000) $ 689,000
========= ========= =========== =========
Shares used:
Weighted average common shares
outstanding used in computing
basic net (loss) income per share 8,838,000 7,790,000 8,632,000 7,591,000
Weighted average options and warrants
to purchase common stock as
determined by application of the
treasury method 372,000
--------- --------- ----------- ---------
Shares used in computing diluted net
(loss) income per share 8,838,000 7,790,000 8,632,000 7,963,000
========= ========= =========== =========
</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 722,000 shares, 373,000
shares and 672,000 shares have been excluded from the shares used in computing
diluted net (loss) income per share for the three months ended September 30,
1998 and 1997 and the nine months ended September 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) income per share for the three and nine months
ended September 30, 1998 and 1997 as their exercise price is higher than the
weighted average market price for those periods, and in addition their effect is
anti-dilutive for the three months ended September 30, 1998 and 1997 and for the
nine months ended September 30, 1998.
-7-
<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 infringed 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 calling for the Company to 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.
-8-
<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. Due to the
settlement with the Hospital, the Company will report a loss for 1998.
Synbiotics has incurred a consolidated accumulated deficit of $11,526,000 at
September 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 now believes it has adequate levels of these bulk fluids to meet its
manufacturing requirements through the first quarter of 1999. 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 second quarter of 1999, 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.
-9-
<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 higher
in the first half of the year, the time period in which distributors purchase
canine heartworm diagnostic products to sell to veterinarians for the heartworm
season, than in the second half of the year. 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.
-10-
<PAGE>
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 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, the Hospital
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 is 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.
-11-
<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 third quarter of 1998 increased by $589,000 or 10% over the
third quarter of 1997. The increase in net sales comprises an increase in
diagnostic product sales of $127,000 or 3% and an increase in vaccine product
sales of $462,000 or 26%. The increased diagnostic product sales were due to a
33% increase in companion animal diagnostic sales, resulting primarily from the
introduction of the Company's WITNESS(R) products in the U.S., offset by a
decrease in large animal diagnostics. This decrease comprises a decrease in
sales of tuberculin diagnostic products resulting from contract renegotiations
with the USDA, and from initial distributor loading in the third quarter of 1997
as a result of the SBIO-E acquisition. The increased vaccine sales comprises an
increase of 36% in sales of vaccines to private label partners and an increase
of 117% in sales of bulk feline leukemia vaccine (related to the timing of
shipments as requested by OEM customers), offset by a 54% 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 ethical 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 nine months ended September 30, 1998 increased by $6,543,000
or 36% over the nine months ended September 30, 1997. The increase in net sales
is due to $3,821,000 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 $2,035,000 and an increase in vaccine product sales of
$687,000. The increase in the sales of non-SBIO-E diagnostic products is due to
an increase in canine heartworm diagnostics sales of 25% and an increase in
feline diagnostics sales of 30%. The increased canine heartworm diagnostics
sales were due to products acquired in conjunction with the acquisition of SBIO-
E, the introduction of the Company's WITNESS(R) product in the U.S. and further
increases in DiroCHEK(R) and ICT Gold(TM). 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 42% 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 a
42% decrease in sales of other vaccine products resulting from the phase-out of
sales of most Synbiotics-label vaccines.
-12-
<PAGE>
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 now
believes it has adequate levels of these bulk fluids to meet its manufacturing
requirements through the first quarter of 1999. 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 second quarter of 1999, will be materially
adversely affected.
The cost of sales as a percentage of net sales was 57% during the third quarter
of 1998 compared to 55% during the third quarter of 1997 (i.e., gross margin
decreased to 43% from 45%). The lower gross margin is due to the increased
sales of bulk vaccine to an OEM distributor which have no margin; instead,
Company receives a royalty on the sales of the OEM distributor's product. The
gross margin, exclusive of the no margin bulk vaccine sales, would have been 48%
and 47% for the third quarter of 1998 and 1997, respectively. The cost of sales
as a percentage of net sales was 48% during the nine months ended September 30,
1998 compared to 54% during the nine months ended September 30, 1997 (i.e.,
gross margin increased to 52% from 46%). 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 nine months end September 30, 1998 had a 50% gross margin as
compared to 43% during the nine months ended September 30, 1997. 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 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 third quarter of 1998 increased by
$49,000 or 9% over the third quarter of 1997, and increased during the nine
months ended September 30, 1998 by $549,000 or 48% over the nine months ended
September 30, 1997. The increases are primarily due to the acquisitions of
SBIO-E and Prisma, which have their 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 9% during the third
quarter of 1998 and 1997, and were 7% and 6% during the nine months ended
September 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 third quarter of 1998 increased by
$370,000 or 35% over the third quarter of 1997, and increased during the nine
months ended September 30, 1998 by $1,209,000 or 36% over the nine months ended
September 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 21% and 17% during the third quarter
of 1998 and 1997, respectively, and were 19% during the nine months ended
September 30, 1998 and 1997.
General and administrative expenses during the third quarter of 1998 increased
by $627,000 or 81% over the third quarter of 1997, and increased during the nine
months ended September 30, 1998 by $1,382,000 or 65% over the nine months ended
September 30, 1997. The increases are due primarily to amortization of goodwill
and additional payroll costs related to the acquisitions of SBIO-E and Prisma,
as well as increased legal expenses. General and administrative expenses as a
percentage of net sales were 21% and 13% during the third quarter of 1998 and
1997, respectively, and were 14% and 12% during the nine months ended September
30, 1998 and 1997, respectively. The Company expects the Prisma acquisition to
increase its general and administrative expenses, without commensurate sales
increases, for the remainder of 1998.
-13-
<PAGE>
On July 28, 1998, the Company entered into a settlement agreement with the
Hospital calling for the Company to 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 third quarter of 1998 decreased by $24,000
from the third quarter of 1997, and decreased during the nine months ended
September 30, 1998 by $660,000 from the nine months ended September 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 $792,000 during the nine
months ended September 30, 1998, as compared to a provision for income taxes of
$898,000 for the nine months ended September 30, 1997. The benefit from income
taxes in 1998 is a result of a deferred tax asset related to the patent
litigation settlement , offset by 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 $9,770,000 at September 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
first half of the year, 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.
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
second quarter of 1999. 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. However, the Company has also
determined that its current information system is inadequate to meet its growth
goals and objectives. The Company is currently in the process of evaluating
-14-
<PAGE>
enterprise resource planning systems, and expects to make its final selection in
the fourth quarter of 1998. The capital expenditure related to the new system
will be material to the Company's financial condition in 1999.
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. The Company has sent letters
requesting the status of the suppliers and vendors year 2000 compliance, and has
yet to receive any responses. 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
-----------------
None.
Item 2. Changes in Securities
---------------------
On August 4, 1998, the Company issued 333,333 shares of newly issued
unregistered Synbiotics common stock to Barnes-Jewish Hospital Foundation as
partial consideration for the settlement of a patent infringement lawsuit. The
shares of common stock were exempt from registration pursuant to Section 4(2) of
the Securities Act of 1933; however, the shares were later registered for resale
on a Registration Statement on Form S-3 which was declared effective on
September 25, 1998.
