<PAGE>
================================================================================
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 MARCH 31, 1999
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 April 30, 1999, 9,021,338 shares of Common Stock were outstanding.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
================================================================================
<PAGE>
SYNBIOTICS CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. Condensed Consolidated Statement of Operations and Comprehensive Income -
Three months ended March 31, 1999 and 1998 3
Condensed Consolidated Balance Sheet -
March 31, 1999 and December 31, 1998 4
Condensed Consolidated Statement of Cash Flows -
Three months ended March 31, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Management's Discussion and Analysis or Plan of Operation 10
PART II. Other Information 17
</TABLE>
-2-
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
--------------------
SYNBIOTICS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------
1999 1998
---- ----
<S> <C> <C>
Revenues:
Net sales $ 9,390,000 $ 8,801,000
License fees 1,453,000
Royalties 3,000 74,000
----------- -----------
10,846,000 8,875,000
----------- -----------
Operating expenses:
Cost of sales 4,080,000 4,046,000
Research and development 560,000 521,000
Selling and marketing 2,018,000 1,591,000
General and administrative 1,414,000 1,239,000
----------- -----------
8,072,000 7,397,000
----------- -----------
Income from operations 2,774,000 1,478,000
Other income (expense):
Interest, net (327,000) (258,000)
----------- -----------
Income before income taxes 2,447,000 1,220,000
Provision for income taxes 1,079,000 530,000
----------- -----------
Income before extraordinary item 1,368,000 690,000
Early extinguishment of debt, net of tax 116,000
----------- -----------
Net income 1,484,000 690,000
Cumulative translation adjustment (904,000) (247,000)
----------- -----------
Comprehensive income $ 580,000 $ 443,000
=========== ===========
Basic income per share:
Income from continuing operations $ .15 $ .08
Early extinguishment of debt, net of tax .01
----------- -----------
Net income $ .16 $ .08
=========== ===========
Diluted income per share:
Income from continuing operations $ .14 $ .07
Early extinguishment of debt, net of tax .01
----------- -----------
Net income $ .15 $ .07
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-3-
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
--------------------
SYNBIOTICS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
---- ----
(unaudited) (audited)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 5,914,000 $ 4,357,000
Securities available for sale 1,372,000 1,613,000
Accounts receivable 5,388,000 4,135,000
Inventories 5,669,000 5,179,000
Deferred tax assets 399,000 341,000
Other current assets 691,000 820,000
------------ ------------
Total current assets 19,433,000 16,445,000
Property and equipment, net 1,998,000 1,774,000
Goodwill 12,920,000 13,372,000
Deferred tax assets 6,917,000 7,873,000
Deferred debt issuance costs 605,000 653,000
Other assets 4,938,000 5,329,000
------------ ------------
$ 46,811,000 $ 45,446,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 6,725,000 $ 5,217,000
Current portion of long-term debt 1,000,000 2,000,000
Income taxes payable 184,000
------------ ------------
Total current liabilities 7,909,000 7,217,000
------------ ------------
Long-term debt 6,512,000 6,716,000
Other liabilities 1,398,000 1,369,000
------------ ------------
7,910,000 8,085,000
------------ ------------
Mandatorily redeemable common stock 2,317,000 2,287,000
------------ ------------
Non-mandatorily redeemable common stock and other shareholders' equity:
Common stock, no par value, 24,800,000 shares authorized,
8,352,000 and 8,246,000 shares issued and outstanding at
March 31, 1999 and December 31, 1998 38,401,000 38,134,000
Common stock warrants 1,003,000 1,003,000
Accumulated other comprehensive income (408,000) 496,000
Accumulated deficit (10,321,000) (11,776,000)
------------ ------------
Total non-mandatorily redeemable common stock and
other shareholders' equity 28,675,000 27,857,000
------------ ------------
$ 46,811,000 $ 45,446,000
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-4-
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
--------------------
SYNBIOTICS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,484,000 $ 690,000
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization 608,000 534,000
Early extinguishment of debt (200,000)
Changes in assets and liabilities:
Accounts receivable (1,253,000) (1,454,000)
Inventories (490,000) 638,000
Deferred taxes 898,000 493,000
Other assets 543,000 (149,000)
Accounts payable and accrued expenses 1,637,000 496,000
Income taxes payable 184,000 23,000
Other liabilities 29,000
------------ ------------
Net cash provided by operating activities 3,440,000 1,271,000
------------ ------------
Cash flows from investing activities:
Acquisition of property and equipment (308,000) (212,000)
Proceeds from sale of securities available for sale 241,000 414,000
------------ ------------
Net cash (used for) provided by investing activities (67,000) 202,000
------------ ------------
Cash flows from financing activities:
Payments of long-term debt (1,050,000) (250,000)
Mandatorily redeemable common stock issuance costs (16,000)
Proceeds from issuance of common stock, net 138,000 (66,000)
------------ -----------
Net cash (used for) financing activities (912,000) (332,000)
------------ -----------
Net increase in cash and equivalents 2,461,000 1,141,000
Effect of exchange rates on cash (904,000) (247,000)
Cash and equivalents - beginning 4,357,000 2,190,000
------------ -----------
Cash and equivalents - end of period $ 5,914,000 $ 3,084,000
============ ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-5-
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
--------------------
SYNBIOTICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 1 - INTERIM FINANCIAL STATEMENTS:
The accompanying consolidated balance sheet as of March 31, 1999 and the
consolidated statements of operations and comprehensive income and of cash flows
for the three month periods ended March 31, 1999 and 1998 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. 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, 1998. 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 - EXTRAORDINARY ITEM:
In February 1999, the Company repaid the $1,000,000 note issued in conjunction
with the March 1998 acquisition of Prisma Acquisition Corp., which was due in
March 1999, for $800,000. As a result, the Company recognized a $200,000
extraordinary gain upon early extinguishment of the debt, which was recorded net
of income taxes totalling $84,000.
