<PAGE>
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
FORM 10-QSB/A
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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: (858) 451-3771
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [_]
As of August 11, 1999, 9,188,595 shares of Common Stock were outstanding.
Transitional Small Business Disclosure Format: Yes [_] No [X]
================================================================================
<PAGE>
In March 1999, we recognized $1,453,000 of non-refundable license fee revenue
related to the amendment of a supply agreement with Merial Limited ("Merial") in
exchange for giving Merial broadened U.S. distribution rights. After initial
consultations with our independent accounting firm, and based on our belief that
our future commitments would be insignificant, we recorded the $1,453,000 cash
received as revenue in the first quarter of 1999. Upon further review of the
facts and circumstances, we remain contractually obligated to continue to supply
Merial with product under this agreement. Based on this, and recent trends in
the accounting profession, we decided it would be more appropriate to recognize
the revenue over the remaining six year life of the supply agreement even though
the cash was received. As a result, we are amending our Quarterly Report on Form
10-QSB for the quarterly period ended June 30, 1999 to reflect the adjustment to
the license fee revenue.
SYNBIOTICS CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
-----
<S> <C> <C>
Part I Condensed Consolidated Statement of Operations and Comprehensive Income -
Three and six months ended June 30, 1999 and 1998 3
Condensed Consolidated Balance Sheet -
June 30, 1999 and December 31, 1998 4
Condensed Consolidated Statement of Cash Flows -
Six months ended June 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Management's Discussion and Analysis or Plan of Operation 9
Part II Other Information 16
</TABLE>
-2-
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (continued)
Synbiotics Corporation
Condensed Consolidated Statement of Operations and Comprehensive Income (Loss)
- ------------------------------------------------------------------------------
(unaudited)
- -----------
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
----------------------------- -----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Net sales $ 8,336,000 $ 8,936,000 $ 17,726,000 $ 17,737,000
License fees 66,000 126,000
Royalties 2,000 65,000 5,000 139,000
------------ ------------ ------------ ------------
8,404,000 9,001,000 17,857,000 17,876,000
Operating expenses:
Cost of sales 3,409,000 3,859,000 7,486,000 7,905,000
Research and development 576,000 592,000 1,136,000 1,113,000
Selling and marketing 1,782,000 1,572,000 3,800,000 3,163,000
General and administrative 1,401,000 880,000 2,816,000 2,119,000
Patent litigation settlement 4,601,000 4,601,000
------------ ------------ ------------ ------------
7,168,000 11,504,000 15,238,000 18,901,000
------------ ------------ ------------ ------------
Income (loss) from operations 1,236,000 (2,503,000) 2,619,000 (1,025,000)
Other income (expense):
Interest, net (286,000) (258,000) (613,000) (515,000)
------------ ------------ ------------ ------------
Income (loss) before income taxes 950,000 (2,761,000) 2,006,000 (1,540,000)
Provision for (benefit from) income taxes 477,000 (1,148,000) 942,000 (618,000)
------------ ------------ ------------ ------------
Income before extraordinary item 473,000 (1,613,000) 1,064,000 (922,000)
Early extinguishment of debt, net of tax 116,000
------------ ------------ ------------ ------------
Net income (loss) 473,000 (1,613,000) 1,180,000 (922,000)
Cumulative translation adjustment (350,000) 188,000 (1,254,000) (60,000)
------------ ------------ ------------ ------------
Comprehensive income (loss) $ 123,000 $ (1,425,000) $ (74,000) $ (982,000)
============ ============ ============ ============
Basic income (loss) per share:
Income (loss) from continuing operations $ 0.05 $ (0.19) $ 0.11 $ (0.12)
Early extinguishment of debt, net of tax 0.01
------------ ------------ ------------ ------------
Net income (loss) $ 0.05 $ (0.19) $ 0.12 $ (0.12)
============ ============ ============ ============
Diluted income (loss) per share:
Income (loss) from continuing operations $ 0.05 $ (0.19) $ 0.11 $ (0.12)
Early extinguishment of debt, net of tax 0.01
------------ ------------ ------------ ------------
Net income (loss) $ 0.05 $ (0.19) $ 0.12 $ (0.12)
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-3-
<PAGE>
Item 1. Financial Statements (continued)
Synbiotics Corporation
Condensed Consolidated Balance Sheet
- ------------------------------------
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------ ------------
(unaudited) (audited)
<S> <C> <C>
Assets
Current assets:
Cash and equivalents $ 5,610,000 $ 4,357,000
Securities available for sale 1,384,000 1,613,000
Accounts receivable 5,075,000 4,135,000
Inventories 5,620,000 5,179,000
Deferred tax assets 279,000 341,000
Other current assets 621,000 820,000
------------ ------------
Total current assets 18,589,000 16,445,000
Property and equipment, net 2,026,000 1,774,000
Goodwill 12,603,000 13,372,000
Deferred tax assets 7,181,000 7,873,000
Deferred debt issuance costs 551,000 653,000
Other assets 4,674,000 5,329,000
------------ ------------
$ 45,624,000 $ 45,446,000
============ ============
Liabilities and Shareholders' Equity:
Current liabilities:
Accounts payable and accrued expenses $ 4,255,000 $ 5,217,000
Current portion of long-term debt 1,000,000 2,000,000
Income taxes payable 186,000
Deferred revenue 242,000
------------ ------------
Total current liabilities 5,683,000 7,217,000
------------ ------------
Long-term debt 6,314,000 6,716,000
Deferred revenue 1,090,000
Other liabilities 1,429,000 1,369,000
------------ ------------
8,833,000 8,085,000
------------ ------------
Mandatorily redeemable common stock 2,349,000 2,287,000
------------ ------------
Non-mandatorily redeemable common stock and other shareholders' equity:
Common stock, no par value, 24,800,000 share authorized,
8,548,000 and 8,246,000 shares issued and outstanding at
June 30, 1999 and December 31, 1998 39,172,000 38,134,000
Common stock warrants 1,003,000 1,003,000
Accumulated other comprehensive income (758,000) 496,000
Accumulated deficit (10,658,000) (11,776,000)
------------ ------------
Total non-mandatorily redeemable common stock and other
shareholders' equity 28,579,000 27,857,000
------------ ------------
$ 45,624,000 $ 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>
Six Months Ended June 30,
--------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,180,000 $ (922,000)
Adjustments to reconcile net income (loss) to net cash provided
by (used for) operating activities:
Depreciation and amortization 1,231,000 929,000
Early extinguishment of debt (200,000)
Changes in assets and liabilities:
Account receivable (940,000) (1,680,000)
Inventories (441,000) (15,000)
Deferred taxes 754,000 (664,000)
Other assets 707,000 (177,000)
Accounts payable and accrued expenses (246,000) 833,000
Income taxes payable 186,000 (91,000)
Deferred revenue 1,332,000
Other liabilities 59,000 3,922,000
------------ ------------
Net cash provided by operating activities 3,685,000 2,135,000
------------ ------------
Cash flows from investing activities:
Acquisition of property and equipment (432,000) (252,000)
Investment in securities available for sale (133,000)
Proceeds from sale of securities available for sale 229,000
------------ ------------
Net cash (used for) investing activities (203,000) (385,000)
------------ ------------
Cash flows from financing activities:
Payments of long-term debt (1,300,000) (633,000)
Mandatorily redeemable stock issuance costs (16,000)
Proceeds from issuance of common stock, net 325,000 (63,000)
------------ ------------
Net cash (used for) financing activities (975,000) (712,000)
------------ ------------
Net increase in cash and equivalents 2,507,000 1,038,000
Effect of exchange rates on cash (1,254,000) (60,000)
Cash and equivalents - beginning of period 4,357,000 2,190,000
------------ ------------
Cash and equivalents - end of period $ 5,610,000 $ 3,168,000
============ ============
</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 condensed consolidated balance sheet as of June 30, 1999 and
the condensed consolidated statements of operations and comprehensive income and
of cash flows for the three and six month periods ended June 30, 1999 and 1998
have been prepared by Synbiotics Corporation (the "Company") and have not been
audited. The condensed 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, in the first quarter of 1999 the Company
recognized a $116,000 extraordinary gain upon early extinguishment of the debt,
net of income taxes totaling $84,000.
Note 3 - Inventories:
Inventories consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- -------------
(unaudited) (audited)
<S> <C> <C>
Raw materials $2,331,000 $2,219,000
Work in progress 786,000 904,000
Finished goods 2,503,000 2,056,000
---------- ----------
$5,620,000 $5,179,000
========== ==========
</TABLE>
-6-
<PAGE>
Item 1. Financial Statements (continued)
SYNBIOTICS CORPORATION
Notes to Condensed Consolidated Financial Statements (unaudited)
- --------------------------------------------------------------------------------
Note 4 - Earnings (Loss) per Share:
The following is a reconciliation of net income (loss) and share amounts used in
the computations of income (loss) per share:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six months Ended June 30,
----------------------------- ---------------------------
1999 1998 1999 1998
------------- -------------- ------------- ------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Basic net income (loss) used:
Income (loss) from continuing operations $ 473,000 $(1,613,000) $1,064,000 $ (922,000)
Less accretion of mandatorily redeemable
common stock (31,000) (37,000) (62,000) (72,000)
---------- ----------- ---------- ----------
Income (loss) from continuing operations
used in computing basic income (loss)
from continuing operations per share 442,000 (1,650,000) 1,002,000 (994,000)
Early extinguishment of debt, net of tax 116,000
---------- ----------- ---------- ----------
Net income (loss) used in computing basic
net income (loss) per share $ 442,000 $(1,650,000) $1,118,000 $ (994,000)
========== =========== ========== ==========
Diluted net income (loss) used:
Income (loss) from continuing operations $ 473,000 $(1,613,000) $1,064,000 $ (922,000)
Less accretion of mandatorily redeemable
common stock (31,000) (37,000) 62,000 (72,000)
---------- ----------- ---------- ----------
Income (loss) from continuing operations
used in computing diluted income (loss)
from continuing operations per share 442,000 (1,650,000) 1,002,000 (994,000)
Early extinguishment of debt, net of tax 116,000
---------- ----------- ---------- ----------
Net income (loss) used in computing diluted
net income (loss) per share $ 442,000 $(1,650,000) $1,118,000 $ (994,000)
========== =========== ========== ==========
Shares used:
Weighted average common shares outstanding
used in computing basic income (loss) per share 9,071,000 8,669,000 9,003,000 8,508,000
Weighted average options and warrants to
purchase common stock as determined by
application of the treasury method 381,000 365,000
---------- ----------- ---------- ----------
Shares used in computing diluted income (loss)
per share 9,452,000 8,669,000 9,368,000 8,508,000
========== =========== ========== ==========
</TABLE>
-7-
<PAGE>
Item 1. Financial Statements (continued)
SYNBIOTICS CORPORATION
Notes to Condensed Consolidated Financial Statements (unaudited)
- --------------------------------------------------------------------------------
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 totaling 680,000 shares and
674,000 shares have been excluded from the shares used in computing diluted net
loss for the three and six months ended June 30, 1998, as their effect is anti-
dilutive. In addition, warrants to purchase 284,000 shares of common stock at
$4.54 per share have been excluded from the shares used in computing diluted net
loss per share for the three and six months ended June 30, 1999 and 1998 as
their exercise price is higher than the weighted average market price for those
periods, as well as their effect is anti-dilutive for the three and six months
ended June 30, 1998.
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 diagnostic, vaccine and instrument products, it does not base its business
decision making on a product category basis.