Item 3. Defaults Upon Senior Securities
-------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Annual Meeting of Shareholders was held on July 30, 1998. The following
matters were submitted to a vote, with the results indicated below:
<TABLE>
<CAPTION>
(a) Election of directors:
Broker
Nominee For Against Abstain Withheld Non-votes
------- --- ------- ------- -------- ---------
<S> <C> <C> <C> <C> <C>
Patrick Owen Burns 7,623,841 n/a n/a 489,098 0
Kenneth M. Cohen 7,624,041 n/a n/a 488,898 0
James C. DeCesare 7,248,422 n/a n/a 864,517 0
Brenda D. Gavin, DVM 7,245,772 n/a n/a 867,167 0
M. Blake Ingle, Ph.D. 7,624,241 n/a n/a 488,698 0
Donald E. Phillips 7,622,141 n/a n/a 490,798 0
</TABLE>
- -15-
<PAGE>
(b) Approval of the amendment of Article Fourth of the Company's
Restated Articles of Incorporation (creation of "blank check"
Preferred Stock"):
For: 4,411,332 Against: 1,286,521 Abstain: 30,075
Broker Non-votes: 2,916,382
Item 5. Other Information
-----------------
On September 8, 1998 Mr. Skip Klein was elected to the Board of Directors. Mr.
Klein, 37, is a health care analyst for The Kaufmann Fund, which he joined in
June of 1998. Previously, Mr. Klein was the portfolio manager of the T. Rowe
Price Health Sciences Fund since its inception in 1995, and a health care
analyst at T. Rowe Price since 1989.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
--------
3.1.1 Certificate of Amendment of Articles of Incorporation, filed
August 4, 1998.
10.64.1 Waiver and First Amendment to $15,000,000 Credit Agreement
Among the Registrant, the Banks Named Therein and Banque
Paribas, as Agent, dated March 6, 1998.
10.70 Settlement Agreement, Stipulation to Settlement Order Under
Seal, Release and License Between Barnes-Jewish Hospital and
the Registrant, dated as of July 28, 1998./(1)/
27 Financial Data Schedule (for electronic filing purposes
only).
-----------------------------
(1) Certain confidential portions of this exhibit have been
omitted by means of blacking out the text (the "Mark"). This
exhibit has been filed separately with the Secretary of the
Commission without the Mark pursuant to the Company's
Application Requesting Confidential Treatment under Rule 24b-
2 under the Securities Exchange Act of 1934, as amended.
(b) Reports on Form 8-K
-------------------
None.
-16-
<PAGE>
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: November 13, 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>
EXHIBIT INDEX
Exhibit No. Exhibit
- ----------- -------
3.1.1 Certificate of Amendment of Articles of Incorporation, filed August
4, 1998.
10.64.1 Waiver and First Amendment to $15,000,000 Credit Agreement Among
the Registrant, the Banks Named Therein and Banque Paribas, as
Agent, dated March 6, 1998.
10.70 Settlement Agreement, Stipulation to Settlement Order Under Seal,
Release and License Between Barnes-Jewish Hospital and the
Registrant, dated as of July 28, 1998./(1)/
27 Financial Data Schedule (for electronic filing purposes only).
-------------------------
(1) Certain confidential portions of this exhibit have been
omitted by means of blacking out the text (the "Mark"). This
exhibit has been filed separately with the Secretary of the
Commission without the Mark pursuant to the Company's
Application Requesting Confidential Treatment under Rule 24b-
2 under the Securities Exchange Act of 1934, as amended.
<PAGE>
CERTIFICATE OF AMENDMENT Exhibit 3.1.1
OF -------------
ARTICLES OF INCORPORATION
OF
SYNBIOTICS CORPORATION
Kenneth M. Cohen and Michael K. Green certify that:
1. They are the president and secretary, respectively, of Synbiotics
Corporation, a California corporation.
2. Article FOURTH of the Articles of Incorporation of this corporation is
amended in its entirety to read as follows:
"FOURTH: The corporation is authorized to issue two classes of stock, to
be designated, respectively, "Common Stock" and "Preferred
Stock". The total number of shares which the corporation is
authorized to issue is 49,800,000 shares. 24,800,000 shares
shall be Common Stock and 25,000,000 shares shall be Preferred
Stock.
The Preferred Stock may be issued from time to time in one or
more series. The Board of Directors is hereby authorized to fix
or alter the dividend rights, dividend rate, conversion rights,
voting rights, rights and terms of redemption (including sinking
fund provisions), redemption price or prices, and the liquidation
preferences of any wholly unissued series of Preferred Stock, and
the number of shares constituting any such series and the
designation thereof, or any of them; and to increase or decrease
the number of shares of any series subsequent to the issuance of
shares of that series, but not below the number of shares of such
series then outstanding. In case the number of shares of any
series shall be so decreased, the shares constituting such
decrease shall resume the status that they had prior to the
adoption of the resolution originally fixing the number of shares
of such series."
3. The foregoing amendment and restatement of articles of incorporation has
been duly approved by the Board of Directors.
4. The foregoing amendment of the Articles of Incorporation has been duly
approved by the required vote of shareholders in accordance with Section
902 of the California Corporations Code. The current total number of
outstanding shares of the corporation is 8,644,310 shares of Common Stock.
(No shares of Series B Common Stock are outstanding). The number of shares
voting in favor of the amendment equaled or exceeded the vote required.
The percentage vote required was more than 50 percent of all outstanding
shares. No shares of Preferred Stock are outstanding.
-1-
<PAGE>
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and correct
of our own knowledge.
DATED: July 30, 1998
/s/ Kenneth M. Cohen
---------------------------
Kenneth M. Cohen, President
/s/ Michael K. Green
---------------------------
Michael K. Green, Secretary
-2-
<PAGE>
Exhibit 10.64.1
---------------
WAIVER AND FIRST AMENDMENT
TO
$15,000,000 CREDIT AGREEMENT
AMONG
SYNBIOTICS CORPORATION,
THE BANKS NAMED THEREIN
AND
BANQUE PARIBAS,
as Agent
March 6, 1998
<PAGE>
WAIVER AND FIRST AMENDMENT TO CREDIT AGREEMENT
This Waiver and First Amendment to Credit Agreement (this "Agreement") is
entered into as of March 6, 1998, by and among Synbiotics Corporation, a
California corporation ("Synbiotics"), the banks referred to in the Credit
Agreement (as defined below) (collectively, the "Banks") and Banque Paribas, as
agent (the "Agent"). For all purposes of this Agreement, capitalized terms used
herein shall have the respective meanings set forth in the Credit Agreement,
dated as of July 9, 1997, among Synbiotics, the Banks and the Agent (the "Credit
Agreement").
RECITALS
--------
A. Synbiotics, Prisma Acquisition Corp., a Delaware corporation
("Prisma"), Robert A. Behrens and each of the stockholders of Prisma have
entered into an Agreement and Plan of Reorganization, dated as of February 27,
1998, whereby Synbiotics and Prisma will combine into a single company through
the statutory merger of Prisma with and into Synbiotics (the "Merger").
B. In anticipation of the Merger, Synbiotics and BioQuest Venture Leasing
Partnership, L.P., a limited partnership organized under the laws of the State
of Delaware (the "Holder") have entered into a Note Purchase Agreement, dated as
of March 6, 1998 (the "Note Agreement") whereby Synbiotics has agreed to sell
and issue to the Holder a $1,000,000 convertible promissory note (the "Note") in
exchange for 482 shares of common stock of Prisma.