NOTE 3 - INVENTORIES:
Inventories consist of the following:
MARCH 31, DECEMBER 31,
1999 1998
---- ----
Raw materials $ 2,265,000 $ 2,219,000
Work in process 839,000 904,000
Finished goods 2,565,000 2,056,000
------------ ------------
$ 5,669,000 $ 5,179,000
============ ============
-6-
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
--------------------
SYNBIOTICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 4 - 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 MARCH 31,
----------------------------
1999 1998
---- ----
(unaudited) (unaudited)
<S> <C> <C>
Basic net income used:
Income from continuing operations $ 1,368,000 $ 690,000
Less accretion of mandatorily redeemable common stock (31,000) (36,000)
------------ ------------
Income from continuing operations used in computing
basic income from continuing operations per share 1,337,000 654,000
Early extinguishment of debt, net of tax 116,000
------------ ------------
Net income used in computing basic net income per share $ 1,453,000 $ 654,000
============ ============
Diluted net income used:
Income from continuing operations $ 1,368,000 $ 690,000
Less accretion of mandatorily redeemable common stock (31,000) (36,000)
Add interest upon assumed conversion of debt 2,000
------------ ------------
Income from continuing operations used in computing
diluted income from continuing operations per share 1,337,000 656,000
Early extinguishment of debt, net of tax 116,000
------------ ------------
Net income used in computing diluted net income per share $ 1,453,000 $ 656,000
============ ============
</TABLE>
-7-
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
--------------------
SYNBIOTICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
---- ----
(unaudited) (unaudited)
<S> <C> <C>
Shares used:
Weighted average common shares outstanding used in computing
basic income per share 8,920,000 8,414,000
Weighted average options and warrants to purchase common stock
as determined by application of the treasury method 349,000 444,000
Weighted average shares of common stock issued upon assumed
conversion of debt 321,000
------------ ------------
Shares used in computing diluted income per share 9,269,000 9,179,000
============ ============
</TABLE>
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 income per share for the
three months ended March 31, 1999 and 1998 as their exercise price is higher
than the weighted average market price for those periods.
NOTE 5 - SEGMENT INFORMATION AND SIGNIFICANT CUSTOMERS:
The Company has determined that it has only one reportable segment based on the
fact that all of its products are animal health products. Although the Company
sells both diagnostic and vaccine products, it does not base its business
decision making on a product category basis.
The following are revenues for the Company's diagnostic and vaccine products:
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
---- ----
(unaudited) (unaudited)
Diagnostics $ 7,632,000 $ 7,191,000
Vaccines 1,758,000 1,610,000
------------ ------------
$ 9,390,000 $ 8,801,000
============ ============
-8-
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
--------------------
SYNBIOTICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
The following are revenues and long-lived asset information by geographic area:
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
---- ----
(unaudited) (unaudited)
Revenues:
United States $ 6,332,000 $ 6,283,000
France 1,404,000 1,622,000
Other foreign countries 1,654,000 896,000
------------ ------------
$ 9,390,000 $ 8,801,000
============ ============
MARCH 31, DECEMBER 31,
1999 1998
---- ----
(unaudited) (audited)
Long-lived assets:
United States $ 15,189,000 $ 13,038,000
France 5,272,000 8,090,000
------------ ------------
$ 20,461,000 $ 21,128,000
============ ============
The Company had sales to one customer totalling $1,806,000 during the three
months ended March 31, 1999. During the three months ended March 31, 1998, sales
to two customers totalled $3,035,000.
-9-
<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:
No Assurance that Acquired Businesses Can Be Successfully Combined
- ------------------------------------------------------------------
There can be no assurance that the anticipated benefits of the 1998 acquisition
of Prisma Acquisition Corp. ("Prisma"), the 1997 acquisition of the veterinary
diagnostics business of Synbiotics Europe SAS ("SBIO-E"), the 1996 acquisition
of the business of International Canine Genetics, Inc. ("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
- -----------
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. Competition in the animal health care
industry is intense, and is particularly intense in vaccines. 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.
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 Barnes-Jewish Hospital of St. Louis (the "Hospital"), the
Company incurred a loss of $1,911,000 for 1998. Synbiotics has incurred a
consolidated accumulated deficit of $10,321,000 at March 31, 1999, even after
the release in 1996 of a $7,158,000 valuation allowance related to deferred tax
assets.
-10-
<PAGE>
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, 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 capable of being sold in
Synbiotics' markets, 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.
In November 1998, Bio-Trends International, Inc. ("Bio-Trends"), Synbiotics'
supplier of feline leukemia virus ("FeLV") vaccine, declared Synbiotics'
previously exclusive worldwide rights to the vaccine to be non-exclusive, based
on an alleged insufficiency of marketing expenditures by Synbiotics. Synbiotics
has filed an arbitration action against Bio-Trends, seeking a declaration that
its rights remain exclusive. An arbitrator has scheduled the hearing in the
action for May 1999. In addition, in February 1999, Binax, Inc. ("Binax"), the
licensor and manufacturer of the ICT Gold products, purported to invoke a
contract clause, based on number of products marketed, which could conceivably
result in Synbiotics losing the right to sell the products. Synbiotics has
denied that Binax is entitled to invoke the clause, but has entered into
negotiations with Binax regarding the reversion of certain license rights. In
the event that Synbiotics were to lose its right to sell these products,
management believes that the Company would be able to replace most of the lost
sales with sales of its other canine heartworm diagnostic and FeLV diagnostic
products. Binax has indicated that it does not propose to deprive Synbiotics of
the right to sell the ICT Gold(TM) canine heartworm diagnostic product.
In addition, Synbiotics' sales of FeLV vaccine to Merial Animal Health and other
distributors for resale in Europe will be at risk unless Bio-Trends obtains
European Union regulatory approvals for its manufacturing facilities. Loss of
these sales would have a material adverse effect on Synbiotics' profitability.
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, all of the Company's vaccine products (exclusive of its
FeLV and canine corona virus vaccine products) are manufactured using bulk
antigen fluids that have been supplied by a third party. The supply agreement
has expired and the Company has been unable to locate a replacement supplier for
these bulk antigen fluids. The Company has decided to discontinue the sales of
the affected products once its remaining supplies have been exhausted, which the
Company believes will be during the second quarter of 1999. Sales of the
affected products totalled $2,073,000, $1,596,000 and $1,225,000 during 1998,
1997 and 1996, respectively.
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, 1998,
sales to two distributors totalled 33% of the Company's net sales. One of
these distributors is a co-op with which Synbiotics ceased doing business in the
second quarter of 1999. In addition, SBIO-E's small animal products are
presently sold primarily through distributors (although the Company is expanding
its telesales and direct sales capabilities), while its large animal products
are sold directly to laboratories. (Small animals mean pet dogs and cats; large
animals mean farm animals.) 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. Synbiotics
adopted a somewhat similar policy in the second quarter of
-11-
<PAGE>
1999, which caused some distributors to abandon the Synbiotics product line. 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 depends, 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.