The following are revenues for the Company's diagnostic, vaccine and instrument
products:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six months Ended June 30,
--------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Diagnostics $ 6,748,000 $ 6,472,000 $ 14,138,000 $ 13,664,000
Vaccines 1,347,000 2,381,000 3,106,000 3,990,000
Instruments 241,000 83,000 482,000 83,000
Other revenues 68,000 65,000 131,000 139,000
------------ ------------ ------------- -------------
$ 8,404,000 $ 9,001,000 $ 17,857,000 $ 17,876,000
============ ============ ============= =============
</TABLE>
The following are revenues and long-lived asset information by geographic area:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six months Ended June 30,
--------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues:
United States $ 6,189,000 $ 6,573,000 $ 12,585,000 $ 13,515,000
France 814,000 1,168,000 2,202,000 2,798,000
Other foreign countries 1,401,000 1,260,000 3,070,000 1,563,000
------------ ------------ ------------- -------------
$ 8,404,000 $ 9,001,000 $ 17,857,000 $ 17,876,000
============ ============ ============= =============
June 30, December 31,
1999 1998
---- ----
(unaudited) (audited)
Long-lived assets:
United States $ 12,793,000 $ 13,038,000
France 7,061,000 8,090,000
------------- -------------
$ 19,854,000 $ 21,128,000
============= =============
</TABLE>
-8-
<PAGE>
The Company had sales to one customer totaling $1,690,000 during the three
months ended June 30, 1999. Sales to one customer totaled $2,292,000 during the
six months ended June 30, 1999. During the six months ended June 30, 1998, sales
to two customers totaled $5,835,000.
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/A contains
both historical financial information and forward-looking statements. We do not
provide forecasts of future financial performance. While we are optimistic about
our 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 our forward-looking
statements and assessing our future financial condition, results of operations
and cash flows:
The market in which we operate is intensely competitive, particularly with
regard to our key canine heartworm diagnostic products, and many of our
competitors are larger and more established
The market for animal health care products is extremely competitive. Companies
in the animal health care market compete to develop new products, to market and
manufacture products efficiently, to implement effective research strategies,
and to obtain regulatory approval. Our current competitors include
significantly larger companies such as Pfizer Animal Health, Merial S.A.S. (the
successor to Rhone-Merieux), Schering-Plough and IDEXX Laboratories. These
companies are substantially larger and have greater financial, manufacturing,
marketing, and research resources than we do. Our current competitors also have
extensive expertise in conducting pre-clinical and clinical testing of new
products and in obtaining the necessary regulatory approvals to market products.
In addition, IDEXX Laboratories prohibits its distributors from selling
competitors' products, including ours. Further, additional competition could
come from new entrants to the animal health care market. We cannot assure you
that we will be able to compete successfully in the future or that competition
will not harm our business.
Our canine heartworm products constitute a large portion of our sales. In
addition to our historic competition with IDEXX Laboratories, the sales leader
in this product category, our sales were substantially affected in 1999 by a new
heartworm product from Heska Corporation. We have filed a lawsuit against
Heska, claiming that its heartworm product infringes our patent
We have a history of losses and an accumulated deficit
Although we generated profits for the years ended December 31, 1997 and 1996, we
did not achieve profitability for the year ended December 31, 1998 and we have
had a history of losses. We have incurred a consolidated accumulated deficit of
$10,658,000 at June 30, 1999. We may not achieve profitability again and if we
are profitable in the future there can be no assurance that profitability can be
sustained.
We depend on third party manufacturers
We contract for the manufacture of some of our products, including all of our
vaccines, our Witness(R), VetRED(R) and ICT Gold(TM) diagnostic kits, and
our SCA 2000(TM) instrument. We also expect that some of our anticipated new
products will be manufactured by third parties. In addition, some of the
products manufactured for us by third parties, including Witness(R),
VetRED(R) and ICT Gold(TM) are licensed to us by their manufacturers. There
are a number of risks associated with our dependence on third-party
manufacturers including:
. reduced control over delivery schedules;
. quality assurance;
. manufacturing yields and costs;
. the potential lack of adequate capacity during periods of excess demand;
. limited warranties on products supplied to us; and
-9-
<PAGE>
. increases in prices and the potential misappropriation of our
intellectual property.
If our third party manufacturers fail to supply us with an adequate number of
finished products, our business would be significantly harmed. We have no long-
term contracts or arrangements with any of our vendors that guarantee product
availability, the continuation of particular payment terms or the extension of
credit limits.
In addition, sales of our feline leukemia virus ("FeLV") vaccine to Merial
S.A.S. and other distributors for resale in Europe will be at risk unless our
manufacturer, Bio-Trends International, Inc. ("Bio-Trends"), obtains European
Union regulatory approvals for its manufacturing facilities. Loss of these
sales would have a material adverse effect on our profitability and our cash
flows.
If we encounter delays or difficulties in our relationships with our
manufacturers, the resulting problems could have a material adverse effect on
us. In fact, all of our vaccine products (exclusive of our FeLV and canine
corona virus products) were manufactured using bulk antigen fluids that were
supplied by a third party. The supply agreement expired and we were unable to
locate a replacement supplier for these bulk antigen fluids. We decided to
discontinue the sales of the affected products once our remaining supplies were
exhausted, which occurred during the third quarter of 1999. Sales of the
affected products totaled $2,073,000, $1,596,000 and $1,225,000 during 1998,
1997 and 1996, respectively.
We rely on third party distributors for a substantial portion of our sales, but
we are experiencing difficulties with the distribution channel
During the year ended December 31, 1998, sales to two distributors totaled 33%
of our net sales. Because we have historically depended upon distributors for
such a large portion of our sales, our ability to establish and maintain an
adequate sales and marketing capability in any or all of our targeted markets
may be impaired. Our failure to independently sell and market our products
could materially harm our business. Further, distributor agreements render our
sales exposed to the efforts of third parties who are not employees of
Synbiotics and over whom we have no control. Their failure to generate
significant sales of our products could materially harm our business. Reduction
by these distributors of the quantity of our products which they distribute
would materially harm our business. In addition, IDEXX Laboratories'
prohibition against its distributors carrying competitors' products, including
ours, has and could continue to make some distributors unavailable to us. We
adopted a similar policy in the second quarter of 1999, which caused some of our
distributors to abandon our product line. Although we have rescinded this
policy, we do not expect to get the distributors back to any meaningful extent.
We are also exposed to the risk that any sales by us directly to veterinarians
could alienate our current distributors.
Our direct selling efforts may not succeed
We are increasing our efforts to sell our products directly to veterinarians,
including by telesales and over the Internet. We are inexperienced in large-
scale direct selling efforts and may not be able to successfully execute this
strategy. Also, veterinarians have traditionally relied on distributors, and
the number of veterinarians willing to purchase directly from manufacturers may
be smaller than we believe.
Our profitable vaccine sales in Europe may decline soon
Merial distributes in Europe our FeLV vaccine, which we obtain from Bio-Trends.
Our gross profit in 1998 on these sales of FeLV to Merial in Europe was
$520,000. Merial has exercised a contractual right which will enable it, in
2002, to introduce its own FeLV vaccine product in Europe. If Merial does so,
our sales to Merial in Europe would probably decline sharply.
There is 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"), 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
-10-
<PAGE>
entering markets in which we have no or limited direct prior experience. In
addition, there can be no assurance that the acquisitions will not have a
material adverse effect upon our business, results of operations, financial
condition or cash flows, 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 us, as well as operating and development expenses
inherent in the Acquired Business itself as opposed to integration of the
Acquired Business.
We depend on key executives and personnel
Our future success will depend, to a significant extent, on the ability of our
management to operate effectively, both individually and as a group.
Competition for qualified personnel in the animal health care products industry
is intense, and we may not be successful in attracting and retaining such
personnel. There are only a limited number of persons with the requisite skills
to serve in those positions and it may become increasingly difficult to hire
such persons.
The loss of the services of any of our key personnel or the inability to attract
or retain qualified personnel could harm our business.
We rely on new and recent products
We rely to a significant extent on new and recently developed products, and
expect that we will need to continue to introduce new products to be successful
in the future. There can be no assurance that we will obtain and maintain
market acceptance of our products. There can be no assurance that future
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 we are unable to
produce internally, or to contract for, a sufficient supply of our new products
on acceptable terms, or if we should encounter delays or difficulties in our
relationships with manufacturers, the introduction of new products would be
delayed, which could have a material adverse effect on our business.
We may need additional capital in the future
We currently anticipate that our existing cash balances and short term
investments and cash flow expected to be generated from future operations will
be sufficient to meet our liquidity needs for at least the next twelve months.
However, we may need to raise additional funds if our estimates of revenues,
working capital and/or capital expenditure requirements change or prove
inaccurate or in order for us to respond to unforeseen technological or
marketing hurdles or to take advantage of unanticipated opportunities.
Further, our future capital requirements will depend on many factors beyond our
control or ability to accurately estimate, including continued scientific
progress in our product 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. In addition, we expect to review
potential acquisitions that would compliment our existing product offerings or
enhance our technical capabilities. While we have no current agreements or
negotiations underway with respect to any such acquisition, any future
transaction of this nature could require potentially significant amounts of
capital. Such funds may not be available at the time or times needed, or
available on terms acceptable to us. If adequate funds are not available, or
are not available on acceptable terms, we may not be able to take advantage of
market opportunities, to develop new products, or to otherwise respond to
competitive pressures. This inability could materially harm our business.
In July 1997, we obtained $15,000,000 of debt financing from Banque Paribas, of
which $11,493,000 was used in connection with our acquisition of portions of
Rhone Merieux S.A.S. The $15,000,000 included a $5,000,000 revolving line of
credit. Draws by us under this line of credit are subject to certain
requirements and can be used only for certain purposes. Additionally, Banque
Paribas requires us to maintain certain financial ratios and levels of tangible
net worth and also restricts our ability to pay dividends and make loans,
capital expenditures, or investments without its consent.
-11-
<PAGE>
If adequate funds are not available to us, or if they are not available on terms
reasonably favorable to us, we may need to delay, reduce, or eliminate one or
more of our research and development programs. Any of these events would impair
our competitive position and harm our business.
Our canine heartworm business is seasonal
Our operations are seasonal due to the success of our canine heartworm
diagnostic products. Our sales and profits tend to be concentrated in the first
half of the year as our distributors prepare for the heartworm season by
purchasing diagnostic products for resale to veterinarians. The operations of
SBIO-E have reduced our seasonality as sales of their large-animal diagnostic
products tend to occur evenly throughout the year. We believe that increased
sales of our instrument products will also reduce our seasonality.
Our failure to adequately establish or protect our proprietary rights may
adversely effect us
We rely on a combination of patent, copyright, and trademark laws, and on trade
secrets and confidentiality provisions and other contractual provisions to
protect our proprietary rights. These measures afford only limited protection.
We currently have 11 issued U.S. patents and several pending patent
applications. Our means of protecting our proprietary rights in the U.S. or
abroad may not be adequate and competitors may independently develop similar
technologies. Our future success will depend in part on our ability to protect
our proprietary rights and the technologies used in our principal products.
Despite our efforts to protect our proprietary rights, unauthorized parties may
attempt to copy aspects of our products or to obtain and use trade secrets or
other information that we regard as proprietary. In addition, the laws of some
foreign countries do not protect our proprietary rights as fully as do the laws
of the U.S. Issued patents may not preserve our proprietary position. Even if
they do, competitors or others may develop technologies similar to or superior
to our own. If we do not enforce and protect our intellectual property, our
business will be harmed.
From time to time, third parties, including our competitors, have asserted
patent, copyright, and other intellectual property rights to technologies that
are important to us. We expect that we will increasingly be subject to
infringement claims as the number of products and competitors in the animal
health care market increases.