C. The Agent and the Banks hereby desire to (i) waive any default under
the Credit Agreement that may result from the transactions contemplated by the
Merger and the Note Agreement and (ii) amend the Credit Agreement as set forth
herein.
AGREEMENT
---------
NOW, THEREFORE, in consideration of the mutual promises and agreements contained
in this Agreement and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree to
the above Recitals and as follows:
1. Conditions Precedent. This Agreement shall not become effective
--------------------
until, and shall become effective when, each of the following conditions
precedent (the "Conditions Precedent") have been satisfied, to the Agent's and
each of the Banks' satisfaction (the date such Conditions Precedent are
satisfied, the "Closing Date"):
2
<PAGE>
1.1. Confirmation of Covenants and Representations and Warranties.
------------------------------------------------------------
All of the covenants, representations, and warranties of Synbiotics contained in
the Loan Documents (except as expressly modified by this Agreement) and this
Agreement remain true and correct and enforceable in all respects and shall
remain true and correct and enforceable in all respects after giving effect to
this Agreement.
1.2. Closing Documents. Synbiotics shall have delivered the following
------------------
documentation to each Bank and the Agent:
(i) in order to perfect t-he Agent's and Banks' security
interest in certain assets of Prisma as a result of the Merger, copies of
financing statements (Form UCC-1), naming the Agent as secured party with
respect to such assets of Prisma, to be filed in the appropriate offices in New
York; and
(ii) in order to perfect the Agent's and Banks' security interest
in certain intellectual property of Prisma as a result of the Merger, amendments
to each of the Patent Security Agreement, Copyright Security Agreement and
Trademark Security Agreement (in each case as defined in the Security
Agreement), naming the Agent as secured party with respect to all patents,
copyrights and trademarks of Prisma, to be filed in the Patent and Trademark
Office and United States Copyright office, as appropriate.
2. Waiver. The Agent and the Banks hereby waive any default by
------
Synbiotics of the following provisions of the Credit Agreement that may result
from the transactions contemplated by the Merger or the Note Agreement:
2.1. Indebtedness. Section 6.2 of the Credit Agreement solely to the
------------
extent such default would be caused by the incurrence of Indebtedness by
Synbiotics under the Note or the assumption by Synbiotics of the Indebtedness of
Prisma incurred prior to the Merger and as set forth on Schedule 2.1 hereto.
2.2. Liens. Section 6.3 of the Credit Agreement solely to the extent
------
such default would be caused by the assumption by Synbiotics of the Liens of
Prisma incurred prior to the Merger and as set forth on Schedule, 2.2 hereto.
2.3. Restrictions on Fundamental Chancres. Section 6.4 of the Credit
------------------------------------
Agreement solely to the extent such default would be caused by the Merger or by
the purchase of the common stock of Prisma pursuant to the Note Agreement.
2.4. Contingent Obligations. Section 6.6 of the Credit Agreement
----------------------
solely to the extent such default would be caused by the
3
<PAGE>
assumption by Synbiotics of the Contingent Obligations of Prisma incurred prior
to the Merger and as set forth on Schedule 2.4 hereto.
2.5. Investments. Section 6.8 of the Credit Agreement solely to the
-----------
extent such default would be caused by the $125,000 bridge loan to Prisma or by
the purchase of the common stock of Prisma in connection with the Merger or
pursuant to the Note Agreement.
3. Amendments.
----------
3.1 Definitions. The following shall be added as new definitions in
-----------
alphabetical order to Section 1.1 of the.Credit Agreement:
"Prisma Capital Expenditures" shall mean those Capital Expenditures
made or incurred by the Borrower and its Subsidiaries in connection with the
Prisma Operations.
"Prisma EBITDA" shall mean, with respect to the Borrower, for any
period, the Consolidated Net Income of the Borrower and its Subsidiaries that is
directly attributable to the Borrower's Prisma Operations for such period,
adjusted to add thereto (to the extent deducted from revenues in determining
such Consolidated Net Income) (i) consolidated income tax expense, (ii)
depreciation and amortization expense, (iii) interest expense and (iv) overhead
expense not related to the Borrower's Prisma Operations, in each case determined
for such period on a consolidated basis for the Borrower and its Subsidiaries in
accordance with GAAP.
"Prisma Operations" shall mean the design, manufacture, sale,
distribution and related activities of veterinary diagnostic instrumentation and
supporting products and services as acquired by the Borrower pursuant to that
certain Agreement and Plan of Reorganization, dated as of February 27, 1998,
among the Borrower, Prisma Acquisition Corp., a Delaware corporation ("Prisma"),
Robert A. Behrens and each of the stockholders of Prisma referred to therein.
3.2 Information Covenants. The following shall be added as a new
---------------------
Section 5.1(o) of the Credit Agreement:
(o) Financial Statements for Prisma Operations. Within (i) 45
-------------------------------------------
days after the close of each quarterly accounting period in each fiscal year of
the Borrower, the Prisma EBITDA and Prisma Capital Expenditures for such
quarterly period and for the elapsed portion of the fiscal year ended with the
last day of such quarterly period, and in each case setting forth comparative
figures for the related periods in the prior fiscal year, (ii) 90 days after the
close of each fiscal year of the Borrower, the
4
<PAGE>
Prisma EBITDA and Prisma Capital Expenditures for such fiscal year, setting
forth comparative figures for the preceding fiscal year and (iii) 30 days after
the end of each monthly reporting period in each fiscal year of the Borrower,
the Prisma EBITDA and Prisma Capital Expenditures for such monthly reporting
period and for the elapsed portion of the fiscal year ended on the last day of
such monthly reporting period, setting forth comparative figures for the related
periods in the prior fiscal year.
3.3 Financial Covenants.
-------------------
(a) Section 6.1(d) of the Credit Agreement shall be and is hereby
amended by replacing the word "The" at the beginning thereof with the following
words:
Other than with respect to Prisma Capital Expenditures, which are
covered in the following sentence, the
(b) Section 6.1(d) of the Credit Agreement shall be and is hereby
amended by adding the following words at the end thereof:
The Borrower shall not make or incur (or commit to make or incur)
and shall not permit any of its Subsidiaries to make or incur (or
commit to make or incur) Prisma Capital Expenditures other than
Prisma Capital Expenditures which do not exceed, in the
aggregate, $250,000 in each of the Borrower's 1998 and 1999
fiscal years.
(c) The following shall be added as a new Section 6.1(f) of the
Credit Agreement:
(f) Prisma EBITDA. The Borrower shall not permit Prisma
-------------
EBITDA to be less than, during any fiscal period listed below, the amount set
forth opposite such period:
<TABLE>
<CAPTION>
Period Amount
------ ------
<S> <C>
fiscal year 1998 -$950,000
fiscal year 1999 -$ 50,000
fiscal year 2000 $0
</TABLE>
4 Representations, Warranties and Covenants of Synbiotics. In addition to
-------------------------------------------------------
the representations and warranties-contained in the Loan Documents, Synbiotics
makes the following undertakings, representations and warranties to the Agent
and the Banks, which undertakings, representations and warranties shall survive
the execution of this Agreement and shall continue in full force and effect
until the full and final satisfaction and discharge of all obligations of
Synbiotics under this Agreement and under the other
5
<PAGE>
Loan Documents:
4.1 No Further Modifications. Synbiotics expressly acknowledges and
------------------------
agrees that neither the Agent nor any Bank shall have any obligation, and have
made no commitment, to further waive, modify or amend the Credit Agreement or
other Loan Documents, except as expressly set forth in this Agreement. Except
as otherwise provided in this Agreement or pursuant to the Credit Agreement,
Synbiotics will not sell, assign, pledge, exchange or dispose of any of the
Collateral in any manner whatsoever or attempt to do any of the, foregoing or
agree to any modification or cancellation of, or substitution for, any of the
Collateral.