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 require
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. Through March
31, 1999, the Company had repaid $1,750,000 of principal on the loans and had an
outstanding principal balance on the loans of $8,250,000 as of March 31, 1999.
-12-
<PAGE>
Seasonality
- -----------
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
has been somewhat reduced by the SBIO-E operations, which is relatively less
seasonal. Increased sales of the Prisma instruments and supplies would also
reduce seasonality.
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. Synbiotics is currently suing Heska
Corporation ("Heska") for infringing Synbiotics' canine heartworm patent, and
Heska has countersued seeking to invalidate the patent. In the event that
Synbiotics were to lose its lawsuit against Heska, management believes its only
direct liability would be its out-of-pocket legal expenses. Although Heska's
counterclaim does not include a claim for damages, if Synbiotics were to lose on
Heska's counterclaim, the Company could face additional competition for its
canine heartworm diagnostic products as other third parties would be able to
manufacture products incorporating Synbiotics' patented technology. 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 based on third parties' patents 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 October 1997, 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 and reclassified
$678,000 of legal expenses related to the patent litigation from general and
administrative expenses in the year ended December 31, 1998.
-13-
<PAGE>
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 also result in the award of substantial damages. 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, most notably the United States Department of Agriculture, and
France. 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 and its suppliers are
subject to foreign regulatory requirements in such foreign jurisdictions, which
vary widely from country to country. There can be no assurance that Synbiotics
and its suppliers will meet and sustain compliance with any such requirements.
In particular, Synbiotics' sales of feline leukemia virus vaccine to Merial
Animal Health and other distributors for resale in Europe will be at risk unless
Bio-Trends, our supplier, obtains European Union regulatory approvals for its
manufacturing facilities.
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.
Hazardous Materials
- -------------------
Synbiotics' manufacturing and research and development processes involve 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 first quarter of 1999 increased by $589,000 or 7% over the
first quarter of 1998. The increase in net sales is due to a net increase in the
overall sales of diagnostic products of $440,000 and an increase in vaccine
product sales of $149,000. The increase in the sales of diagnostic products is
due to an increase in canine heartworm diagnostics sales of 9% and an increase
in feline diagnostics sales of 8%. The increased canine heartworm diagnostics
sales were due to increases in the sales of rapid canine heartworm diagnostic
tests, resulting from the success of the Company's WITNESS(R) product (which was
introduced in the U.S. in the third quarter of 1998), and further increases in
DiroCHEK(R) sales; however, the Company's sales of its canine heartworm
diagnostic products have been impacted by increased competition. The increase in
feline diagnostic sales was due to a full quarter of sales of the Company's
WITNESS(R) FeLV diagnostic test which was introduced at the end of the first
quarter of 1998, offset by a decrease in the sales of the Company's feline
heartworm diagnostic test which was launched in the
-14-
<PAGE>
first quarter of 1998. The increase in companion animal diagnostic sales was
offset by decreases in large animal diagnostic sales for SBIO-E of 14% due to
the non-recurrence of one-time sales in the first quarter of 1998 relating to
the changing of distribution partners. These one-time sales of approximately
$800,000 in the first quarter of 1998 were also at reduced prices which
negatively impacted gross margins during the first quarter of 1998. The
increased vaccine sales reflected an increase of 69% in sales of bulk FeLV
vaccine (related to the timing of shipments as requested by Merial Animal
Health, our OEM customer), offset by a 6% decrease in sales of vaccines to
private label partners. The Company's instrument business, which was acquired
in March 1998, contributed 3% of sales for the first quarter of 1999.
Overall, net sales in countries other than the U.S. and France in the first
quarter of 1999 increased by $758,000 or 84% over the first quarter of 1998,
reflecting the transition of SBIO-E's strategy from distribution to direct
sales.
All of the Company's vaccine products (exclusive of its FeLV and canine corona
virus vaccine products) are manufactured using bulk antigen fluids that have
been supplied by a third party. The supply agreement has expired and the
Company has been unable to locate a replacement supplier for these bulk antigen
fluids. The Company has decided to discontinue the sales of the affected
products once its remaining supplies have been exhausted, which the Company
believes will be during the second quarter of 1999. Sales of the affected
products totalled $2,073,000 and $1,596,000 during 1998 and 1997, respectively.
The cost of sales as a percentage of net sales was 43% during the first quarter
of 1999 compared to 46% during the first quarter of 1998 (i.e., gross margin
increased to 57% from 54%). The higher gross margin is a direct result of two
factors: i) a high percentage of SBIO-E's sales relate to products manufactured
by SBIO-E rather than by third party manufacturers and ii) SBIO-E's sales of its
large animal diagnostic products during the first quarter of 1999 carried higher
margins than those during the first quarter of 1998 as a result of one-time
sales in the first quarter of 1998, relating to the changing of distribution
partners, of approximately $800,000 which were at reduced prices and which
negatively impacted gross margins. The Company's domestic sales (i.e., exclusive
of the SBIO-E sales), during the first quarter of 1999 and 1998 had a 56% gross
margin. A significant portion of the Company's manufacturing costs are fixed
costs. Among the Company's major products, DiroCHEK(R) canine heartworm
diagnostic products are manufactured at Company facilities, whereas WITNESS(R),
ICT GOLD HW, VetRED(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.
In March 1999, the Company amended (effective July 1, 1998) its FeLV vaccine
supply agreement with Merial. Since 1992, Synbiotics has supplied Bio-Trends-
manufactured FeLV vaccine to Merial in the United States. This has included
shipments to Merial at Synbiotics' cost, while Merial has paid a royalty to
Synbiotics on Merial's sales of Merial-labeled FeLV vaccine. In exchange for
$1,500,000 in cash (which the Company recorded as a one-time license fee in the
first quarter of 1999), the revised supply agreement broadens Merial U.S.
distribution rights (which had been an area of ongoing discussions) and
eliminates the royalty. In addition, the Company and Merial will seek to have
Bio-Trends supply FeLV vaccine directly to Merial for U.S. distribution. The
FeLV vaccine sales to Merial for U.S. resale totalled $2,029,000 and $1,309,000
during 1998 and 1997, respectively. If Merial buys its FeLV vaccine for U.S.
resale from Bio-Trends instead of from Synbiotics, Synbiotics will lose net
sales but have a relatively higher overall gross margin. In the meantime,
Synbiotics will continue to resell Bio-Trends-supplied FeLV vaccine to Merial at
cost for U.S. resale. Synbiotics' sales of its own VacSyn and other FeLV-
labeled vaccine products, its sales of Bio-Trends supplied FeLV vaccine to
Merial S.A. in France, which are at a profit rather than at cost, and the
collaborative research relationship between Merial Limited and Synbiotics are
not affected by this amendment.