The results of any litigated matter are inherently uncertain. In the event of
an adverse result in any litigation with third parties that could arise in the
future, we could be required to:
. pay substantial damages, including treble damages if we are held
to have willfully infringed;
. cease the manufacture, use and sale of infringing products;
. expend significant resources to develop non-infringing
technology; or
. obtain licenses to the infringing technology.
Licenses may not be available from any third party that asserts intellectual
property claims against us on commercially reasonable terms, or at all.
Also, litigation is costly regardless of its outcome and can requires
significant management attention. For example, in 1997, Barnes-Jewish Hospital
filed an action against claiming that our canine heartworm diagnostic products
infringe their patent. We settled this lawsuit, but there can be no assurance
that we would be able to resolve similar incidents in the future.
Also, because our patents and patent applications cover novel diagnostic
approaches,
. the patent coverage which we receive could be significantly narrower
than the patent coverage we seek in our patent applications; and
. our patent positions involve complex legal and factual issues which
can be hard for patent examiners or lawyers asserting patent coverage
to successfully resolve.
Because of this, our patent position could be vulnerable and our business could
be materially harmed.
-12-
<PAGE>
The U.S. patent application system also exposes us to risks. In the United
States, the first party to make a discovery is granted the right to patent it
and patent applications are maintained in secrecy until the underlying patents
issue. For these reasons, we can never know if we are the first to discover
particular technologies. Therefore, we can never be certain that our
technologies will be patented and we could become involved in lengthy,
expensive, and distracting disputes concerning whether we were the first to make
the disputed discovery. Any of these events would materially harm our business.
Our business is regulated by the United States and various foreign governments
Our business is subject to substantial regulation by the United States
government, most notably the United States Department of Agriculture, and the
French government. In addition, our operations may be subject to future
legislation and/or rules issued by domestic or foreign governmental agencies
with regulatory authority relating to our business. There can be no assurance
that we will continue to be in compliance with any of these regulations.
For marketing outside the United States, we, and our suppliers, are subject to
foreign regulatory requirements, which vary widely from country to country.
There can be no assurance that we, and our suppliers, will meet and sustain
compliance with any such requirements. In particular, our sales of feline
leukemia virus vaccine to Merial S.A.S. or other distributors for resale in
Europe will be at risk unless Bio-Trends, our supplier, obtains European Union
regulatory approvals for its manufacturing facilities.
Our liability insurance may prove inadequate
Our products carry an inherent risk of product liability claims and associated
adverse publicity. While we have maintained product liability insurance for
such claims to date, we cannot be certain that this type of insurance will
continue to be available to us or that, if it is available, that it can be
obtained on acceptable terms. Also, our current coverage limits may not be
adequate. Any claim against us which results in our having to pay damages in
excess of our coverage limits will materially harm our business. Even if such a
claim is covered by our existing insurance, the resulting increase in insurance
premiums or other charges would increase our expenses and harm our business.
We use hazardous materials
Our business requires that we store and use hazardous materials and chemicals,
including radioactive compounds. Although we believe that our procedures for
storing, handling, and disposing of these 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.
If any of these materials were mishandled, or if an accident with them occurred,
the consequences could be extremely damaging and we could be held liable for
them. Our liability for such an event would materially harm our business and
could exceed all of our available resources for satisfying it.
Results of Operations
Our net sales for the second quarter of 1999 decreased by $600,000 or 7% from
the second quarter of 1998. The decrease in our net sales reflects a net
increase in our sales of diagnostic products of approximately $242,000, a
decrease in our vaccine product sales of approximately $1,000,000 and an
increase in our instrument sales of $158,000. The increase in the sales of our
diagnostic products is primarily due to an increase in our canine heartworm
diagnostics sales of 4%. The increased canine heartworm diagnostics sales were
due to increases in the sales of our rapid canine heartworm diagnostic tests,
resulting from the success of our WITNESS(R) product (which we introduced in the
U.S. in the third quarter of 1998), and further increases in our DiroCHEK(R)
sales; however, our sales of our canine heartworm diagnostic products have been
impacted by increased competition. The decreased vaccine sales reflected a
decrease of 45% in sales of bulk FeLV vaccine (related to the timing of
shipments as requested by our OEM customer), and a 42% decrease in sales of
vaccines to private label partners resulting from the phase-out of sales of most
of our Synbiotics-labeled vaccines. Our instrument business, which we acquired
in March 1998, contributed 3% of our sales for the second quarter of 1999, as
compared with less than 1% for the prior year.
Our net sales for the six months ended June 30, 1999 decreased by $11,000 from
the six month period ended June 30, 1998. The decrease in our net sales
reflects a net increase in our sales of diagnostic products of approximately 3%,
a decrease in our vaccine product sales of 22% and an increase in our instrument
sales of 483%. The increase in the sales of our diagnostic products is due
primarily to an increase in our canine heartworm diagnostic sales of 8%. The
increased canine heartworm diagnostics sales were due to increases in the sales
of our rapid canine heartworm diagnostic tests, resulting from the success of
our WITNESS(R) product
-13-
<PAGE>
(which we introduced in the U.S. in the third quarter of 1998), and further
increases in our DiroCHEK(R) sales; however, our sales of our canine heartworm
diagnostic products have been impacted by increased competition. The decreased
vaccine sales reflected a decrease of 16% in sales of bulk FeLV vaccine (related
to the timing of shipments as requested by our OEM customer) and a 27% decrease
in sales of vaccines to private label partners resulting from the phase-out of
sales of most of our Synbiotics-labeled vaccines. Our instrument business, which
we acquired in March, 1998, contributed 3% of sales for the first six months of
1999, compared with less than 1% for the prior year.
All of our vaccine products (exclusive of our FeLV vaccine products) were
manufactured using bulk antigen fluids that were supplied by a third party. The
supply agreement expired and we were unable to locate a replacement supplier for
these bulk antigen fluids. We decided to discontinue the sales of the affected
products once our remaining supplies were exhausted, which occurred during the
third quarter of 1999. Sales of the affected products totaled $2,073,000 and
$1,596,000 during 1998 and 1997, respectively.
Although veterinary products manufacturers, including us, have traditionally
relied on distributors, we have been increasing our direct sales of products to
veterinarians via telesales and the Internet as part of a focused strategy. In
addition, we stopped selling to several distributors and to Vedco, Inc., a
distributor co-op, in the second quarter of 1999.
Our cost of sales as a percentage of our net sales was 41% during the second
quarter of 1999 compared to 43% during the second quarter of 1998 (i.e., our
gross margin increased to 59% from 57%). The higher gross margin is a direct
result of three factors: i) a high percentage of our sales relate to products
manufactured by us rather than by third party manufacturers; ii) a decrease in
our sales of lower margin vaccines, and iii) the fact that a significant portion
of our manufacturing costs are fixed costs. Among our major products, our
DiroCHEK(R) canine heartworm diagnostic products are manufactured at our
facilities, whereas our WITNESS(R), ICT GOLD(TM) HW, VetRED(R) and all our
vaccines are manufactured by third parties. In addition to affecting our gross
margins, outsourcing of manufacturing renders us relatively more dependent on
the third-party manufacturers. Our cost of sales as a percentage of our net
sales was 42% during the six months ended June 30, 1999 compared to 45% during
the six months ended June 30, 1998 (i.e. our gross margins increased to 58% from
55%). The higher gross margins are a result of the three factors mentioned
above.
In March 1999, we amended (effective July 1, 1998) our FeLV vaccine supply
agreement with Merial Limited ("Merial"). Since 1992, we have supplied Bio-
Trends-manufactured FeLV vaccine to Merial in the United States. This has
included shipments to Merial at our cost, while Merial has paid a royalty to us
on their sales of Merial-labeled FeLV vaccine. In exchange for $1,500,000 in
cash ($1,453,000 of which we are recognizing ratably over the remaining term of
the supply agreement, and the remainder was applied to royalties receivable from
Merial), the revised supply agreement broadens Merial's U.S. distribution rights
(which had been an area of ongoing discussions) and eliminates the royalty. In
addition, we will work with Merial to try to have Bio-Trends supply FeLV vaccine
directly to Merial for U.S. distribution. Our FeLV vaccine sales to Merial for
U.S. resale totaled $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 us, we will lose net sales but have a higher overall gross
margin. In the meantime, we will continue to resell Bio-Trends-supplied FeLV
vaccine to Merial at no profit for U.S. resale. Our sales of our own VacSyn and
other FeLV-labeled vaccine products, our sales of Bio-Trends supplied FeLV
vaccine to Merial S.A.S. in France, which are at a profit rather than at cost,
and the collaborative research relationship between Merial and us were not
affected by this amendment.
Our research and development expenses during the second quarter of 1999
decreased $16,000 or 3% from the second quarter of 1998 and increased during the
six months ended June 30, 1999 by $23,000 or 2% over the six months ended June
30, 1998. The decrease for the quarter relates to the timing of external
research projects and the increase for the six months is primarily due to an
increase in personnel costs resulting from the March 1998 acquisition of Prisma.
Our research and development expenses as a percentage of our net sales were 7%
during the second quarters of 1999 and 1998, and were 6% during the six months
ended June 30, 1999 and 1998. We expect our research and development expenses
to increase during the remainder of 1999 due to further development of our
instrument product line.
Our selling and marketing expenses during the second quarter of 1999 increased
by $210,000 or 13% over the second quarter of 1998, and increased $637,000 or
20% over the six months ended June 30, 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 our WITNESS(R)
products, an increase in our field sales force during the fourth quarter of 1998
and an increase in promotional programs. Our selling and marketing expenses as
a percentage of our net sales were 21% and 18% during the second quarter of 1999
and 1998, respectively, and were 21% and 18% during the six months ended June
30, 1999 and 1998, respectively.
We have experienced increased competition in certain of our U.S. distribution
channels, arising primarily from Heska's attempt to
-14-
<PAGE>
launch a canine heartworm diagnostic product. In response, in addition to the
patent infringement lawsuit, we have significantly revised some of our
distribution strategies and policies, and we continue to increase our own
marketing capabilities. We will continue to increase our investment in sales and
marketing to expand our field sales force and our telemarketing and Internet
sales efforts. In the second quarter of 1999, we decided to require our full-
line distributors to carry our heartworm diagnostics exclusively. As a result of
this policy, we terminated our relationship with several of our U.S.
distributors in the second quarter of 1999. We believe that our remaining
exclusive distributors, coupled with our own marketing efforts, may be able to
substantially mitigate the sales lost from the terminated distribution
arrangements.
Our general and administrative expenses during the second quarter of 1999
increased by $521,000 or 59% over the second quarter of 1998 and increased
$697,000 or 33% over the six months ended June 30, 1998. The increase is due
primarily to an increase in personnel costs resulting from the March 1998
acquisition of Prisma, legal expenses related to the Heska patent litigation,
and the fact that we reclassified $463,000 of legal expenses relating to
settlement of patent litigation from general and administrative expenses during
the second quarter of 1998. Our general and administrative expenses as a
percentage of our net sales were 17% and 10% during the second quarters of 1999
and 1998, respectively, and were 16% and 12% during the six months ended June
30, 1999 and 1998, respectively.
Our royalty income during the second quarter of 1999 and for the six months
ended June 30, 1999 decreased from the prior periods as a result of our amended
supply agreement with Merial (see above); we will no longer receive royalties
beginning in 1999. Our royalty income totalled $317,000 and $332,000 during
1998 and 1997, respectively.
Our combined effective tax rate was 47% during the first six months of 1999 as
compared to 40% during the first six months of 1998. The increase in our
effective rate is due primarily to an increase in our state income tax expense
resulting from certain states' taxes being calculated on our net worth rather
than our net income.