4.2 No Default. No Default or Event of Default under the Loan
----------
Documents has occurred and is continuing or will occur by giving (affect hereto
and the execution of this Agreement will not result in any Default, Event of
Default or in any breach of any of the terms, conditions or provisions of or
constitute a default under any indenture, mortgage, deed of trust or other
agreement or instrument to which Synbiotics is a party or by which it or its
property is bound or any order of any court or administrative agency entered in
any proceeding to which Synbiotics is a party or by which it or its property may
be bound or to which it or its property may be subject.
5. Miscellaneous.
-------------
5.1. Notices, etc. Any and all notices, requests, certificates and
------------
other instruments executed and delivered after the execution and delivery of
this Agreement may refer to the Credit Agreement without making specific
reference to this Agreement but nevertheless all such references shall include
this Agreement unless the context otherwise requires.
5.2. Headings. The descriptive headings of the various Sections or
--------
parts of this Agreement are for convenience only and shall not affect the
meaning or construction of any of the provisions hereof.
5.3. Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the laws of California.
5.4. Counterparts. The execution hereof by the parties hereto shall
------------
constitute a contract between the parties hereto for the uses and purposes
hereinabove set forth, and this Agreement may be executed in any number of
counterparts, each executed counterpart constituting an original, but all
together only one agreement.
6
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the day and the year first written.
SYNBIOTICS CORPORATION
By: /s/ Michael Green
----------------------------------
Name: Michael Green
Title: VP Finance
(signatures continued on next page)
7
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BANQUE PARIBAS,
as Agent and as a Bank
By: /s/ Lynne A. Lueders
-----------------------------
Name: Lynne A. Lueders
Title: Director
By: /s/ Matthew C. Bishop
-----------------------------
Name: Matthew C. Bishop
Title: Assistant Vice President
(signatures continued on next page)
8
<PAGE>
IMPERIAL BANK, as a Bank
By: /s/ Leila Ghoroghchi
-----------------------------
Name: Leila Ghoroghchi
Title: Vice President
9
<PAGE>
Schedule 2.1
Assumption of Indebtedness
Demand Notes payable in the amount of approximately $140,900.
Deferred Compensation in the amount of approximately $102,500.
10
<PAGE>
Schedule 2.2
Assumption of Liens
Prisma Acquisition Corp. acquired all the of Prisma Systems Corporation free and
clear of all liens and encumbrances. Reference the attached May 2, 1997 Court
Order.
No leases were assumed, however the company is utilizing test equipment that
Prisma Systems had leased from Hewlett-Packard. Hewlett Packard engaged a
collection agency who would like us to enter into a payment plan for
approximately $450/month for 30 months to pay the old lease balance of
$13,603.55. Our preference is to offer $8,000 for an outright purchase of the
equipment. Market value is $10,000 - 12,000. No formal offers have been made
as yet a no contracts have been entered into by the company with regards to a
new lease for the equipment. Prisma Acquisition Corp. hereby agrees that nay
amounts actually paid to Hewlett-Packard in excess of $8,000 pursuant to a
payment plan or purchase of the equipment shall be considered accounts payable
as of the Closing Date.
11
<PAGE>
Schedule 2.3
Assumption of Contingent Liabilities
No leases were assumed, however the company is utilizing test equipment that
Prisma Systems had leased from Hewlett-Packard. Hewlett Packard engaged a
collection agency who would like us to enter into a payment plan for
approximately $450/month for 30 months to pay the old lease balance of
$13,603.55. Our preference is to offer $8,000 for an outright purchase of the
equipment. Market value is $10,000 - 12,000. No formal offers have been made
as yet a no contracts have been entered into by the company with regards to a
new lease for the equipment. Prisma Acquisition Corp. hereby agrees that nay
amounts actually paid to Hewlett-Packard in excess of $8,000 pursuant to a
payment plan or purchase of the equipment shall be considered accounts payable
as of the Closing Date.
12
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Exhibit 10.70
-------------
SETTLEMENT AGREEMENT,
STIPULATION TO SETTLEMENT ORDER UNDER SEAL,
RELEASE AND LICENSE BETWEEN
BARNES-JEWISH HOSPITAL AND SYNBIOTICS CORPORATION
-------------------------------------------------
This Settlement Agreement, Stipulation to Settlement Order Under Seal, Release
and License (the "Agreement") effective this 28th day of July, 1998 ("Effective
Date") is made by and between Barnes-Jewish Hospital (hereinafter "the
HOSPITAL") , a Missouri not-for-profit corporation with headquarters in St.
Louis, Missouri, and Synbiotics Corporation (hereinafter "Synbiotics") , a
California corporation with headquarters in San Diego, California.
WHEREAS, the parties were in litigation and set to commence trial in early 1999;
WHEREAS, the HOSPITAL and Synbiotics agreed to forego that trial in exchange for
the terms of this Agreement; and
WHEREAS, the parties desire to fully and finally settle all controversies
between them by the terms of this Agreement.
NOW, THEREFORE, the parties agree to the following terms and conditions:
ARTICLE I - DEFINITIONS
-----------------------
For purposes of this Agreement the words and phrases set forth in this Article
shall have the following meanings:
1.1 As used in the Agreement, "HOSPITAL" and "Synbiotics" include and refer to
each such party's respective parents, subsidiaries, affiliates and
successors.
1.2 "LICENSED PATENTS" means [*].
1.3 "LICENSED PRODUCTS" means any [*] diagnostic products within the allowed
claims of the applicable LICENSED PATENTS, regardless of the end use of
such product. The Parties agree that [*] are covered within the allowed
claims of the applicable LICENSED PATENTS.
- ---------------
[*] Certain confidential portions of this exhibit have been omitted by means of
blacking out the text (the "Mark"). This exhibit has been filed separately
with the Secretary of the Commission without the Mark pursuant to the
Company's Application Requesting Confidential Treatment under Rule 24b-2
under the Securities Exchange Act of 1934, as amended.
<PAGE>
1.4 "NET SELLING PRICE" means the price charged by Synbiotics to customers for
the sale of LICENSED PRODUCTS, [*]. If any LICENSED PRODUCTS are
transferred to a third party which is not a subsidiary or affiliate of
Synbiotics in a barter transaction or for other than bona fide cash
consideration, NET SELLING PRICE for such LICENSED PRODUCTS shall be the
[*] of such product.
1.5 "SALE(S)" and forms of that term (e.g., "sold") used for purposes of this
agreement means "the passing of title from the seller to the buyer for a
price (U.C.C.(S) 2.401)" as set forth at U.C.C.(S) 2.106, from a person
within the definition of Synbiotics to a person not within the definition
of Synbiotics.
1.6 "NET SALES" means the total sales as calculated from the sales of [*] of
each such sale, together with [*] as set forth in paragraph 1.4.
1.7 "CALENDAR YEAR" means January 1 to December 31.