Research and development expenses during the first quarter of 1999 increased
$39,000 or 7% over the first quarter of 1998. The increase is primarily due to
an increase in personnel costs resulting from the March 1998 acquisition of
Prisma, offset by a decrease in external research and development projects.
Research and development expenses as a percentage of net sales were 6% during
the first quarters of 1999 and 1998. The Company expects its research
-15-
<PAGE>
and development expenses to increase during the remainder of 1999 due to further
development of Prisma's product line.
Selling and marketing expenses during the first quarter of 1999 increased by
$427,000 or 27% over the first quarter of 1998. The increase is due primarily
to the addition of an outbound telemarketing group during the third quarter of
1998, increased royalties due to the 1998 introduction of the WITNESS/(R)/
products, an increase in the field sales force during the fourth quarter of 1998
and an increase in promotional programs. Selling and marketing expenses as a
percentage of net sales were 21% and 18% during the first quarter of 1999 and
1998, respectively.
The Company has experienced increased competition in certain of its U.S.
distribution channels. In addition to the previously announced patent
infringement lawsuit, the Company has significantly revised some of its
distribution strategies and policies, arising primarily from Heska's attempt to
launch a canine heartworm diagnostic product, and continues to increase its own
marketing capabilities. The Company will continue to increase its investment in
sales and marketing to expand its field sales force, its telemarketing effort.
Sales to U.S. distributors accounted for 33%, 47% and 50% of first quarter net
sales during 1999, 1998 and 1997, respectively. In the second quarter of 1999,
the Company decided to require its full-line distributors to carry its heartworm
diagnostics exclusively. As a result of this policy, the Company and several of
its U.S. distributors terminated their relationship in the second quarter of
1999. The Company believes that its remaining exclusive distributors, coupled
with its own marketing efforts, may be able to substantially mitigate the sales
lost from the terminated distribution arrangements.
General and administrative expenses during the first quarter of 1999 increased
by $175,000 or 14% over the first quarter of 1998. The increase is due
primarily to an increase in personnel costs resulting from the March 1998
acquisition of Prisma. General and administrative expenses as a percentage of
net sales were 15% during the first quarters of 1999 and 1998.
Royalty income during the first quarter of 1999 decreased $71,000 or 96% from
the first quarter of 1999. As a result of the amended supply agreement with
Merial (see above), the Company will no longer receive royalties beginning in
1999. Royalty income totalled $317,000 and $332,000 during 1998 and 1997,
respectively.
Net interest expense during the first quarter of 1999 increased by $69,000 over
the first quarter 1998 due to a higher number of days of interest expense
related to the debt incurred to a form stockholder of Prisma and increasing
amortization of debt issuance costs and debt discount, incurred in conjunction
with the acquisition of SBIO-E.
The combined effective tax rate was 44% during the first quarter of 1999 as
compared to 43% during the first quarter of 1998. The increase in the effective
rate is due primarily to an increase in state income tax expense resulting from
certain states' taxes being calculated on net worth rather than net income.
FINANCIAL CONDITION
Management believes that the Company's present capital resources, which included
working capital of $11,524,000 at March 31, 1999, are sufficient to meet its
current working capital needs and service the debt related to the acquisition of
SBIO-E through 1999. 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.
As of March 31, 1999, the Company had outstanding principal balances on its
Banque Paribas debt of $8,250,000, and may borrow up to $5,000,000 (subject to a
borrowing base calculation) on its revolving line of credit. In February 1999,
the Company repaid the $1,000,000 note issued in conjunction with the
acquisition of Prisma for $800,000, and recognized a $200,000 extraordinary
gain, which was recorded, net of income taxes totalling $84,000, during the
first quarter of 1999.
-16-
<PAGE>
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
has been somewhat reduced by the SBIO-E operations, which are relatively less
seasonal. Increased sales of the Prisma instruments and supplies would also
reduce seasonality.
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 embedded microprocessors or 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 systems used in its U.S.
operations are not year 2000 compliant. Although the software manufacturer has
provided the necessary software to make the systems year 2000 compliant, the
Company has also determined that its current information system is inadequate to
meet its growth goals and objectives. The Company selected an enterprise
resource planning system, and began implementation of the new system in March
1999. The total cost of the new system (including software, hardware and
implementation) is expected to be approximately $1,000,000, for which the
Company has obtained lease financing. The new system is year 2000 compliant.
The computer systems of SBIO-E are not affected by the year 2000 issue as new
systems were implemented during 1999, and those systems are year 2000 compliant.
The Company has also determined that its telephone systems and equipment used in
its manufacturing and research and development processes are 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 customers' year 2000 compliance, and
has yet to receive any responses. In the event that these suppliers and
customers fail to become year 2000 compliant and suffer disruptions in their own
operations, there could be a material adverse impact on the Company's results of
operations and financial condition beginning in 2000. The greatest disruption
would occur if third-party manufacturers of Synbiotics' diagnostic products and
vaccines were interrupted due to their own, or their own suppliers', year 2000
problems.
PART II. OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS:
------------------
No material changes.
ITEM 2. CHANGES IN SECURITIES:
----------------------
None.
-17-
<PAGE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES:
--------------------------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
----------------------------------------------------
None.
ITEM 5. OTHER INFORMATION:
------------------
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
---------------------------------
(a) Exhibits
--------
4.3.2 Waiver and Second Amendment to $15,000,000 Credit Agreement
Among the Registrant, the Banks Named Therein and Banque
Paribas, as Agent, dated January 12, 1999.
10.9 Employment Contract between Synbiotics Europe, SAS and
Francois Guillemin, dated as of July 22, 1999/+/.
10.41.2 Third Amendment to Distribution Agreement between the
Registrant and Merial Limited, dated as of July 1, 1998.
27 Financial Data Schedule (for electronic filing purposes
only).
__________________
+ Management contract.
(b) Reports on Form 8-K
-------------------
None.
-18-
<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, thereto duly
authorized.