Our operations have become seasonal due to the success of our canine heartworm
diagnostic products. Our sales and profits tend to be concentrated in the first
half of the year, as our distributors prepare for the heartworm season by
purchasing diagnostic products for resale to veterinarians. The operations SBIO-
E have reduced our seasonality as sales of their large-animal diagnostic
products tend to occur evenly throughout the. We believe that increased sales
of our instruments and supplies would also reduce seasonality.
Financial Condition
We believe that our present capital resources, which included working capital of
$12,906,000 at June 30, 1999, are sufficient to meet our current working capital
needs and service our debt for at least the next twelve months. However,
pursuant to a debt agreement with Banque Paribas, we are required to maintain
certain financial ratios and levels of tangible net worth and we are also
restricted in our ability to pay dividends and make loans, capital expenditures
or investments without Banque Paribas' consent. As of June 30, 1999, we had
outstanding principal balances on our Banque Paribas debt of $8,000,000, and may
borrow up to $5,000,000 (subject to a borrowing base calculation) on our
revolving line of credit.
In February 1999, we repaid the $1,000,000 note issued in conjunction with the
acquisition of Prisma for $800,000, and recognized a $116,000 extraordinary
gain, net of income taxes totaling $84,000, during the first quarter of 1999.
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. 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.
We have determined that the financial systems used in our U.S. operations are
not year 2000 compliant. Although the software manufacturer has provided the
necessary software to make the systems year 2000 compliant, we have also
determined that our current information system is inadequate to meet our growth
goals and objectives. We have 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 we have obtained lease financing. The new
system is year 2000 compliant.
-15-
<PAGE>
The computer systems of SBIO-E are not affected by the year 2000 issue as new
systems were implemented during 1998, and those systems are year 2000 compliant.
We have also determined that our telephone systems and equipment used in our
manufacturing and research and development processes are year 2000 compliant.
We have been notified by our major suppliers and customers that they are testing
their systems for year 2000 compliance, and to the best of their knowledge those
systems are year 2000 compliant. In the event that these suppliers' and
customers' systems in fact fail to become year 2000 compliant and the suppliers
and customers suffer disruptions in their own operations, there could be a
material adverse impact on our results of operations and financial condition
beginning in 2000. The greatest disruption would occur if third-party
manufacturers of our 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
Arbitration of Contractual Dispute Between Synbiotics Corporation and Bio-Trends
- --------------------------------------------------------------------------------
International, Inc.
- ------------------
In November 1998, Bio-Trends International, Inc. ("Bio-Trends"), our supplier of
feline leukemia virus ("FeLV") vaccine, declared our previously exclusive
domestic rights to the vaccine to be non-exclusive, based on an alleged
insufficiency of marketing expenditures by us. We filed an arbitration action
against Bio-Trends, seeking a declaration that our rights remain exclusive. On
June 9, 1999, the arbitrator ruled that our rights were no longer
exclusive.
Item 2. Changes in Securities
None.
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 June 30, 1999. The following
matters were submitted to a vote, with the results indicated below:
(a) Election of directors:
<TABLE>
<CAPTION>
Broker
Nominee For Against Abstain Withheld Non-votes
------- --- ------- ------- -------- ---------
<S> <C> <C> <C> <C> <C>
Patrick Owen Burns 7,795,275 n/a n/a 488,772 0
Kenneth M. Cohen 7,801,675 n/a n/a 482,372 0
James C. DeCesare 7,756,425 n/a n/a 487,622 0
Brenda D. Gavin, DVM 7,793,775 n/a n/a 490,272 0
M. Blake Ingle, Ph.D. 7,798,075 n/a n/a 485,972 0
Donald E. Phillips 7,796,575 n/a n/a 487,472 0
Joseph Klein III 7,799,125 n/a n/a 484,922 0
</TABLE>
-16-
<PAGE>
(b) Approval of the amendment of the Company's 1995 Stock
Option/Stock Issuance Plan:
For: 4,485,539 Against: 996,920 Abstain: 76,987 Broker Non-votes:
2,724,601
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
--------
10.49 Amendment Number Three To Agreement Regarding
Licensing, Development, Marketing and Manufacturing
between the Registrant and Binax, Inc. dated April 20,
1999.
10.50 1995 Stock Option/Stock Issuance Plan, as amended.
27 Financial Data Schedule (for electronic filing purposes
only).
(b) Reports on Form 8-K
-------------------
On April 2, 1999, we filed an amended Form 8-K with regard to an
event dated July 9, 1997, providing revised financial statements
and revised pro forma financial information pertaining to our
1997 acquisition of SBIO-E.
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: April 10, 2000 /s/ Michael K. Green
------------------------------------------
Michael K. Green
Senior Vice President and Chief Financial
Officer (signing both as a duly authorized
officer and as principal financial officer)
-17-
<PAGE>
EXHIBIT INDEX
Exhibit No. Exhibit
- ---------- -------
10.49 Amendment Number Three To Agreement Regarding Licensing,
Development, Marketing and Manufacturing between the Registrant
and Binax, Inc. dated April 20, 1999.
10.50 1995 Stock Option/Stock Issuance Plan, as amended.
27 Financial Data Schedule (for electronic filing purposes only).
-18-
<PAGE>
Exhibit 10.49
-------------
AMENDMENT NUMBER THREE
TO
AGREEMENT REGARDING LICENSING,
DEVELOPMENT, MARKETING AND MANUFACTURING
This Amendment Number Three to Agreement Regarding Licensing, Development,
Marketing and Manufacturing ("Amendment") is made and entered into as of April
20, 1999 by and between Synbiotics Corporation, a California corporation
("Synbiotics"), and Binax, Inc., a Delaware corporation ("Binax").
RECITALS
WHEREAS, Synbiotics and Binax entered into that certain Agreement Regarding
Licensing, Development, Marketing and Manufacturing dated June 30, 1993, as
previously amended by Amendment Number One thereto dated December 9, 1993 and
Amendment Number Two thereto dated July 27, 1994 (together, the "Agreement").
WHEREAS, the parties desire to amend and modify certain of the provisions
of the Agreement pursuant to Section 16.2 of the Agreement to memorialize the
results of their good faith negotiations pursuant to Section 3.7 of the
Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. The FeLV Synbiotics Sublicensed Product (the "FeLV product") is hereby
licensed back to Binax for development, manufacture, sale and distribution
anywhere in the world as contemplated by the second, the next-to-last, and the
last sentence of Section 3.7, provided that Binax's obligation to make royalty
payments to Synbiotics under the second sentence of Section 3.7 shall terminate
when Binax has paid Synbiotics a total of $150,000 in royalties on its FeLV
product. Synbiotics agrees to amend its Distribution Agreement with Daiichi
Pharmaceutical Co., Ltd. ("Daiichi") to delete the FeLV product therefrom (but
nonetheless also to amend Section 3(b)(ii) thereof to provide for payment to
Synbiotics by Daiichi of $75,000 within 30 days of registration of the FeLV
product in Japan by Daiichi in furtherance of any Binax/Daiichi Distribution
Agreement). Binax agrees to negotiate in good fait the terms of a Distribution
Agreement with Daiichi for the registration and sale of the FeLV product in
Japan. Synbiotics acknowledges that Daiichi and Binax may not come to an
agreement regarding registration and sale of the FeLV product in Japan and
therefore that the $75,000 payment by Daiichi to Synbiotics may never be made.
Synbiotics shall allow Daiichi/Binax to use the ICT GOLD trademark for such FeLV
product in Japan, an if requested to do so shall supply reagents for it on
commercially reasonable terms. Binax may distribute the FeLV product
independently or through a third party.
<PAGE>
2. The rights and duties of the parties with regard to the existing ICT Gold
HW canine heartworm test shall remain unchanged for as long as Synbiotics wishes
to market such a test. (E.g., Synbiotics cannot lose such rights under section
3.7 or 5.3.2(a)(iii) of the Agreement.) Notwithstanding the foregoing, and
notwithstanding the exclusivity of the rights granted to Synbiotics under the
Section 3.1(a) of the Agreement, Binax may develop and manufacture (but not
sell) and may, any time after April 1, 2000, manufacture, market and sell a
proprietary rapid canine heartworm test in the ICT Format, or another format
controlled by Binax, (the "Binax Test") anywhere in the world. Synbiotics need
not provide reagents or other products to Binax for the Binax Test, or provide
the use of any Synbiotics Confidential Information, Synbiotics Developments,
intellectual property or technology, or provide any other development,
manufacturing or marketing assistance to Binax for the Binax Test. Synbiotics
grants no license to use any Synbiotics trademarks, tradenames, logos or other
marks or other intellectual property in connection with the Binax Test, except
as provided in Section 3 below. Because the parties agree to deem the Binax
Test not to constitute a reverted Synbiotics sublicensed Product, Binax nee not
pay the 7.5% royalty or recoupment of development costs which was contemplated
by Section 3.7 of the Agreement. Because the Binax Test, if developed and
marketed, will compete with Synbiotics' ICT Gold HW and other heartworm
products, it is agreed that the relation of the parties with regard to marketing
their respective products shall be that of arms-length competitors.
3. Synbiotics hereby grants Binax a limited, nonsublicensable,
nonassignable, nonexclusive license under U.S. Patent No. 4,789,631 to develop,
make, sell, market, distribute and use the Binax Test. Such license requires
both an upfront consideration and a running royalty. The upfront consideration
is Binax's agreement not to market or sell the Binax Test before April 1, 2000.
The running royalty is 8% of the net selling price received by Binax and its
Affiliates upon sales of units of the Binax Test which are made, sold, marketed,
distributed or used in the United States (net of returns and customary trade
discounts actually allowed and taken), and shall be paid at Synbiotics;
headquarters in U.S. dollars within 30 days after the end of each calendar
quarter, accompanied by a detailed net-sales report for such quarter signed by
Binax's President. No royalty or other payments shall be due on units of the
Binax Test which are neither made, sold, marketed, distributed or used in the
United States. Binax's obligation to make royalty payments on sales of Binax
Tests units made, sold, marketed, distributed or used within the United States
shall expire on December 5, 2005. Binax shall maintain at its headquarters
full, complete and accurate books and records showing the calculation of such
net sales of the Binax Test, and Synbiotics may audit those books and records
upon reasonable notice. Such audit shall be at Synbiotics' expense unless it
shows a Binax underpayment of more than 5% for any audited period, in which case
Binax shall reimburse Synbiotics for the reasonable costs of such audit.
4. It is understood Binax may also have to pay royalties to Becton-
Dickinson, Barnes-Jewish Hospital, Carter-Wallace and/or SmithKline Diagnostics
on the Binax Test. Synbiotics agrees that, if all the other licensors reduce
their royalty rates to Binax, Synbiotics will reduce its running royalty rate to
Binax by the same percentage.
2
<PAGE>
5. The license specified in Section 3 of this Amendment shall terminate (a)
30 days after written notice by Synbiotics to Binax of material breach of the
Agreement or this Amendment by Binax, which breach is not cured within such 30
days, (b) upon sale of Binax or its stock (by merger or otherwise) before
December 5, 2005 to any company with a substantial animal health business that
does not already have a license of the above-referenced patent from Synbiotics,
or (c) upon any sale of the Binax Test udne a trademark or trade name not owned
by Binax of its Affiliates. A "substantial animal health business" means at
least $10 million in total assets or annual net sales pertaining to animal
health diagnostics, or at least $500 million in total assets or annual net sales
in animal health. A breach described in this Section 5(a) can also, but would
not necessarily, also result in termination of the entire Agreement as provided
in Article 8 of the Agreement.