ARTICLE II - SUPERSEDURE
------------------------
2.1 Upon the Effective Date, the terms and conditions of the Agreement shall
supersede the terms and conditions of any other agreement between the
parties, whether written or oral, relating to the subject matter of this
Agreement, Omission of any terms of the July 9, 1998 Memorandum only
indicates that such term is,not included as a part of this Agreement.
Notwithstanding the above, while the parties intend and believe that the
terms of this Agreement are consistent with the terms of the July 9, 1998
Memorandum, in the event of any perceived or determined inconsistency of
any express terms therebetween, the terms and conditions of the Agreement
shall govern. The terms of this Agreement are both Court Orders and
contractual and not a mere recital.
ARTICLE III - LICENSE GRANT
---------------------------
3.1 Grant of Rights.
The HOSPITAL hereby grants to Synbiotics a [*] to make, use, import, market
and sell LICENSED PRODUCTS under the LICENSED PATENTS, and (without either
party expressing a position as to whether and to what extent such other
products are actually covered within the allowed claims of the applicable
LICENSED PATENTS) a [*], non-royalty bearing license [*] under the LICENSED
PATENTS to make, use, import, market and sell any and all [*], other than
LICENSED PRODUCTS.
2
<PAGE>
The Hospital hereby grants to Synbiotics a most [*] which applies [*]
hereunder. If the [*] by the Hospital now or at any time in the future [*]
to any other commercial licensee of the LICENSED PATENTS, or any of them,
is [*] then, on or after reaching the [*] of [*] Synbiotics may elect, at
its option, to adopt prospectively the [*] (as calculated above) [*] to
such [*]. The Hospital covenants to inform Synbiotics of all [*] to the
extent they contain [*] would make it [*]. This [*] is not [*]. This [*]
shall not apply to any [*] but shall apply to any [*].
3.2 Patent Marking.
A. Products
Synbiotics shall, within a reasonable amount of time from the Effective
Date of this Agreement, and until given written notice to the contrary by
the HOSPITAL, mark all LICENSED PRODUCTS sold by Synbiotics under this
Agreement in accordance with applicable laws and regulatory requirements,
with (at a minimum) the following patent notice:
[*]
Synbiotics' markings need not, however, refer to any country in which the
marked unit of product is not made or sold. It is agreed that patent
markings on product inserts shall be sufficient.
B. [*] for [*].
In the event that Synbiotics [*] LICENSED PRODUCTS as required by [*] of
this section, Synbiotics shall [*].
ARTICLE IV - ROYALTIES
----------------------
4.1 Settlement/License Issue Fee.
A. [*]
1. At the Time of Closing and Future Payments
Synbiotics shall pay to HOSPITAL a [*] settlement/license issue fee in the
sum of [*] payable [*] as follows: (a) [*] at the [*] of this Agreement,
(b) Synbiotics shall deliver to the HOSPITAL at Closing a [*] in a form to
be agreed upon by the parties with a [*] in [*] on the [*] of the Agreement
in the [*], and (c) Synbiotics shall deliver to the HOSPITAL at Closing a
[*] in a form to be agreed upon by the parties with a [*] in [*] on the [*]
of the Agreement in the [*].
2. [*] for [*]
Synbiotics agrees that, when its [*] with [*] is [*], Synbiotics shall [*]
the Hospital a [*] in Synbiotics' [*], in [*] of the [*] under Paragraphs
4.1.A.1.b and 4.1.A.l.c, provided, that such [*] shall be [*], and the
HOSPITAL shall
3
<PAGE>
execute and deliver any [*]. Synbiotics shall give notice to the Hospital
of the [*] of its [*] with [*] on or before the date of [*] thereof. The
parties agree that the [*] shall be in the form attached.
B. Stock
1. Issuance of Stock
Synbiotics shall issue 333,333 [*] shares of [*] Synbiotics common stock
(the "Shares") to the HOSPITAL on the fifth business day after the
Effective Date, wherein:
a. Synbiotics shall [*], covering the [*] the Hospital, or [*],
to be [*] by the [*] within [*] of issuance of the Shares
and [*] or (ii) the time when the [*]. Synbiotics shall
take any action necessary to [*] such Shares [*] as
requested by the Holders. Synbiotics shall be responsible
for the [*]. Synbiotics shall [*] the holders against [*].
Synbiotics shall provide, [*], copies of the [*] as
reasonably requested by the Holders in connection with [*]
thereunder. Upon request of Holders, Synbiotics shall, in
connection with [*] by the Holders, reasonably cooperate and
[*] as necessary for the Holders to [*].
b. If Synbiotics common stock [*] a [*] per share on [*] the
Effective Date, [*] the following number of [*] of
Synbiotics common stock to the HOSPITAL:
[*]
where
[*]
[*]
Synbiotics shall [*], [*], to be [*] by the [*] within [*]
of issuance of the [*] and shall cause it to [*] (i) [*], or
(ii) the time when the [*] may be [*]. Synbiotics shall
take any action necessary to [*] such [*] as requested by
the Holders. Synbiotics shall be responsible for the [*].
Synbiotics shall [*] against [*]. Synbiotics shall provide,
[*], copies of the [*] as reasonably requested by the
Holders in connection with [*] thereunder. Upon, request of
Holders, Synbiotics shall, in connection with [*] by
4
<PAGE>
the Holders, reasonably cooperate and [*] Holders to [*].
c. If the Hospital has disposed of any percentage of its
original Shares before the [*] mark, the number of [*]
issuable [*] shall be [*]. For purposes of this Paragraph
4.1.B.1 and Paragraph 4.1.B.2. transfers by the [*];
d. The parties agree that if for the [*] period as contemplated
in Paragraph 4.1.B.l.b, wherein Synbiotics' common stock
does [*] of [*] on [*], there is no day on which the [*] and
the [*] by Nasdaq for such [*] is less than [*], then the
[*] in Paragraph 4.1.B.l.b shall be [*] to a [*], subject
only to the original Paragraph 4.1.B.l.b requirements, and
of which the [*] then ended can count as the [*];
e. In the event that Synbiotics fails to cause the [*]
Paragraph 4.1.B.l.a [*], then Synbiotics shall at the option
of the Holders, pay to the Holders at the [*] the [*], in
exchange for all of the Shares; and
f. In the event that Synbiotics fail to cause the [*] within
the Paragraph 4.1.B.i.b [*], then Synbiotics shall at the
[*], in exchange for all of the [*], at the option of the
Holders, pay to the Holders the amount [*].
2. Buy-out or Merger of Synbiotics
In the event that prior to the date occurring [*] following the date hereof
Synbiotics common stock ceases to be included for quotation on the Nasdaq
National Market (and is not then being listed on the New York Stock Exchange),
then Synbiotics, at the time Synbiotics common stock ceases to be so included,
shall at the option of the Holders [*], and no [*] shall be [*]. In the event
that prior to the date occurring [*] following the date hereof, Synbiotics
engages in a transaction pursuant to which the Synbiotics common stock is to be
transformed into the right to receive anything but common stock which is
included for quotation on the Nasdaq National Market or listed on the New York
Stock Exchange, then immediately prior to such transaction Synbiotics or any
other party to any such transaction shall at the option of the Holders [*], and
no [*] shall be [*]. In the event that prior to the date occurring [*]
following the date hereof, Synbiotics engages in a transaction pursuant to which
the Synbiotics common stock is to be transformed into the right to receive
common stock of another entity which is included for quotation on the Nasdaq
5
<PAGE>
National Market or listed on the New York Stock Exchange, then immediately prior
to such transaction Synbiotics shall at the option of a majority of interest of
the Holders, either cause such other entity to execute an agreement to be bound
by the provisions of this Paragraph 4.1.B. as to [*] before the [*] or [*]. If
the Hospital has disposed of any percentage of its original shares before the
[*], all references to [*] in this Paragraph 4.1.B.2. shall be [*].