SYNBIOTICS CORPORATION
Date: May 14, 1999 /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)
-19-
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
EXHIBITS
TO
FORM 10-QSB
UNDER
SECURITIES EXCHANGE ACT OF 1934
SYNBIOTICS CORPORATION
<PAGE>
EXHIBIT INDEX
Exhibit No. Exhibit
- ----------- -------
4.3.2 Waiver and Second Amendment to $15,000,000 Credit Agreement Among
the Registrant, the Banks Named Therein and Banque Paribas, as
Agent, dated January 12, 1999.
10.9 Employment Contract between Synbiotics Europe, SAS and Francois
Guillemin, dated as of July 22, 1999/+/.
10.41.2 Third Amendment to Distribution Agreement between the Registrant
and Merial Limited, dated as of July 1, 1998.
27 Financial Data Schedule (for electronic filing purposes only).
__________________
+ Management contract.
<PAGE>
Exhibit 4.3.2
-------------
WAIVER AND SECOND AMENDMENT
TO
$15,000,000 CREDIT AGREEMENT
AMONG
SYNBIOTICS CORPORATION,
THE BANKS NAMED THEREIN
AND
PARIBAS,
AS AGENT
JANUARY 12, 1999
<PAGE>
WAIVER AND SECOND AMENDMENT TO CREDIT AGREEMENT
This Waiver and Second Amendment to Credit Agreement (this "Agreement") is
entered into as of January 12, 1999, by and among Synbiotics Corporation, a
California corporation ("Synbiotics"), the banks referred to in the Credit
Agreement (as defined below) (collectively, the "Banks") and 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, as amended
as of March 6, 1998 (the "Credit Agreement").
RECITALS
--------
A. Synbiotics and Barnes-Jewish Hospital (the "Hospital"), a Missouri
not-for-profit corporation with headquarters in St. Louis, Missouri, have
entered into a Settlement Agreement, Stipulation to Settlement Order Under Seal,
Release and License (the "BJH Settlement") effective as of July 28, 1998,
whereby Synbiotics and the Hospital have agreed to fully and finally settle all
of the controversies between them as described in Schedule 4.4 of the Credit
Agreement.
B. In connection with and pursuant to the BJH Settlement, Synbiotics has
issued to the Hospital two promissory notes (collectively, the "BJH Notes").
C. Synbiotics and Prisma Acquisition Corp., a Delaware corporation
("Prisma") have combined into a single company through the statutory merger of
Prisma with and into Synbiotics (the "Merger").
D. In connection with the Merger, Synbiotics has sold and issued to
BioQuest Venture Leasing Partnership, L.P., a limited partnership organized
under the laws of the State of Delaware ("BioQuest") a $1,000,000 convertible
promissory note (the "BioQuest Note") in exchange for 482 shares of common stock
of Prisma.
E. 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
BJH Settlement, the Merger and the other transactions referred to in this
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"):
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:
2
<PAGE>
(a) in order to perfect the Agent's and Banks, security interest in
certain licensed patents of Synbiotics as a result of the BJH Settlement, an
amendment to the Patent Security Agreement (as defined in the Security
Agreement), naming the Agent as secured party with respect to all such licensed
patents of Synbiotics, to be filed in the Patent and Trademark Office; and
(b) copies of (i) the February 9, 1998 amendments to Synbiotics' by-
laws, (ii) the August 4, 1998 amendments to Synbiotics, articles of
incorporation and (iii) the certificate of determination, and any amendments to
the certificates of determination, with respect to Synbiotics' preferred stock,
if any, which shall, in each case (i), (ii) and (iii), be reasonably
satisfactory to the Agent and the Banks.
1.3. Fees and Expenses. (a) The Agent shall have received a working
-----------------
fee in connection with the negotiation, preparation, approval, execution and
delivery of this Amendment equal to $40,000 for the account of the Agent.
2. Waiver. The Agent and the Banks hereby waive any default by
------
Synbiotics of the following provisions of the Credit Agreement:
2.1. BJH Settlement. Sections 4.5, 4.71 4.14, 4.15, 4.18, and 4.21
--------------
of the Credit Agreement solely to the extent such default would be caused by the
terms of the BJH Settlement or the preceding litigation or the contingent
liability that existed before the BJH Settlement in relation to such preceding
litigation.
2.2. Plans. The first sentence of Section 4.12 of the Credit
Agreement solely to the extent such default would be caused by the existence of
Plans not previously disclosed to the Agent and the Banks. Synbiotics hereby
represents and warrants that all Plans have been in compliance with the
provisions of Section 4.12 since the Closing Date.
2.3. Ownership of Property. Section 4.19 of the Credit Agreement
---------------------
solely to the extent such default would be caused by the failure of Synbiotics
to amend Schedule 4.19 to set forth Synbiotics' leasehold interest in certain
real property in Rome, New York.
2.4. Amended Provisions. Any other provision of the Credit Agreement
------------------
which is expressly amended by this Agreement solely to the extent such default
would be caused by the failure of Synbiotics to amend such provision as
contemplated by this Agreement prior to such default.
3. Amendments.
----------
3.1 Definitions. (a) The following shall be added as new definitions
-----------
in alphabetical order to Section 1.1 of the Credit Agreement:
"BJH Settlement" shall mean the Settlement Agreement, Stipulation to
Settlement Order Under Seal, Release and License, effective as of July 28, 1998,
whereby Synbiotics and the Hospital have agreed to fully and finally settle all
of the controversies between them as described in Schedule 4.4 of the Credit
Agreement. The terms and conditions of the BJH Settlement shall not be amended
without the consent of the Agent as long as either Paribas or Imperial Bank are
Banks.
"BioQuest Note" shall mean the $1,000,000 promissory note issued by
Synbiotics to BioQuest Venture Leasing Partnership, L.P., dated as of March 6,
1998, which is convertible, at the option of Synbiotics, into the common stock
of Synbiotics.
"BJH Notes" shall mean, collectively, the two promissory notes issued
by Synbiotics to the Hospital in connection with and pursuant to the BJH
Settlement.
3
<PAGE>
"Date-Sensitive Data" means any data of any type that includes date
information or which is otherwise derived from or dependent on date information.
"Date-Sensitive System" means any software or hardware system or
component, including any electronic or electronically controlled system, that
processes any Date-Sensitive Data and that is installed, in development or on
order.
"Hospital" shall mean Barnes-Jewish Hospital, a Missouri not-for-
profit corporation with headquarters in St. Louis, Missouri.