6. Synbiotics does not represent or warrant that the Binax Test will be
free from infringement of any patents or other proprietary rights of any third
parties, nor does Synbiotics represent or warrant the validity or scope of U.S.
Patent No. 4,789,631 r make any other express or implied warranty, including any
warranty of merchantability or of fitness for a particular purpose, with regard
either to the licensed Synbiotics patented technology or the Binax Test.
7. Binax shall mark all Binax Test units sold in the United States (or
their product inserts) with the following patent notice: "Licensed under U.S.
Patent No. 4,789,631."
8. Binax agrees that the transfer price for ICT Gold HW will in no event be
increased to above $1.40 before April 1, 2000.
9. Except as provided in Section 1 of this Amendment, Section 3.7 of the
Agreement is deleted from the Agreement.
10. Section 5.11.1 of the Agreement is amended by adding at the end: "or (d)
for any third party claims against Synbiotics as a result of Binax's
manufacture, marketing, sale or use, after April 20, 1999, of the FeLV product
or the Binax Test, unless such claim relates to Synbiotics' right to grant a
license to use, or Binax's right to exercise its rights as licensee with respect
to, U.S. Patent No. 4,789,631."
11. The second sentence of Section 5.12.1 of the Agreement is amended by
inserting after the word "Products": "or Binax's manufacture, marketing, sale or
use, after April 20, 1999, of the FeLV product or the Binax Test."
12. Except as expressly set forth in the Agreement or herein, Synbiotics
grants no licenses whatsoever to Binax.
13. Except as amended as set forth in Sections 1 through 12 above, the
Agreement shall remain unchanged and shall remain in full force and effect.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
3
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Amendment Number
Three to the Agreement to be effective as of the date first above written.
WITNESS: SYNBIOTICS CORPORATION
/s/ Judith Francello By: /s/ Kenneth M. Cohen
- -------------------- --------------------
Its: President and CEO
WITNESS: BINAX, INC.
/s/ By: /s/ Roger U. Piasio
-------------------
Its: President and CEO
(SIGNATURE PAGE TO AMENDMENT NUMBER THREE TO
AGREEMENT REGARDING LICENSING, DEVELOPMENT,
MARKETING AND MANUFACTURING)
4
<PAGE>
Exhibit 10.50
-------------
SYNBIOTICS CORPORATION
1995 STOCK OPTION/STOCK ISSUANCE PLAN
-------------------------------------
as amended through March 29, 1999
---------------------------------
ARTICLE ONE
GENERAL PROVISIONS
------------------
I. PURPOSE OF THE PLAN
This 1995 Stock Option/Stock Issuance Plan (the "Plan") is intended to promote
the interests of Synbiotics Corporation, a California corporation, by providing
eligible persons with the opportunity to acquire a proprietary interest, or
otherwise increase their proprietary interest, in the Corporation as an
incentive for them to remain in the service of the Corporation.
Capitalized terms not otherwise defined shall have the meanings assigned to such
terms in the attached Appendix.
II. STRUCTURE OF THE PLAN
A. The Plan shall be divided into three separate equity programs:
(i) the Discretionary Option Grant Program under which eligible
persons may, at the discretion of the Plan Administrator, be
granted options to purchase shares of common stock of the
Corporation,
(ii) the Stock Issuance Program under which eligible persons may, at
the discretion of the Plan Administrator, be issued shares of
common stock of the Corporation directly, either through the
immediate purchase of such shares or as a bonus for services
rendered the Corporation (or any Parent or Subsidiary), and
(iii) the Automatic Option Grant Program under which non-employee
directors shall automatically receive option grants at periodic
intervals to purchase shares of common stock of the
Corporation.
B. The provisions of Articles One and Five shall apply to all equity
programs under the Plan and shall accordingly govern the interests of
all persons under the Plan.
III. ADMINISTRATION OF THE PLAN
A. Plan Administrator. Either the Board or a committee of two (2) or
------------------
more non-employee Board members appointed by the Board to administer
the Discretionary Option Grant and Stock Issuance Programs with
respect to Section 16 insiders (the "Primary Committee") shall have
sole and exclusive authority to administer the Plan with respect to
Section 16 Insiders.
B. Committees. Administration of the Discretionary Option Grant and
----------
Stock Issuance Programs with respect to all other persons eligible to
participate in those programs may, at the Board's discretion, be
-1-
<PAGE>
vested in the Board, the Primary Committee or a committee of two (2)
or more Board members appointed by the Board to administer the
Discretionary Option Grant Program and Stock Issuance Program with
respect to eligible persons other than Section 16 insiders (the
"Secondary Committee"), or the Board may retain the power to
administer those programs with respect to all such persons. All Board
members are eligible to be members of the Secondary Committee,
including Board members who are Employees eligible to receive
discretionary option grants or direct stock issuances under the Plan
or any other stock option, stock appreciation, stock bonus or other
stock plan of the Corporation (or any Parent or Subsidiary).
C. Members of Committees. Members of the Primary Committee or any
---------------------
Secondary Committee shall serve for such period of time as the Board
may determine and may be removed by the Board at any time. The Board
may also at any time terminate the functions of any Secondary
Committee and assume all powers and authority previously delegated to
such committee.
D. Service as Committee Members. Service on the Primary Committee or the
----------------------------
Secondary Committee shall constitute service as a Board member, and
members of each such committee shall accordingly be entitled to full
indemnification and reimbursement as Board members for their service
on such committee. No member of the Primary Committee or the
Secondary Committee shall be liable for any act or omission made in
good faith with respect to the Plan or any option grants or stock
issuances under the Plan.
E. Authority. Each Plan Administrator shall, within the scope of its
---------
administrative functions under the Plan, have full power and authority
(subject to the express provisions of the Plan) to (i) establish such
rules and regulations as it may deem appropriate for the proper
administration of the Discretionary Option Grant Program and Stock
Issuance Program and to make such determinations under, and issue such
interpretations of, such programs and any outstanding option grants or
stock issuances as it may deem necessary or advisable, (ii) determine,
with respect to the option grants under the Discretionary Option Grant
Program, which eligible persons are to receive option grants, the time
or times when such option grants are to be made, the number of shares
to be covered by each such grant, the status of the granted option as
either an Incentive Option or a Non-Statutory Option, the time or
times at which each option is to become exercisable, the vesting
schedule (if any) applicable to the option shares and the maximum term
for which the option is to remain outstanding and (iii) determine,
with respect to stock issuances under the Stock Issuance Program,
which eligible persons are to receive stock issuances, the time or
times when such issuances are to be made, the number of shares to be
issued to each Participant, the vesting schedule (if any) applicable
to the issued shares and the consideration to be paid by the
Participant for such shares. The Plan Administrator(s) shall have the
absolute discretion either to grant options in accordance with the
Discretionary Option Grant Program or to effect stock issuances in
accordance with the Stock Issuance Program. Decisions of each Plan
Administrator shall be final and binding on all parties who have an
interest in the Discretionary Option Grant Program and Stock Issuance
Program or any outstanding option or stock issuance thereunder.
F. Restriction on Discretion. The administration of the Automatic Option
-------------------------
Grant Program under Article Three shall be self executing in
accordance with the terms and conditions thereof and the Plan
Administrator shall not exercise any discretionary functions in
respect to matters governed by Article Three.
-2-
<PAGE>
IV. OPTION GRANTS AND STOCK ISSUANCES
A. Subject to Section V.B below, the persons eligible to receive stock
issuances under the Stock Issuance Program ("Participant") and/or
option grants pursuant to the Discretionary Option Grant Program
("Optionee") are as follows:
(i) officers and other employees of the Corporation (or its parent
or subsidiary corporations) who render services which
contribute to the management, growth and financial success of
the Corporation (or its parent or subsidiary corporations);
(ii) non-employee members of the Board; and
(iii) those consultants or other independent contractors who provide
valuable services to the Corporation (or its parent or
subsidiary corporations).
B. The individuals eligible to receive option grants under the Automatic
Option Grant Program shall be those individuals who serve as non-
employee Board members during the term of the Plan.
V. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of authorized but
unissued or reacquired common stock of the Corporation ("Common
Stock"), including shares repurchased by the Corporation on the open
market. The maximum number of shares of Common Stock which may be
issued over the term of the Plan shall not exceed 2,752,565 shares.
Such authorized share reserve is comprised of (i) the number of shares
available for issuance under the Predecessor Plan as last approved by
the Corporation prior to their incorporation into this Plan, including
the shares subject to the outstanding options incorporated into the
Plan and any other shares which would have been available for future
option grants under the Predecessor Plan, plus (ii) an additional
increase of 1,332,055 shares authorized by the Board under the Plan,
subject to stockholder approval.
B. No one person participating in the Plan may receive options and direct
stock issuances for more than 800,000 shares of Common Stock in the
aggregate over the term of the Plan.
C. Shares of Common Stock subject to outstanding options shall be
available for subsequent issuance under the Plan to the extent (i) the
options (including any options incorporated from the Predecessor
Plan) expire or terminate for any reason prior to exercise in full or
(ii) the options are cancelled in accordance with the cancellation-
regrant provisions of Article Two. All shares issued under the Plan
(including shares issued upon exercise of options incorporated from
the Predecessor Plan), whether or not those shares are subsequently
repurchased by the Corporation pursuant to its repurchase rights under
the Plan, shall reduce on a share-for-share basis the number of shares
of Common Stock available for subsequent issuance under the Plan. In
addition, should the exercise price of an option under the Plan
(including any option incorporated from the Predecessor Plan) be paid
with shares of Common Stock or should shares of Common Stock otherwise
issuable under the Plan be withheld by the Corporation in satisfaction
of the withholding taxes incurred in connection with the exercise of
an option or the vesting of a stock issuance under the Plan, then the
number of shares of Common Stock available for issuance under the Plan
shall be reduced by the gross number of shares for which the option is
exercised or which vest under the stock issuance, and not by the net
number of shares of Common Stock issued to the holder of such option
or stock issuance.
D. Should any change be made to the Common Stock by reason of any stock
split, stock dividend,
-3-
<PAGE>
recapitalization, combination of shares, exchange of shares or other
change affecting the outstanding Common Stock as a class without the
Corporation's receipt of consideration, appropriate adjustments shall
be made to (i) the maximum number and/or class of securities issuable
under the Plan, (ii) the maximum number and/or class of securities for
which the share reserve is to increase automatically each year, (iii)
the number and/or class of securities for which any one person may be
granted options and direct stock issuances over the term of the Plan,
(iv) the number and/or class of securities for which automatic option
grants are to be subsequently made under the Automatic Option Grant
Program and (v) the number and/or class of securities and the exercise
price per share in effect under each outstanding option (including any
option incorporated from the Predecessor Plan) in order to prevent the
dilution or enlargement of benefits thereunder. The adjustments
determined by the Plan Administrator shall be final, binding and
conclusive.
ARTICLE TWO
DISCRETIONARY OPTION GRANT PROGRAM
----------------------------------
I. OPTION TERMS
Each option shall be evidenced by one or more documents in the form approved by
the Plan Administrator; provided, however, that each such document shall comply
--------
with the terms specified below. Each document evidencing an Incentive Option
shall, in addition, be subject to the provisions of the Plan applicable to such
options.
A. Exercise Price.
--------------
1. The exercise price per share shall be fixed by the Plan
Administrator but shall not be less than eighty-five percent
(85%) of the Fair Market Value per share of Common Stock on the
option grant date, provided that the Plan Administrator may fix
the exercise price at less than 85% if the optionee makes a
payment to the Company (including payment made by means of a
salary reduction agreement) of no less than the excess of 85% of
the Fair Market Value of the Common Stock on the option grant
date over such exercise price.