4.2. Royalties on Patent Rights.
A. [*] Royalties on [*]
[*] royalty shall be due on the [*] of Synbiotics' Net Sales of Licensed
Products cumulatively from and after [*]. For avoidance of doubt: [*]
shall be deemed only to include, for any purpose, Net Sales of LICENSED
PRODUCTS made, used, imported, or sold [*], as the case may be, after the
issuance of and prior to the expiration of the respective Licensed Patent
applicable to such country.
B. [*] Royalty on the [*]
Synbiotics will pay an [*] royalty on the [*] of Synbiotics' [*].
C. [*] Royalty [*]
Synbiotics will pay a [*] royalty on the [*] of Synbiotics' [*].
D. Royalties Payable [*]
Royalties payable under Paragraphs 4.2.B and 4.2.C shall be reportable and
payable [*] in the Calendar Year, provided that until royalties begin to accrue
pursuant to Paragraph, 4.2.B., reports need only be made annually as provided
below. [*]. (For example, if cumulative [*] are [*], royalties of [*] will be
due).
ARTICLE V - RECORDS, AUDITS, REPORTS AND PAYMENTS
-------------------------------------------------
5.1 Records.
Synbiotics shall keep full, complete, and accurate books and records
containing all particulars which may be reasonably necessary for
determining the amounts payable to the HOSPITAL. Said books of account
shall be kept at Synbiotics, principal place of business. For purposes of
this Agreement, the date of SALE shall be the date Synbiotics takes revenue
credit in its sales accounting records or upon actual receipt of the
proceeds of said SALE, lease or barter, whichever, is earlier.
6
<PAGE>
5.2 [*] Audit.
Said books and records of Section 5.1 shall be made available for
inspection, upon reasonable notice, [*] as of right during each CALENDAR
YEAR said license is active and for [*] after its termination. Said books
and records shall be maintained for at least [*] following the end of the
CALENDAR YEAR to which they pertain, for inspection by an authorized
accounting representative retained by the HOSPITAL at the HOSPITAL's
expense, for the purpose of verifying Synbiotics, statements. In the event
that Synbiotics, royalties calculated for any [*] reporting period are in
[*], the cost of the audit and review will be borne by Synbiotics.
Notwithstanding the foregoing provisions of this Paragraph 5.2. for any
CALENDAR YEAR which contains a calendar quarter for which net sales of
LICENSED PRODUCTS are [*] of the net sales of LICENSED PRODUCTS for the
same quarter of the prior CALENDAR YEAR, the HOSPITAL may secure [*]
additional audit initially at its own expense and according to all of the
terms of this Paragraph 5.2. Such [*] does not replace or preclude the [*]
set forth above.
5.3 Compliance Audit.
Synbiotics shall provide to the HOSPITAL upon the HOSPITAL's request the
following for the purpose of assuring compliance with the Agreement:
A. One sample of each and every product made, used, offered for sale,
sold or imported by Synbiotics related to detection of [*];
B. Reports on any tests or evaluations of the products described in 5.3.A
when such tests or evaluations are relevant to the determination of whether
such product is a LICENSED PRODUCT.
5.4 Reports.
Concurrently with the royalties required by Article IV, except as set forth
in 4.2.D, Synbiotics shall deliver true and accurate royalty and revenue
reports to the HOSPITAL within [*] after the end of each calendar quarter,
(provided however, that for Net Sales in 4.2.A, Synbiotics shall provide an
[*] for each Calendar Year within 60 days of the end of the calendar year
with all information set forth in 5.4.A through 5.4.D), giving such
particulars of the business conducted by Synbiotics during the preceding
quarter as follows:
[*]
E. For each CALENDAR YEAR, a certification from the Chief Financial Officer
of Synbiotics that the above 5.4.A through 5.4.D fairly represent an
accurate accounting.
7
<PAGE>
F. Synbiotics represents and warrants that the attached Exhibit A is a fair
and accurate accounting for all [*]. The supporting detail required for
this Paragraph 5.4 (and, correspondingly, Paragraph 5.1) will not be
required for the [*], provided, however, this will not reduce the audit
rights of HOSPITAL. For Net Sales commencing on [*] and thereafter the
details in Paragraph 5.4 shall be required.
5.5 [*] Payments.
Royalties will be accumulated and reported on a [*] calendar basis.
Payment shall be made within [*] following the close of each [*] calendar
period.
5.6 Currency.
All royalties and other payments payable by Synbiotics hereunder shall be
paid in United States Dollars. if transfer restrictions exist or; are
imposed which prevent such payments in United States Dollars, the parties
agree to cooperate to procure whatever licenses or permits are required to
obtain the waiver of such restrictions or otherwise to facilitate the
transfer of such dollars.
5.7 Late Payments
A late charge at the [*] shall accrue on the outstanding balance of any
payment under this Agreement for the period that payment is due until the
time payment is actually received.
ARTICLE VI - PATENT INFRINGEMENT
--------------------------------
6.1 Synbiotics agrees to notify the HOSPITAL promptly of each infringement of
one or more LICENSED PATENTS of which Synbiotics is or becomes aware. In
such event, Synbiotics shall cooperate in all respects if the HOSPITAL
decides to pursue litigation or otherwise take action, but the HOSPITAL
shall reimburse Synbiotics for all personnel and other costs reasonably
incurred in, and as requested by the Hospital, in providing such
cooperation. The HOSPITAL retains sole discretion whether to take action
or institute any litigation.
ARTICLE VII - REPRESENTATIONS AND WARRANTIES
--------------------------------------------
7.1 Authority.
Each party represents and warrants that it has the right and authority to
enter into this Agreement, including but not limited to the fact that it
has sufficient Board Authorization to do so. The persons undersigned
represent that they are authorized to bind the party on whose behalf they
are executing this agreement.
8
<PAGE>
7.2 Conflicts.
Each party represents and warrants that the making of this Agreement does
not violate any separate agreement it has with any other person or entity.
7.3 Exception.
NOTWITHSTANDING ANY PROVISIONS OF THIS AGREEMENT, THE PARTIES DO NOT
WARRANT OR REPRESENT THAT ANYTHING MADE, USED, SOLD OR OTHERWISE DISPOSED
OF UNDER ANY LICENSE GRANTED IN THIS AGREEMENT OR ANY METHOD(S) PRACTICED
UNDER ANY LICENSE GRANTED IN THIS AGREEMENT ARE OR WILL BE FREE FROM
INFRINGEMENT OF ANY PATENTS OR OTHER PROPRIETARY RIGHTS OF THIRD PARTIES,
NOR WARRANTS THE VALIDITY OR THE SCOPE OF PATENTS.