"SL Guaranty" shall mean the guaranty by the Borrower of the
obligations of Serge Leterme, an employee of the Borrower, to Imperial Bank
under that certain short term home purchase loan dated September 14, 1998.
"SL Loan" shall mean the $75,000 loan made by the Borrower to Serge
Leterme, an employee of the Borrower, in order to cover his relocation expenses
to San Diego, California.
(b) The defined term "Consolidated EBITDA" shall be and is hereby
amended by replacing the word "and" in the seventh line thereof with 11,11 and
by inserting the following language at the end thereof:
"and (iv) with respect to the Borrower, the costs and expenses incurred by
the Borrower in connection with the BJH Settlement (including without
limitation the issuance of the BJH Notes) in an amount not to exceed
$4,746,000; provided, however, that any loans and advances made after
-----------------
October 31, 1998 by the Borrower and its Subsidiaries to their employees in
accordance with Section 6.8(c) shall be deducted from Consolidated EBITDA
for purposes of Section 6.1."
(c) The defined term "Consolidated Net Income" shall be and is hereby
amended by inserting the following language at the end thereof:
"For purposes of Section 6.1(e)(ii)(b) only, the $4,746,000 in costs and
expenses incurred by the Borrower in connection with the BJH Settlement
shall not be deducted for purposes of determining Consolidated Net Income."
(d) The defined term "Consolidated Tangible Net Worth" shall be and
is hereby amended by inserting the following language at the end thereof:
"For purposes of Section 6.1(e) only, (i) the amounts outstanding under the
BioQuest Note shall constitute Consolidated Tangible Net Worth and (ii) the
after-tax effect of the $4,746,000 costs and expenses at the time incurred
by the Borrower in connection with the BJH Settlement shall be added to
Consolidated Tangible Net Worth."
(e) The defined term "Eligible Accounts Receivable" shall be and is
hereby amended by inserting the following language at the end of clause (p)
thereof:
"; provided, however, that accounts from RM, an Affiliate of the Borrower,
shall be considered to be Eligible Accounts Receivable to the extent
provided for in clause (1) above.
(f) The defined term "Indebtedness" shall be and is hereby amended by
inserting the following language at the end thereof:
"provided, however, that the amounts outstanding under the BioQuest Note
-----------------
and the BJH Notes shall not constitute Indebtedness for purposes of Section
6.1"
4
<PAGE>
3.2 Section 4.16.
------------
(a) Section 4.16 of the Credit Agreement shall be and is hereby
amended by inserting the following after the word "Subsidiary" in the sixth line
thereof:
", as of the Closing Date. Schedule 4.16(b) hereto sets forth the number
of authorized and issued shares of capital stock of the Borrower and each
of its Subsidiaries and the registered owner(s) of each such Subsidiary, as
of October 30, 1998."
(b) Section 4.16 of the Credit Agreement shall be and is hereby
further amended by replacing the word "and" on the twenty-first line thereof
with "," and adding the following at the end thereof:
", and (iv) preferred stock purchase rights issued pursuant to any
shareholder rights plan previously approved by the Agent."
3.3 Schedule 4.19. Schedule 4.19 of the Credit Agreement shall be
-------------
and is hereby amended by deleting item number 4 in its entirety and inserting
the following in replacement thereof:
"4. 1721 Black River Road; C.A. Kaplan Real Estate
Rome, NY 13440 1300 Floyd Avenue
315-337-6014 Rome, NY 13440"
3.4 Section 6.16. The following shall be added as a new Section 6.16
------------
to the Credit Agreement:
"Section 6.16 Conversion of BioQuest Note. The Borrower shall not
---------------------------
repay the BioQuest Note and shall instead convert such note into the common
stock of Borrower in accordance with the terms thereof."
3.5 Section 6.1. Section 6.1(d) shall be and is hereby amended by
-----------
deleting such section in its entirety and inserting the following in replacement
therefor:
"(d) Capital Expenditures. Other than with respect to Prisma
--------------------
Capital Expenditures, which are covered by the following sentence, 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) Capital Expenditures (i) in the 1998 fiscal year which exceed, in
the aggregate, $1,000,000, (ii) in the 1999 fiscal year which exceed, in
the aggregate, $1,000,000 in connection with the Borrower's Date-Sensitive
System (the "DSS Capex") and $1,000,000 in connection with any other
Capital Expenditures (the "Other Capex"), and (iii) in the 2000 fiscal year
and any fiscal year thereafter which exceed, in the aggregate, $1,000,000
for such fiscal year; provided that if the maximum amount set forth above
--------
for any period in clauses (ii) and (iii) exceeds the aggregate amount of
Capital Expenditures made or incurred (or committed to be made or incurred)
during such period (such excess, the "CE Excess"), then the maximum amount
set forth above for the following period (but not any subsequent periods)
shall be increased by the amount of CE Excess; provided further, that
----------------
calculations of CE Excess during the 1999 fiscal year shall only be made
with respect to Other Capex and not DSS Capex. 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; provided, however, that Prisma Capital Expenditures in the 2000
--------
fiscal year and any fiscal year thereafter shall be applied against the
limitation set forth in clause (iii) ."
3.5 Section 6.2. (a) Section 6.2(f) of the Credit Agreement shall be
-----------
and is hereby (i) re-lettered as Section 6.2(i) and (ii) amended by replacing
"(e)" with "(h)".
5
<PAGE>
(b) The following shall be added as new Sections 6.2(f), (g), and (h)
of the Credit Agreement:
"(f) Indebtedness under the BioQuest Note;
(g) Indebtedness under the BJH Notes;
(h) Indebtedness under the SL Guaranty, provided such guaranty shall
terminate on or prior to November 13, 1998;"
3.6 Section 6.4.
-----------
(a) Section 6.4(b) of the Credit Agreement shall be and is hereby
amended by adding the following language at the end thereof:
"provided, however, this Section 6.4(b) shall not apply to the Borrower's
-----------------
acquisition of a nonexclusive license to certain patents of the Hospital,
as more fully described in attachment 1 to the Second Amendment to Patent
Security Agreement, dated as of October 23, 1998, between the Agent and the
Borrower"
(b) Section 6.4(c) of the Credit Agreement shall be and is hereby
amended by inserting the following language at the end thereof:
"except for the amendments to the Borrower's (i) bylaws of February 9,
1998, (ii) articles of incorporation of August 4, 1998 and (iii)
certificates of determination with respect to the Borrower's preferred
stock"
3.7 Section 6.5. Section 6.5 of the Credit Agreement shall be and is
-----------
hereby amended by inserting the following language at the end thereof:
"and (iii) sales of contract rights in connection with the transaction with
Merial LLC allowing Merial LLC to use certain distribution channels and to
receive the benefits of the Borrower's strategic position in the supply of
feline leukemia virus vaccine in North America and Central America"
3.8 Section 6.6. The introductory paragraph of Section 6.6 of the
-----------
Credit Agreement shall be and is hereby amended by replacing "6.2(f)" with
"6.2(h) or (i)".