2. The exercise price shall become immediately due upon exercise of
the option and shall, subject to the provisions of Section II of
Article Five and the documents evidencing the option, be payable
in one or more of the forms specified below:
(i) cash or check made payable to the Corporation,
(ii) shares of Common Stock held for the requisite period
necessary to avoid a charge to the Corporation's earnings
for financial reporting purposes and valued at Fair Market
Value on the exercise date, or
(iii) to the extent the option is exercised for vested shares,
through a special sale and remittance procedure pursuant
to which the Optionee shall concurrently provide
irrevocable written instructions to (a) a Corporation-
designated brokerage firm to effect the immediate sale of
the purchased shares and remit to the Corporation, out of
the sale proceeds available on the settlement date,
sufficient funds to cover the aggregate exercise price
payable for the purchased shares plus all applicable
Federal, state and local income and employment taxes
required to be withheld by the Corporation by reason of
such exercise and (b) the Corporation to deliver the
certificates for the purchased shares directly to such
brokerage firm in order to
-4-
<PAGE>
complete the sale transaction.
Except to the extent such sale and remittance procedure is
utilized, payment of the exercise price for the purchased shares
must be made on the exercise date.
B. Exercise and Term of Options. Each option shall be exercisable at
----------------------------
such time or times, during such period and for such number of shares
as shall be determined by the Plan Administrator and set forth in the
documents evidencing the option. However, no option shall have a term
in excess of ten (10) years measured from the option grant date.
C. Effect of Termination of Service.
--------------------------------
1. The following provisions shall govern the exercise of any options
held by the Optionee at the time of cessation of Service or
death:
(i) Any option outstanding at the time of the Optionee's
cessation of Service for any reason shall remain
exercisable for such period of time thereafter as shall be
determined by the Plan Administrator and set forth in the
documents evidencing the option, but no such option shall
be exercisable after the expiration of the option term.
(ii) Any option exercisable in whole or in part by the Optionee
at the time of death may be subsequently exercised by the
personal representative of the Optionee's estate or by the
person or persons to whom the option is transferred
pursuant to the Optionee's will or in accordance with the
laws of descent and distribution.
(iii) During the applicable post-Service exercise period, the
option may not be exercised in the aggregate for more than
the number of vested shares for which the option is
exercisable on the date of the Optionee's cessation of
Service. Upon the expiration of the applicable exercise
period or (if earlier) upon the expiration of the option
term, the option shall terminate and cease to be
outstanding for any vested shares for which the option has
not been exercised. However, the option shall, immediately
upon the Optionee's cessation of Service, terminate and
cease to be outstanding to the extent it is not
exercisable for vested shares on the date of such
cessation of Service.
(iv) In the event of a Corporate Transaction,the provisions of
Section III of this Article Two shall govern the period
for which the outstanding options are to remain
exercisable following the Optionee's cessation of Service
and shall supersede any provisions to the contrary in this
section.
2. The Plan Administrator shall have the discretion, exercisable
either at the time an option is granted or at any time while the
option remains outstanding, to:
(i) extend the period of time for which the option is to
remain exercisable following the Optionee's cessation of
Service from the period otherwise in effect for that
option to such greater period of time as the Plan
Administrator shall deem appropriate, but in no event
beyond the expiration of the option term, and/or
(ii) permit the option to be exercised, during the applicable
post-Service exercise period, not only with respect to the
number of vested shares of Common Stock for
-5-
<PAGE>
which such option is exercisable at the time of the
Optionee's cessation of Service but also with respect to
one or more additional installments in which the Optionee
would have vested under the option had the Optionee
continued in Service.
D. Stockholder Rights. The holder of an option shall have no stockholder
------------------
rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the exercise price and
become a holder of record of the purchased shares.
E. Repurchase Rights. The Plan Administrator shall have the discretion
-----------------
to grant options which are exercisable for unvested shares of Common
Stock. Should the Optionee cease Service while holding such unvested
shares, the Corporation shall have the right to repurchase, at the
exercise price paid per share, any or all of those unvested shares.
The terms upon which such repurchase right shall be exercisable
(including the period and procedure for exercise and the appropriate
vesting schedule for the purchased shares) shall be established by the
Plan Administrator and set forth in the document evidencing such
repurchase right.
F. Limited Transferability of Options. Unless the Plan Administrator
----------------------------------
otherwise expressly approves in writing, the option shall be
exercisable only by the Optionee during the lifetime of the Optionee,
and shall not be assignable or transferable other than by will or by
the laws of descent and distribution following the Optionee's death.
However, a Non-Statutory Option may be assigned in accordance with the
terms of a Qualified Domestic Relations Order within the meaning of
Internal Revenue Code Section 414(p). The assigned option may only be
exercised by the person or persons who acquire a proprietary interest
in the option pursuant to such Qualified Domestic Relations Order.
The terms applicable to the assigned option (or portion thereof) shall
be the same as those in effect for the option immediately prior to
such assignment and shall be set forth in such documents issued to the
assignee as the Plan Administrator may deem appropriate
II. INCENTIVE OPTIONS
The terms specified below shall be applicable to all Incentive Options. Except
as modified by the provisions of this Section II, all the provisions of Articles
One, Two and Five shall be applicable to Incentive Options. Options which are
specifically designated as Non-Statutory Options when issued under the Plan
shall not be subject to the terms of this Section II.
---
A. Eligibility. Incentive Options may only be granted to Employees.
-----------
B. Exercise Price. The exercise price per share shall not be less than
--------------
one hundred percent (100%) of the Fair Market Value per share of
Common Stock on the option grant date.
C. Dollar Limitation. The aggregate Fair Market Value of the shares of
-----------------
Common Stock (determined as of the respective date or dates of grant)
for which one or more options granted to any Employee under the Plan
(or any other option plan of the Corporation or any Parent or
Subsidiary) may for the first time become exercisable as Incentive
Options during any one (1) calendar year shall not exceed the sum of
One Hundred Thousand Dollars ($100,000). To the extent the Employee
holds two (2) or more such options which become exercisable for the
first time in the same calendar year, the foregoing limitation on the
exercisability of such options as Incentive Options shall be applied
on the basis of the order in which such options are granted.
D. 10% Stockholder. If any Employee to whom an Incentive Option is
---------------
granted is a 10% stockholder (within the meaning of Internal Revenue
Code Section 424(d)), then the exercise price per share shall
-6-
<PAGE>
not be less than one hundred ten percent (110%) of the Fair Market
Value per share of Common Stock on the option grant date, and the
option term shall not exceed five (5) years measured from the option
grant date.
III. CORPORATE TRANSACTION
A. In the event of any Corporate Transaction, each outstanding option
shall automatically accelerate so that each such option shall,
immediately prior to the effective date of the Corporate Transaction,
become fully exercisable for all of the shares of Common Stock at the
time subject to such option and may be exercised for any or all of
those shares as fully-vested shares of Common Stock. However, an
outstanding option shall not so accelerate if and to the extent: (i)
such option is, in connection with the Corporate Transaction, either
to be assumed by the successor corporation (or parent thereof) or to
be replaced with a comparable option to purchase shares of the capital
stock of the successor corporation (or parent thereof), (ii) such
option is to be replaced with a cash incentive program of the
successor corporation which preserves the spread existing on the
unvested option shares at the time of the Corporate Transaction and
provides for subsequent payout in accordance with the same vesting
schedule applicable to such option or (iii) the acceleration of such
option is subject to other limitations imposed by the Plan
Administrator at the time of the option grant. The determination of
option comparability under clause (i) above shall be made by the Plan
Administrator, and its determination shall be final, binding and
conclusive.
B. All outstanding repurchase rights shall also terminate automatically,
and the shares of Common Stock subject to those terminated rights
shall immediately vest in full, in the event of any Corporate
Transaction, except to the extent: (i) those repurchase rights are to
be assigned to the successor corporation (or parent thereof) in
connection with such Corporate Transaction or (ii) such accelerated
vesting is precluded by other limitations imposed by the Plan
Administrator at the time the repurchase right is issued.
C. Immediately following the consummation of the Corporate Transaction,
all outstanding options shall terminate and cease to be outstanding,
except to the extent assumed by the successor corporation (or parent
thereof).
D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such
Corporate Transaction, to apply to the number and class of securities
which would have been issuable to the Optionee in consummation of such
Corporate Transaction had the option been exercised immediately prior
to such Corporate Transaction. Appropriate adjustments shall also be
made to (i) the number and class of securities available for issuance
under the Plan on both an aggregate and per Optionee basis following
the consummation of such Corporate Transaction and (ii) the exercise
price payable per share under each outstanding option, provided the
--------
aggregate exercise price payable for such securities shall remain the
same.
E. Any options which are assumed or replaced in the Corporate Transaction
and do not otherwise accelerate at that time, shall automatically
accelerate (and any of the Corporation's outstanding repurchase rights
which do not otherwise terminate at the time of the Corporate
Transaction shall automatically terminate and the shares of Common
Stock subject to those terminated rights shall immediately vest in
full) in the event the Optionee's Service should subsequently
terminate by reason of an Involuntary Termination within eighteen (18)
months following the effective date of such Corporate Transaction.
Any options so accelerated shall remain exercisable for fully-vested
shares until the earlier of (i) the expiration of the option term or
-------
(ii) the expiration of the one (1)-year period measured from the
effective date of the Involuntary Termination.
-7-
<PAGE>
F. The portion of any Incentive Option accelerated in connection with a
Corporate Transaction or Change in Control shall remain exercisable as
an Incentive Option only to the extent the applicable One Hundred
Thousand Dollar limitation is not exceeded. To the extent such dollar
limitation is exceeded, the accelerated portion of such option shall
be exercisable as a Non-Statutory Option under the Federal tax laws.
G. The grant of options under the Discretionary Option Grant Program
shall in no way affect the right of the Corporation to adjust,
reclassify, reorganize or otherwise change its capital or business
structure or to merge, consolidate, dissolve, liquidate or sell or
transfer all or any part of its business or assets.
IV. CANCELLATION AND REGRANT OF OPTIONS
The Plan Administrator shall have the authority to effect, at any time and from
time to time, with the consent of the affected option holders, the cancellation
of any or all outstanding options under the Discretionary Option Grant Program
(including outstanding options incorporated from the Predecessor Plan) and to
grant in substitution new options covering the same or different number of
shares of Common Stock but with an exercise price per share based on the Fair
Market Value per share of Common Stock on the new option grant date.
ARTICLE THREE
STOCK ISSUANCE PROGRAM
----------------------
I. STOCK ISSUANCE TERMS
Shares of Common Stock may be issued under the Stock Issuance Program through
direct and immediate issuances without any intervening option grants. Each such
stock issuance shall be evidenced by a Stock Issuance Agreement which complies
with the terms specified below.
A. Purchase Price
--------------
1. The purchase price per share shall be fixed by the Plan
Administrator, but shall not be less than eighty-five percent
(85%) of the Fair Market Value per share of Common Stock on the
stock issuance date.
2. Subject to the provisions of Section II of Article Five, shares
of Common Stock may be issued under the Stock Issuance Program
for one or both of the following items of consideration which the
Plan Administrator may deem appropriate in each individual
instance:
(i) cash or check made payable to the Corporation, or
(ii) past services rendered to the Corporation (or any Parent or
Subsidiary).