7.4 Disclaimer.
THE HOSPITAL MAKES NO REPRESENTATIONS AND EXTENDS NO WARRANTIES OF ANY
KIND, EITHER EXPRESS OR IMPLIED. THERE ARE NO EXPRESS OR IMPLIED
WARRANTIES OF MERCHANTABILITY OR FITNESS OF LICENSED PRODUCTS FOR A
PARTICULAR PURPOSE, AND SUCH REPRESENTATIONS AND WARRANTIES ARE EXPRESSLY
DISCLAIMED.
ARTICLE VIII - [*]
------------------
8.1 [*]
[*] shall [*], defend, and hold harmless the [*] and its directors,
officers, and employees (collectively [*]), against any liability, damage
or cost, fines, penalties, loss or expense (including, without limitation
attorney?s fees and court costs), incurred by or imposed upon [*] in
connection with any claims, suits, actions, demands, or judgments brought
against an [*] arising out of [*]
ARTICLE IX - CONFIDENTIALITY
----------------------------
9.1 General.
Each party agrees to keep secret [*] the confidential information provided
by the other. It is the obligation of the party seeking a confidential
status of information to designate such information as confidential by
stamping or marking each piece of paper "confidential" or otherwise
informing the receiving party, in writing, that the particular information
is "confidential". The parties will make all efforts possible to have this
Agreement filed under SEAL by the Order of the Court. In any event, this
Agreement, the terms of this Agreement and the July 9, 1998 Memorandum
constitute Confidential Information of each of the parties. Any information
related to the LICENSED PATENTS provided to Synbiotics by the HOSPITAL
under this Agreement shall be deemed "Confidential Information. 11 Each
party shall not use
9
<PAGE>
any Confidential Information of the other party for any purpose other than
for the purposes of this Agreement.
9.2 Exceptions.
Notwithstanding the foregoing, the confidentiality obligations herein shall
not apply to any Confidential Information received by a party ("Receiving
Party") which falls into any of the following categories:
A. Confidential Information of the HOSPITAL which Synbiotics needs to
disclose to third parties as necessary for making, using, offering for
sale, selling and importing LICENSED PRODUCTS, Any such disclosure shall be
pursuant to confidentiality obligations obtained from the third party, such
confidentiality obligations being acceptable to the HOSPITAL and obtained
prior to any disclosure.
B. The HOSPITAL may disclose this Agreement as necessary for it to comply
with existing provisions and obligations, including but not limited to most
favored nations provisions, in its existing license agreements for the
LICENSED PATENTS.
C. Synbiotics may disclose portions of this Agreement to the extent
strictly necessary for it to comply with its reporting obligations as a
public company.
D. Either party may disclose portions of this Agreement as necessary for
either party to comply with a valid Court Order (provided that the party
requested to disclose shall give the nondisclosing party as much notice as
practicable of the potential court order so as to allow it the opportunity
to resist, in its own or the disclosing party's name, if necessary, the
imposition of the order).
E. Information which becomes generally available to the public through no
breach of this Agreement or third party confidentiality obligations which
may arise consistent with this Agreement;
F. Information which is published or disclosed consistent with the terms of
this Agreement by a party, its employees, or agents to the general public
(including, but not limited to, publication in trade or academic journals,
or similar events open to the general academic or trade community);
G. Information which is disclosed to the Receiving Party by a third party
having the lawful right to disclose same, without direct or indirect
obligation of confidentiality to the Disclosing Party, or its consultants
or agents;
H. Information which is disclosed by the Receiving Party to a government
agency to comply with statutory requirements for
10
<PAGE>
market approval, clinical trials, certification, manufacture and/or
distribution of the LICENSED PRODUCTS, for which the ReceiVing Party is
unable to lawfully secure confidentiality; or
I. Information which is approved for release by the Disclosing Party, and
then only to the extent such written approval is granted.
ARTICLE X - TERM AND TERMINATION
--------------------------------
10.1 Term.
Unless this Agreement is terminated sooner as provided in this Article 10,
this Agreement shall extend from the Effective Date until the expiration of
the last Licensed Patent to expire.
10.2 Default.
A. Timely Payment of Royalties
Should Synbiotics default in its timely payment of royalties, "payments" or
any other charges or [*] amounts, the HOSPITAL shall have the right to
serve notice upon Synbiotics of its intention to terminate this Agreement
within [*] after said notice of termination, unless Synbiotics shall cure
such default within the [*] period. If within said [*] cure period,
Synbiotics fails in paying any or all such royalties as calculated per
Synbiotics, royalty reports or the Hospital's audits, payments, or other
charges or indemnification amounts due and payable, the rights, privileges,
and license granted hereunder shall terminate immediately upon receipt of
written notice thereof from the HOSPITAL. Synbiotics shall at any time
prior to receipt of notice of termination have the right to pay under
protest and sue for refund.
B. Timely Issuance [*] of Stock
Should Synbiotics default in its timely issuance of stock and/or (despite
tender by the HOSPITAL of the securities to be surrendered for
cancellation) the [*], the HOSPITAL shall have the right to serve notice
upon Synbiotics of its intention to terminate this Agreement within [*]
after said notice of termination, unless Synbiotics shall cure such default
within the [*] period. If within said [*] cure period, Synbiotics fails in
fulfilling the obligations due to the Hospital,;the rights, privileges, and
license granted hereunder shall terminate immediately upon receipt of
written notice thereof from the HOSPITAL.
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<PAGE>
C. Material Breach.
Upon any material breach by Synbiotics of its obligations under Paragraphs
5.1 through 5.4 of this Agreement, the HOSPITAL shall have the right to
terminate this Agreement, and the rights and license granted hereunder, by
giving [*] notice to Synbiotics. Such termination shall become effective
at the end of such [*] period unless Synbiotics has cured such breach prior
to the expiration of the [*] period.
D. Specific Remedies.
The parties confirm that damages at law would be an inadequate remedy for
breach or threatened breach of any of the promises described in Paragraphs
3.2, 5.11, 5.21, 5.31, 5.4 and Article IX and the parties further agree
that in the event of a breach or threatened breach of any provision
thereof, the respective rights and obligations shall be enforceable by
specific performance, injunction or other equitable remedy, but nothing
herein contained is intended or shall it limit or affect any rights
available to the parties at law, by statute or otherwise, it being the
intention of this paragraph to make clear that the promises shall be
enforceable in equity as law or otherwise.
10.3 Remedy Not Exclusive.
Termination shall not be the exclusive remedy for the matters described in
Paragraph 10.2, nor shall the seeking of any other remedy be deemed an
election of remedies.
10.4 Obligation on Termination.
Upon termination, a final report shall be submitted by Synbiotics as
described in Section 5.4 and any royalty payments under Article IV due to
the HOSPITAL shall become immediately payable. Upon termination,
Synbiotics and the HOSPITAL will, if such have not already been destroyed
in the ordinary course, return all originals and copies in all media of all
Confidential Information, subject to the exceptions provided in the
Protective Order entered by the United States District Court, Eastern
District of Missouri (the "Court"), in Civil Action Docket No. 4:97CV1989
DJS (the "Action") as to retention of pleadings and other confidential
documents related to said proceeding. In the absence of a default or
material breach of this Agreement by Synbiotics, upon termination
Synbiotics may complete the manufacture of LICENSED PRODUCTS then in
process and sell its remaining inventory of LICENSED PRODUCTS, subject to
the payment of royalties as set forth in Article V. However, nothing herein
shall be construed to release either party from any obligation which
matured prior to the effective date of such termination.