3.9 Section 6.7. Section 6.7 of the Credit Agreement shall be and is
-----------
hereby amended by inserting the following language at the end thereof:
"and (iii) the Borrower may distribute and/or redeem shares of its common
stock or other equity interests (or rights to acquire other equity
interests) in the Borrower pursuant to any shareholder rights plan
previously approved by the Agent."
3.10 Section 6.8. (a) Section 6.8(c) of the Credit Agreement shall be
-----------
and is hereby amended by deleting such section in its entirety and inserting the
following in replacement therefor:
"(c) loans and advances by the Borrower and its Subsidiaries to their
employees for the purpose of providing for relocation expenses."
(b) The following shall be added as new Sections 6.8(e) and (f) of
the Credit Agreement:
"(e) subsequent to October 31, 1998 or as otherwise agreed to by the
Lenders, loans and advances by the Borrower and its Subsidiaries to
their employees in the ordinary course of its business not exceeding
$1,000 per employee at any one time outstanding; and
6
<PAGE>
(f) the issuance of the BJH Notes and the BioQuest Note and the
acquisition of Prisma Acquisition Corp., a Delaware corporation."
3.11 Section 6.10. Section 6.10 of the Credit Agreement shall be and
------------
is hereby amended by inserting the following sentence at the end thereof:
"The foregoing shall not apply to the conversion of the BioQuest Note into
common stock of the Borrower or to the scheduled complete or partial
forgiveness, based on time of continued service, of the SL Loan or of any
other loans and advances by the Borrower and its Subsidiaries to their
employees for the purpose of providing for relocation expenses."
3.12 Section 6.11. Section 6.11 of the Credit Agreement shall be and
------------
is hereby amended by inserting the following language at the end thereof:
"with the exception of the veterinary diagnostics instrumentation business
of Prisma Acquisition Corp., a Delaware corporation, acquired by the
Borrower"
3.13 Schedule 4.16(b). Schedule 4.16 of the Credit Agreement shall be
----------------
and is hereby amended to include the schedule entitled "Schedule 4.16(b)", which
is attached hereto as an additional schedule to the Credit Agreement.
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 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 effect 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.
7
<PAGE>
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 heretofore 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.
8
<PAGE>
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: V.P. Finance
(signatures continued on next page)
S-1
<PAGE>
PARIBAS,
as Agent and as a Bank
By: /s/ John W. Kopcha
-----------------------
Name: John W. Kopcha
Title: Vice President
By: /s/ Marc A. Preiser
-----------------------
Name: Marc A. Preiser
Title: Assistant Vice President
(signatures continued on next page)
S-2
<PAGE>
IMPERIAL BANK, as a Bank
By: /s/ Leila Ghoroghchi
------------------------
Name: Leila Ghoroghchi
Title: Vice President
S-3
<PAGE>
Schedule 4.16b
Corporate Structure; Capitalization
-----------------------------------
(at 10/31/98)
Authorized Issued
----------- ------
1. Pre-Acquisition
---------------
Synbiotics Corporation 24,800,000 7,393,000
Common Stock
2. Post-Acquisition
----------------
Synbiotics Corporation 24,800,000 9,005,420
Common Stock
Synbiotics Corporation 25,000,000 -0-
Preferred Stock
Synbiotics Europe 47,500,000 FF 47,500,000 FF
(R.M. - Diagnostics S.A.S.)
Common Stock.
<PAGE>
Exhibit 10.9
------------
Translation from French
-----------------------
EMPLOYMENT CONTRACT
BETWEEN
SYNBIOTICS EUROPE SAS, whose registered office is at 299, avenue Jean Jaures,
69007 Lyon, registered with the Lyons RCS under number 412 381 212, and
represented by Mr. Kenneth M. Cohen, fully empowered for the purposes hereof,
pursuant to a decision of the Partners dated July 29, 1997,
Hereinafter referred to as the "Company"
ON THE ONE HAND
AND
Mr. Francois Guillemin, residing at 76, boulevard des Belges, 69006 Lyon, born
on February 18, 1950, a French national, Social Security No. 150026938608410,
ON THE OTHER HAND.
WITNESSETH:
-----------
Pursuant to an employment contract dated March 30, 1977, Mr. Guillemin was hired
by Rhone-Merieux. Most recently, Mr. Guillemin held the position of delegate
responsible veterinarian in the diagnostics department of Rhone-Merieux. This
department was contributed to the Company on July 9, 1997 in the form of the
contribution of an autonomous branch of activity, thus the purpose of this
contract is to define the duties and conditions of Mr. Guillemin's employment
with the Company.
This contract cancels and supersedes any employment contract or any agreement or
understanding of any kind whatsoever which might have been entered into
previously with the Company or the legal entities of which it has become the
assign, it being understood that Mr. Guillemin shall under this contract retain
the benefits he had acquired prior to the contribution.
IT HAS BEEN DECIDED AND AGREED AS FOLLOWS:
------------------------------------------
1. Mr. Guillemin shall be hired by the Company as Director of Research &
Development for an indefinite term. His seniority under his employment contract
dated March 30, 1977 shall be taken over by the Company.
<PAGE>
2. As Director of Research & Development, and responsible pharmacist
veterinarian, Mr. Guillemin shall have the following responsibilities, the list
hereinafter being not limitative or exhaustive:
- - participation in preparing the Company's research and study program;
- - filing of the applications for authorization to market regulated products;
- - organization and supervision, in particular, of the manufacture, packaging,
storage, control and delivery of regulated products.
Mr. Guillemin shall report regularly on the developments in his activities to
the Committee responsible for research & development.
3. Mr. Guillemin shall receive a gross annual compensation of FF 832,510,
payable in 14 installments. Mr. Guillemin's gross annual compensation has been
agreed in view of the nature of his duties and responsibilities and shall be
independent of the time he will actually devote to performing his duties. This
compensation could be increased every year depending on the results achieved by
Mr. Guillemin and the Company. Mr. Guillemin may not, throughout the entire
term of this contract, carry on any professional activity other than the one
described herein, without first obtaining the Company's written consent.