B. Vesting Provisions
------------------
1. Shares of Common Stock issued under the Stock Issuance Program
may, in the discretion of the Plan Administrator, be fully and
immediately vested upon issuance or may vest in one or more
installments over the Participant's period of Service or upon
attainment of specified
-8-
<PAGE>
performance objectives. The elements of the vesting schedule
applicable to any unvested shares of Common Stock issued under
the Stock Issuance Program, namely:
(i) the Service period to be completed by the Participant or
the performance objectives to be attained,
(ii) the number of installments in which the shares are to
vest,
(iii) the interval or intervals (if any) which are to lapse
between installments, and
(iv) the effect which death, Permanent Disability or other
event designated by the Plan Administrator is to have upon
the vesting schedule,
shall be determined by the Plan Administrator and incorporated
into the stock issuance agreement.
2. Any new, substituted or additional securities or other property
(including money paid other than as a regular cash dividend)
which the Participant may have the right to receive with respect
to the Participant's unvested shares of Common Stock by reason of
any stock dividend, stock split, recapitalization, combination of
shares, exchange of shares or other change affecting the
outstanding Common Stock as a class without the Corporation's
receipt of consideration shall be issued subject to (i) the same
vesting requirements applicable to the Participant's unvested
shares of Common Stock and (ii) such escrow arrangements as the
Plan Administrator shall deem appropriate.
3. The Participant shall have full stockholder rights with respect
to any shares of Common Stock issued to the Participant under the
Stock Issuance Program, whether or not the Participant's interest
in those shares is vested. Accordingly, the Participant shall
have the right to vote such shares and to receive any regular
cash dividends paid on such shares.
4. Should the Participant cease to remain in Service while holding
one or more unvested shares of Common Stock issued under the
Stock Issuance Program or should the performance objectives not
be attained with respect to one or more such unvested shares of
Common Stock, then those shares shall be immediately surrendered
to the Corporation for cancellation, and the Participant shall
have no further stockholder rights with respect to those shares.
To the extent the surrendered shares were previously issued to
the Participant for consideration paid in cash or cash equivalent
(including the Participant's purchase-money indebtedness), the
Corporation shall repay to the Participant the cash consideration
paid for the surrendered shares and shall cancel the unpaid
principal balance of any outstanding purchase-money note of the
Participant attributable to such surrendered shares.
5. The Plan Administrator may in its discretion waive the surrender
and cancellation of one or more unvested shares of Common Stock
(or other assets attributable thereto) which would otherwise
occur upon the non-completion of the vesting schedule applicable
to such shares. Such waiver shall result in the immediate
vesting of the Participant's interest in the shares of Common
Stock as to which the waiver applies. Such waiver may be
effected at any time, whether before or after the Participant's
cessation of Service or the attainment or non-attainment of the
applicable performance objectives.
II. CORPORATE TRANSACTION
-9-
<PAGE>
A. All of the outstanding repurchase rights under the Stock Issuance
Program shall terminate automatically, and all the shares of Common
Stock subject to those terminated rights shall immediately vest in
full, in the event of any Corporate Transaction, except to the extent
(i) those repurchase rights are assigned to the successor corporation
(or parent thereof) in connection with such Corporate Transaction or
(ii) such accelerated vesting is precluded by other limitations
imposed in the stock issuance agreement.
B. Any repurchase rights that are assigned in the Corporate Transaction
shall automatically terminate, and all the shares of Common Stock
subject to those terminated rights shall immediately vest in full, in
the event the Optionee's Service should subsequently terminate by
reason of an Involuntary Termination within eighteen (18) months
following the effective date of such Corporate Transaction.
III. SHARE ESCROW/LEGENDS
Unvested shares may, in the Plan Administrator's discretion, be held in escrow
by the Corporation until the Participant's interest in such shares vests or may
be issued directly to the Participant with restrictive legends on the
certificates evidencing those unvested shares.
ARTICLE FOUR
AUTOMATIC OPTION GRANT PROGRAM
------------------------------
I. OPTION TERMS
A. Grant Dates. Option grants shall be made on the dates specified
-----------
below:
1. Each non-employee director who is who is first elected or
appointed as a non-employee Board member after the effective date
of the Plan shall automatically be granted, on such initial
election or appointment, a Non-Statutory Option to purchase 7,000
shares of Common Stock.
2. On the date of each Annual Stockholders Meeting, beginning with
the 1995 Annual Meeting, each individual who is to continue to
serve as a non-employee director after such meeting, shall
automatically be granted, whether or not such individual is
standing for re-election as a Board member at that Annual
Meeting, a Non-Statutory Option to purchase an additional 7,000
shares of Common Stock, provided such individual has served as a
non-employee Board member for at least six (6) months prior to
the date of such Annual Meeting. There shall be no limit on the
number of such 7,000-share option grants any one non-employee
director may receive over his or her period of Board service.
-10-
<PAGE>
B. Exercise Price.
--------------
1. The exercise price per share shall be equal to one hundred
percent (100%) of the Fair Market Value per share of Common Stock
on the option grant date.
2. The exercise price shall be payable in one or more of the
alternative forms authorized under the Discretionary Option Grant
Program. Except to the extent the sale and remittance procedure
specified thereunder is utilized, payment of the exercise price
for the purchased shares must be made on the exercise date.
C. Option Term. Each option shall have a term of ten (10) years measured
-----------
from the option grant date.
D. Exercise and Vesting of Options. Each option shall be immediately
-------------------------------
exercisable for any or all of the option shares. However, any shares
purchased under the option shall be subject to repurchase by the
Corporation, at the exercise price paid per share, upon the Optionee's
cessation of Board service prior to vesting in those shares. Each
grant shall vest, and the Corporation's repurchase right shall lapse,
in a series of four (4) equal and successive quarterly installments
over the Optionee's period of continued service as a Board member,
with the first such installment to vest upon the Optionee's completion
of three (3) months of Board service measured from the option grant
date.
E. Effect of Termination of Board Service. The following provisions
--------------------------------------
shall govern the exercise of any options held by the Optionee at the
time the Optionee ceases to serve as a Board member:
(i) The Optionee (or, in the event of Optionee's death, the
personal representative of the Optionee's estate or the person
or persons to whom the option is transferred pursuant to the
Optionee's will or in accordance with the laws of descent and
distribution) shall have the balance of the option term in
which to exercise each such option.
(ii) Following cessation of service on the Board for other than
death or disability, the option may not be exercised in the
aggregate for more than the number of vested shares of Common
Stock for which the option was exercisable at the time of the
Optionee's cessation of Board service.
(iii) Should the Optionee cease to serve as a Board member by reason
of death or Permanent Disability, then all shares at the time
subject to the option shall immediately vest so that such
option may be exercised for all or any portion of such shares
as fully-vested shares of Common Stock.
(iv) Upon expiration of the option term, the option shall terminate
and cease to be outstanding for any vested shares for which the
option has not been exercised. However, the option shall,
immediately upon the Optionee's cessation of Board service,
terminate and cease to be outstanding to the extent it is not
exercisable for vested shares on the date of such cessation of
Board service.
-11-
<PAGE>
II. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. In the event of any Corporate Transaction, the shares of Common Stock
at the time subject to each outstanding option but not otherwise
vested shall automatically vest in full so that each such option
shall, immediately prior to the effective date of the Corporate
Transaction, become fully exercisable for all of the shares of Common
Stock at the time subject to such option and may be exercised for all
or any portion of such shares as fully-vested shares of Common Stock.
Immediately following the consummation of the Corporate Transaction,
each automatic option grant shall terminate and cease to be
outstanding, except to the extent assumed by the successor corporation
(or parent thereof).
B. In connection with any Change in Control, the shares of Common Stock
at the time subject to each outstanding option but not otherwise
vested shall automatically vest in full so that each such option
shall, immediately prior to the effective date of the Change in
Control, become fully exercisable for all of the shares of Common
Stock at the time subject to such option and may be exercised for all
or any portion of such shares as fully-vested shares of Common Stock.
Each such option shall remain exercisable for such fully-vested option
shares until the expiration or sooner termination of the option term
or the surrender of the option in connection with a Hostile Take-Over.
C. Upon the occurrence of a Hostile Take-Over, the Optionee shall have a
thirty (30)-day period in which to surrender to the Corporation each
automatic option held by him or her for a period of at least six (6)
months. The Optionee shall in return be entitled to a cash
distribution from the Corporation in an amount equal to the excess of
(i) the Take-Over Price of the shares of Common Stock at the time
subject to the surrendered option (whether or not the Optionee is
otherwise at the time vested in those shares) over (ii) the aggregate
exercise price payable for such shares. Such cash distribution shall
be paid within five (5) days following the surrender of the option to
the Corporation. No approval or consent of the Board shall be
required in connection with such option surrender and cash
distribution.
D. The grant of options under the Automatic Option Grant Program shall in
no way affect the right of the Corporation to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to
merge, consolidate, dissolve, liquidate or sell or transfer all or any
part of its business or assets.
III. REMAINING TERMS
---------------
The remaining terms of each option granted under the Automatic Option Grant
Program shall be the same as the terms in effect for option grants made under
the Discretionary Option Grant Program.
ARTICLE FIVE
MISCELLANEOUS
-------------
I. ACCELERATION
A. The Plan Administrator shall have the discretion, exercisable either
at the time an option is granted under the Discretionary Stock Option
Program, at the time that stock is issued under the Stock Issuance
Program or at any time while the option or stock remains outstanding,
to provide for the acceleration of one or
-12-
<PAGE>
more outstanding options and the termination of repurchase rights on
one or more outstanding shares upon the occurrence of such events as
the Plan Administrator may determine, including upon a Corporate
Transaction regardless or whether or not such options are to be
assumed or replaced or the repurchase rights are to be assigned in the
Corporate Transaction.
B. The Plan Administrator shall not have the discretion to provide for
the acceleration of any options granted under the Automatic Option
Grant Program.
II. FINANCING
A. The Plan Administrator may permit any Optionee or Participant to pay
the option exercise price under the Discretionary Option Grant Program
or the purchase price for shares issued under the Stock Issuance
Program by delivering a promissory note payable in one or more
installments. The terms of any such promissory note (including the
interest rate and the terms of repayment) shall be established by the
Plan Administrator in its sole discretion. Promissory notes may be
authorized with or without security or collateral. In all events, the
maximum credit available to the Optionee or Participant may not exceed
the sum of (i) the aggregate option exercise price or purchase price
payable for the purchased shares plus (ii) any Federal, state and
local income and employment tax liability incurred by the Optionee or
the Participant in connection with the option exercise or share
purchase.
B. The Plan Administrator may, in its discretion, determine that one or
more such promissory notes shall be subject to forgiveness by the
Corporation in whole or in part upon such terms as the Plan
Administrator may deem appropriate.
III. TAX WITHHOLDING
A. The Corporation's obligation to deliver shares of Common Stock upon
the exercise of options or upon the issuance or vesting of such shares
under the Plan shall be subject to the satisfaction of all applicable
Federal, state and local income and employment tax withholding
requirements.
B. The Plan Administrator may, in its discretion, provide any or all
holders of Non-Statutory Options or unvested shares of Common Stock
under the Plan (other than the options granted or the shares issued
under the Automatic Option Grant Program) with the right to use shares
of Common Stock in satisfaction of all or part of the federal, state
and local income or employment taxes incurred by such holders in
connection with the exercise of their options or the vesting of their
shares. Such right may be provided to any such holder in either or
both of the following formats:
(i) Stock Withholding: The election to have the Corporation
-----------------
withhold, from the shares of Common Stock otherwise issuable
upon the exercise of such Non-Statutory Option or the vesting
of such shares, a portion of those shares with an aggregate
Fair Market Value equal to the percentage of such taxes (not to
exceed one hundred percent (100%)) designated by the holder.