12
<PAGE>
10.5 Survival.
Section 3.2, Article V, Article VII, Article VIII, Article IX, Article X
and Article XII and Section 13.1 shall survive any termination of this
Agreement.
10.6 Survivability of This Agreement.
[*]
ARTICLE XI - [*]
----------------
11.1 [*] This Agreement shall inure to the benefit of and be binding upon the
HOSPITAL and Synbiotics, and their assigns and licensees. Notwithstanding the
above, the license granted herein [*] by [*].
ARTICLE XII - MISCELLANEOUS PROVISIONS
--------------------------------------
12.1 Government Rights.
This Agreement is subject to any rights pursuant to research funding from
the Federal Government and will be modified as necessary to conform to
government regulations.
12.2 Waiver.
Neither party may waive or release any of its rights or interests in this
Agreement except in writing. Failure to assert any right arising from this
Agreement shall not be deemed or construed to be a waiver of such right nor
to prohibit subsequent enforcement of such right.
12.3 Agent.
Neither party shall be deemed to be an agent, partner or joint venturer of
the other party as a result of any transaction under or related to this
Agreement, and shall not in any way pledge the other party's credit or
incur any obligation on behalf of the other party.
12.4 Notice.
Except as required by the provisions of Paragraph 9.2.D, any notice or
other communication pursuant to this Agreement shall be sufficiently made
or given on the date of mailing if sent to such party by certified First
Class mail, postage prepaid, addressed to it at its address as first set
forth in this Agreement, or as it shall designate by subsequent written
notice given to the other party. Notices shall be sent to:
If to the HOSPITAL:
Barnes-Jewish Hospital
One Barnes-Jewish Hospital Plaza
St. Louis, MO 63110
ATTENTION: Marlene Hartmann
Vice-President
13
<PAGE>
If to Synbiotics:
Synbiotics Corporation
11011 Via Frontera
San Diego, CA 92127
ATTENTION: President
This notice information may be amended by either party upon written notice to
the other.
12.5 Publicity.
Synbiotics will not use the name of the HOSPITAL (except to identify it as
a patent licensor and the plaintiff in the settled litigation), nor any
physician, staff member, or employee of the HOSPITAL, in any form of
publicity, advertising, or news release without the prior approval of the
HOSPITAL.
12.6 Governing Law and Jurisdiction.
All questions relating to the license of the Patents granted by the
HOSPITAL to Synbiotics under this Agreement, not governed by Federal Law,
shall be governed by the laws of the State of [*] and all questions
relating to rights and/or releases granted by the HOSPITAL to Synbiotics
under Article 13 of this Agreement shall be governed by the laws of the
State of [*]. The United States District Court for the [*] shall have and
retain jurisdiction for enforcement and interpretation of the Agreement.
12.7 Severability.
The provisions of the Agreement are severable, and in the event that any
provision of this Agreement is determined to be invalid or unenforceable
under any controlling body of law, such invalidity or unenforceability
shall not in any way affect the validity or enforceability of the remaining
provisions hereof.
12.8 Integration.
The parties acknowledge that this instrument sets forth the entire
agreement and understanding of the parties hereto as to the subject matter
hereof, and shall not be subject to any change or modification except by
the execution of a written instrument subscribed to by the parties hereto.
12.9 Governmental Approval.
Synbiotics will be solely responsible for obtaining appropriate licenses
(including but not limited to exports) and other governmental approvals for
making, using, offering for sale, selling or importing the LICENSED
PRODUCTS.
14
<PAGE>
12.10 Settlement Order And Dismissal.
On or before August 1, 1998, the HOSPITAL and Synbiotics will jointly file
with the Court, in and as to the Action, a stipulation for Dismissal with
Prejudice and a motion for leave to file this Agreement under Seal as a
Settlement Order Under Seal and to maintain such sealed status. The
HOSPITAL and Synbiotics will cooperate in good faith to obtain entry of
the order for dismissal with prejudice and granting such motion, and
thereafter to file and maintain this Agreement under seal and
affirmatively resist all efforts by anyone to unseal it. The aforesaid
filings shall be approved in advance by Synbiotics and the Hospital.
12.11 Attorneys' Fees and Costs
In the event of a dispute regarding this Agreement (including but not
limited to interpretation and/or enforcement), the parties agree that the
prevailing party on a particular issue shall recover its reasonable fees
and costs expended related to that issue.
ARTICLE 13 - MUTUAL RELEASE
---------------------------
13.1 Release.
Synbiotics and the HOSPITAL hereby release, acquit and forever discharge
each other, their subsidiaries, affiliates, agents, employees, insurers,
directors, officers, and shareholders, and their successors and assigns
from any and all liabilities, actions, causes of action, claims or demands
for damages, costs, contribution or indemnification on account of, or in
any way growing out of, any and all known or unknown, foreseen or
unforeseen, anticipated or unanticipated damages of whatever kind or
equitable or declaratory, relief resulting or to result from occurrences
that happened at any time prior to the signing of this Agreement,
including but not limited to those matters set forth in a Complaint and
Counterclaim filed in the Action, except for those obligations set forth
in this Agreement and in the Court's Settlement Order Under Seal entered
or to be entered in said Action. For avoidance of doubt: the HOSPITAL's
claims for patent infringement for all LICENSED PRODUCT activities between
the date the Complaint was filed in the Action and the Effective Date are
also released.
[*]
13.2 No Representations.
Synbiotics and the HOSPITAL admit that no representation of fact or
opinion has been made by either of them to the other with respect to the
extent or nature of the claims or damages in order to induce this
compromise, except as set forth in Paragraph 5.4.F. above.
15
<PAGE>
13.3 Advice Of Counsel.
Each party has had the advice of counsel of their own choosing before
executing this Agreement. Each party also acknowledges that they have
reviewed this Agreement prior to execution and the execution hereof is
their free act and deed.
IN WITNESS WHEREOF, the parties have hereunder set their hands and seals and
duly executed this Agreement in duplicate by their duly authorized officers the
day and year first above written.
BARNES-JEWISH HOSPITAL SYNBIOTICS CORPORATION
/s/ Peter L. Savin /s/ Kenneth M. Cohen
- ----------------------------- -------------------------------
SIGNATURE SIGNATURE
Peter L. Slavin Kenneth M. Cohen
NAME NAME
President President and CEO
TITLE TITLE
16
<PAGE>
EXHIBIT "A"
[*]
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1998 AND THE RELATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME AND OF
CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 4,507
<SECURITIES> 1,615
<RECEIVABLES> 4,217
<ALLOWANCES> 120
<INVENTORY> 5,490
<CURRENT-ASSETS> 16,659
<PP&E> 5,726
<DEPRECIATION> 4,112
<TOTAL-ASSETS> 46,002
<CURRENT-LIABILITIES> 6,889
<BONDS> 6,920
2,847
0
<COMMON> 38,123
<OTHER-SE> (10,118)
<TOTAL-LIABILITY-AND-EQUITY> 46,002
<SALES> 24,472
<TOTAL-REVENUES> 24,780
<CGS> 11,725
<TOTAL-COSTS> 26,285
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 952
<INCOME-PRETAX> (2,457)
<INCOME-TAX> (792)
<INCOME-CONTINUING> (1,665)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,665)
<EPS-PRIMARY> (.21)
<EPS-DILUTED> (.21)
</TABLE>