4. In addition to this fixed compensation, Mr. Guillemin will receive a bonus,
pursuant to the Synbiotics group's senior managers' program, as determined from
time to time.
5. Mr. Guillemin will be granted options covering fifty thousand (50,000)
shares of Synbiotics Corporation. The purchase price of these shares will be
the share price at the close of trading on July 9, 1997. Each option shall be
valid for a period of 10 years, Mr. Guillemin being granted an option for 25% of
all the shares mentioned above upon expiration of each of the four first years
of his duties with the Company.
It is specified that in the event of transfer of the Company, Mr. Guillemin will
have the possibility, without respecting the above-mentioned conditions, of
acquiring the balance of the shares not already acquired by him on the date of
the transfer.
6. The Company shall provide Mr. Guillemin with a company car of the Monospace
type (Renault Espace) for his business and personnel requirements. The Company
shall bear the leasing costs of the vehicle and the reasonable expenses incurred
by Mr. Guillemin for his business activities, upon presentation of the
corresponding receipts, up to an approximate amount of FF 68,000 per year.
7. Mr. Guillemin will have 31 work days of paid vacation per year according to
legal conditions, in addition to the legal holidays granted by labor laws in
France, to be taking depending on work requirements.
8. Mr. Guillemin shall normally carry out his duties at the Company's
registered office in Lyon, it being understood that this place of work may, as
the case may be, be transferred to another place depending on work requirements,
it being understood that such transfer shall not constitute a material
modification of his employment contract.
The parties shall agree reciprocally, in good faith, on the terms and
conditions of this transfer.
9. In view of his duties, Mr. Guillemin will need to travel frequently for
business purposes both in France and abroad, which he declares that he expressly
accepts.
The business expenses on the one hand and the reasonable travel expenses on the
other hand which Mr. Guillemin incurs at such times will be reimbursed to him
upon presentation of receipts, in accordance with the usual practice applicable
within the profession.
<PAGE>
10. Mr. Guillemin undertakes to respect the terms of the confidentiality
undertaking attached to this contract.
11. In the event of termination of this employment contract for dismissal other
than for serious or gross misconduct (faute grave or faute lourde), Mr.
Guillemin shall, in addition to the collective bargaining agreement and legal
severance payments, receive an amount equal to six months of salary.
In any event, the total amount received by Mr. Guillemin shall be equal to the
greater of (a) 12 months of salary or (b) the total amount of the legal and
collective bargaining agreement severance payments.
Moreover, an additional indemnity equal to six months of salary shall be paid to
Mr. Guillemin in the event that the termination of this contract occurs
following the acquisition of the Company by another company, or following any
change of control occurring in the Company's capital.
12. For all that is not provided for herein, the parties refer to the labor
regulations in force in France, and to the provisions of the National Collective
Bargaining Agreement of the Pharmaceutical Industry as extended.
Executed in two originals
In Lyon on October 12, 1997
Signature (preceded by the handwritten words
in French "lu et approuve" - read and approved)
/s/ Francois Guillemin /s/ Kenneth M. Cohen
- ---------------------------- -------------------------
Francois Guillemin For Synbiotics Corporation
<PAGE>
EXHIBIT 10.41.2
---------------
THIRD AMENDMENT
---------------
The Agreement between Merial Limited ("Merial') and Synbiotics Corporation
("Synbiotics"), dated January 1, 1992 and amended on July 27, 1993 and August
22, 1996 (as so amended, the "Agreement"), is amended as follows on March 1,
1999, effective as of July 1, 1998:
A. Paragraph 1.2.3 is amended to add "This includes the right to sell
FeLV "Product" and any FeLV "Product" combination vaccines in the USA through
ethical distributors acting as sales agents toward USA veterinarians; it is
understood, however, that Merial doing so will not prevent Synbiotics from
selling FeLV "Product" and FeLV "Product" combination vaccines through the same
and/or other ethical distributors acting as ethical distributors as contemplated
by the Agreement."
B. Paragraph 3.3.2 as amended is deleted in its entirety.
C. Synbiotics agrees to use its reasonable best efforts and work with
Merial to try to negotiate amendments to Synbiotics' current agreement with Bio-
Trends International, Inc. to allow Bio-Trends International, Inc. and Merial to
deal directly with each other (while preserving Synbiotics' other rights) to
facilitate the operation of Merial's business (as contemplated by the Agreement,
as hereby amended) with respect to the North American/Central American market.
D. In consideration for the above, Merial agrees to pay Synbiotics
$1,600,000 immediately. Royalties paid by Merial to Synbiotics for the quarter
ended September 30, 1998 will be deducted from this amount.
E. Except as expressly amended by this Amendment, the Agreement remains
unchanged and in full force and effect.
Synbiotics Corporation Merial Limited (domesticated in Delaware as
Merial LLC, and the successor in interest to
Rhone Merieux, Inc.)
By /s/ Michael Green By /s/ Donald G. Hildebrand
---------------------- ------------------------
Title V.P. Finance Title V.P. Merial Limited
Print Name Michael Green Print Name Donald G. Hildebrand
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1999 AND THE RELATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND CASH FLOWS FOR THE THREE
MONTHS ENDED MARCH 31, 1999 INCLUDED ELSEWHERE IN THIS FORM 10-QSB AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 5,914
<SECURITIES> 1,372
<RECEIVABLES> 5,447
<ALLOWANCES> 59
<INVENTORY> 5,669
<CURRENT-ASSETS> 19,433
<PP&E> 5,925
<DEPRECIATION> 3,927
<TOTAL-ASSETS> 46,811
<CURRENT-LIABILITIES> 7,909
<BONDS> 6,512
2,317
0
<COMMON> 38,401
<OTHER-SE> (9,726)
<TOTAL-LIABILITY-AND-EQUITY> 46,811
<SALES> 9,390
<TOTAL-REVENUES> 10,846
<CGS> 4,080
<TOTAL-COSTS> 8,072
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 327
<INCOME-PRETAX> 2,447
<INCOME-TAX> 1,079
<INCOME-CONTINUING> 1,368
<DISCONTINUED> 0
<EXTRAORDINARY> 116
<CHANGES> 0
<NET-INCOME> 1,484
<EPS-PRIMARY> .16
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