(ii) Stock Delivery: The election to deliver to the Corporation, at
--------------
the time the Non-Statutory Option is exercised or the shares
vest, one or more shares of Common Stock previously acquired by
such holder (other than in connection with the option exercise
or share vesting triggering the taxes) with an aggregate Fair
Market Value equal to the percentage of such taxes (not to
exceed one hundred percent (100%)) designated by the holder.
-13-
<PAGE>
IV. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan shall become effective on the date the Plan is adopted by the
Board, and options may be granted under the Discretionary Option Grant
Program from and after the effective date. However, no options
granted under the Plan may be exercised, and no shares shall be issued
under the Plan, until the Plan is approved by the Corporation's
stockholders. If such stockholder approval is not obtained within
twelve (12) months after such effective date, then all options
previously granted under this Plan shall terminate and cease to be
outstanding, and no further options shall be granted and no shares
shall be issued under the Plan.
B. The Plan shall serve as the successor to the Predecessor Plan, and no
further option grants shall be made under the Predecessor Plan after
the effective date of the Plan. All options outstanding under the
Predecessor Plan as of such date shall, immediately upon approval of
the Plan by the Corporations's stockholders, be incorporated into the
Plan and treated as outstanding options under the Plan. However, each
outstanding option so incorporated shall continue to be governed
solely by the terms of the documents evidencing such option. No
provision of the Plan shall be deemed to adversely affect or otherwise
diminish the rights or obligations of the holders of such incorporated
options with respect to their acquisition of shares of Common Stock
which may exist under the terms of the Predecessor Plan under which
such incorporated option was issued. Subject to the rights of the
optionee under the incorporated option documents and Predecessor Plan,
the discretion delegated to the Plan Administrator hereunder may be
exercised with respect to incorporated options to the same extent as
it is exercisable with respect to options originally granted under
this Plan.
C. The option/vesting acceleration provisions of Article Two relating to
Corporate Transactions and Changes in Control may, in the Plan
Administrator's discretion, be extended to one or more options
incorporated from the Predecessor Plan which do not otherwise provide
for such acceleration.
D. The Plan shall terminate upon the earliest of (i) April 27, 2005, (ii)
--------
the date on which all shares available for issuance under the Plan
shall have been issued pursuant to the exercise of the options or the
issuance of shares (whether vested or unvested) under the Plan or
(iii) the termination of all outstanding options in connection with a
Corporate Transaction. Upon such Plan termination, all options and
unvested stock issuances outstanding on such date shall thereafter
continue to have force and effect in accordance with the provisions of
the documents evidencing such options or issuances.
V. AMENDMENT OF THE PLAN
A. The Board shall have complete and exclusive power and authority to
amend or modify the Plan in any or all respects. However, no such
amendment or modification shall adversely affect the rights and
obligations with respect to options or unvested stock issuances at the
time outstanding under the Plan unless the Optionee or the Participant
consents to such amendment or modification. In addition, certain
amendments may require stockholder approval if so determined by the
Board or pursuant to applicable laws or regulations.
B. If stockholder approval is required, pursuant to the previous
sentence, to amend the Plan to increase the number of shares of Common
Stock available for issuance under the Plan, then upon Board approval
of such an amendment, options to purchase shares of Common Stock may
be granted under the Discretionary Option Grant Program and shares of
Common Stock may be issued under the Stock Issuance Program that are
in each instance in excess of the number of shares then available for
issuance under the Plan, provided any excess shares actually issued
under those programs are held in
-14-
<PAGE>
escrow until there is obtained stockholder approval of an amendment
sufficiently increasing the number of shares of Common Stock
available for issuance under the Plan. If such stockholder approval
(if so required) is not obtained within twelve (12) months after the
date the first such excess issuances are made, then (i) any
unexercised options granted on the basis of such excess shares shall
terminate and cease to be outstanding and (ii) the Corporation shall
promptly refund to the Optionees and the Participants the exercise or
purchase price paid for any excess shares issued under the Plan and
held in escrow, together with interest (at the applicable Short Term
Federal Rate) for the period the shares were held in escrow, and such
shares shall thereupon be automatically cancelled and cease to be
outstanding.
VI. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of shares of Common
Stock under the Plan shall be used for general corporate purposes.
VII. REGULATORY APPROVALS
A. The implementation of the Plan, the granting of any option under the
Plan and the issuance of any shares of Common Stock (i) upon the
exercise of any option or (ii) under the Stock Issuance Program shall
be subject to the Corporation's procurement of all approvals and
permits required by regulatory authorities having jurisdiction over
the Plan, the options granted under it and the shares of Common Stock
issued pursuant to it.
B. No shares of Common Stock or other assets shall be issued or
delivered under the Plan unless and until there shall have been
compliance with all applicable requirements of Federal and state
securities laws, including the filing and effectiveness of the Form
S-8 registration statement for the shares of Common Stock issuable
under the Plan, and all applicable listing requirements of any stock
exchange (or the Nasdaq National Market, if applicable) on which
Common Stock is then listed for trading.
VIII. NO EMPLOYMENT/SERVICE RIGHTS
Nothing in the Plan shall confer upon the Optionee or the Participant any right
to continue in Service for any period of specific duration or interfere with or
otherwise restrict in any way the rights of the Corporation (or any Parent or
Subsidiary employing or retaining such person) or of the Optionee or the
Participant, which rights are hereby expressly reserved by each, to terminate
such person's Service at any time for any reason, with or without cause.
-15-
<PAGE>
APPENDIX
--------
The following definitions shall be in effect under the Plan:
A. Board shall mean the Corporation's Board of Directors.
-----
B. Change in Control shall mean a change in ownership or control of the
-----------------
Corporation effected through either of the following transactions:
(i) the acquisition, directly or indirectly, by any person or related
group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by, or is under
common control with, the Corporation), of beneficial ownership
(within the meaning of Rule 13d-3 of the Securities Exchange Act of
1934) of securities possessing more than fifty percent (50%) of the
total combined voting power of the Corporation's outstanding
securities pursuant to a tender or exchange offer made directly to
the Corporation's stockholders which the Board does not recommend
such stockholders to accept, or
(ii) a change in the composition of the Board over a period of thirty-
six (36) consecutive months or less such that a majority of the
Board members ceases, by reason of one or more contested elections
for Board membership, to be comprised of individuals who either (A)
have been Board members continuously since the beginning of such
period or (B) have been elected or nominated for election as Board
members during such period by at least a majority of the Board
members described in clause (A) who were still in office at the
time the Board approved such election or nomination.
C. Corporate Transaction shall mean either of the following stockholder-
---------------------
approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which the Company is not the surviving
entity, except for a transaction the principal purpose of which is
to change the State of the Company's incorporation,
(ii) the sale, transfer or other disposition of all or substantially all
of the assets of the Company in liquidation or dissolution of the
Company, or
(iii) any reverse merger in which the Company is the surviving entity but
in which securities possessing more than fifty percent (50%) of the
total combined voting power of the Company's outstanding securities
are transferred to holders different from those who held such
securities immediately prior to such merger.
D. Corporation shall mean Synbiotics Corporation, a California corporation.
-----------
E. Employee shall mean an individual who is in the employ of the Corporation
--------
(or any Parent or Subsidiary), subject to the control and direction of the
employer entity as to both the work to be performed and the manner and
method of performance.
F. Fair Market Value per share of Common Stock on any relevant date shall be
-----------------
determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the Nasdaq National
Market, then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question, as such
price is reported by the National Association of Securities Dealers
on the Nasdaq National Market or any successor system. If there is
no closing selling price for the Common Stock on the date in
A-1
<PAGE>
question, then the Fair Market Value shall be the closing selling
price on the last preceding date for which such quotation exists.
(ii) If the Common Stock is at the time listed on any stock exchange,
then the Fair Market Value shall be the closing selling price per
share of Common Stock on the date in question on the Stock Exchange
determined by the Plan Administrator to be the primary market for
the Common Stock, as such price is officially quoted in the
composite tape of transactions on such exchange. If there is no
closing selling price for the Common Stock on the date in question,
then the Fair Market Value shall be the closing selling price on the
last preceding date for which such quotation exists.
(iii) If the Common Stock is at the time not traded on the Nasdaq National
Market or listed on any stock exchange, then the Fair Market Value
shall be determined according to whatever method is from time to
time approved in good faith by the Board.
G. Hostile Take-Over shall mean a change in ownership of the Corporation
-----------------
effected through acquisition, directly or indirectly, by any person or
related group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by, or is under common
control with, the Corporation) of beneficial ownership (within the meaning
of Rule 13d-3 of the Securities Exchange Act of 1934) of securities
possessing more than fifty percent (50%) of the total combined voting power
of the Corporation's outstanding securities pursuant to a tender or
exchange offer made directly to the Corporation's stockholders which the
Board does not recommend such stockholders to accept.
H. Incentive Option shall mean an option which satisfies the requirements of
----------------
Internal Revenue Code Section 422.
I. Involuntary Termination shall mean the termination of the Service of any
-----------------------
individual which occurs by reason of:
(i) such individual's involuntary dismissal or discharge by the
Corporation for reasons other than Misconduct, or
(ii) such individual's voluntary resignation following (A) a change in
his or her position with the Corporation which materially reduces
his or her level of responsibility, (B) a reduction in his or her
level of compensation (including base salary, fringe benefits and
any non-discretionary and objective-standard incentive payment or
bonus award) by more than fifteen percent (15%) or (C) a relocation
of such individual's place of employment by more than fifty (50)
miles, provided and only if such change, reduction or relocation is
effected by the Corporation without the individual's consent.
J. Misconduct shall mean the commission of any act of fraud, embezzlement or
----------
dishonesty by the Optionee or Participant, any unauthorized use or
disclosure by such person of confidential information or trade secrets of
the Corporation (or any Parent or Subsidiary), or any other intentional
misconduct by such person adversely affecting the business or affairs of
the Corporation (or any Parent or Subsidiary) in a material manner. The
foregoing definition shall not be deemed to be inclusive of all the acts or
omissions which the Corporation (or any Parent or Subsidiary) may consider
as grounds for the dismissal or discharge of any Optionee, Participant or
other person in the Service of the Corporation (or any Parent or
Subsidiary).
K. Non-Statutory Option shall mean an option which is not an Incentive Option.
--------------------
L. Parent shall mean any corporation (other than the Corporation) in an
------
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the
time of the determination, stock possessing fifty percent (50%) or more of
the total combined voting power
A-2
<PAGE>
of all classes of stock in one of the other corporations in such chain.
M. Permanent Disability or Permanently Disabled shall mean the inability of
--------------------------------------------
the Optionee or the Participant to engage in any substantial gainful
activity by reason of any medically determinable physical or mental
impairment expected to result in death or to be of continuous duration of
twelve (12) months or more.
N. Predecessor Plan shall mean, collectively, the Corporation's existing 1986
----------------
Stock Option Plan, 1987 Stock Option Plan, 1988 Stock Option Plan, 1991
Stock Option Plan, 1994 Stock Option Plan, 1996 Stock Option Plan and 1998
Stock Option Plan.
O. Service shall mean the provision of services to the Corporation (or any
-------
Parent or Subsidiary) by a person in the capacity of an Employee, a non-
employee member of the board of directors or a consultant or independent
advisor, except to the extent otherwise specifically provided in the
documents evidencing the option grant.
P. Subsidiary shall mean any corporation (other than the Corporation) in an
----------
unbroken chain of corporations beginning with the Corporation, provided
each corporation (other than the last corporation) in the unbroken chain
owns, at the time of the determination, stock possessing fifty percent
(50%) or more of the total combined voting power of all classes of stock in
one of the other corporations in such chain.
Q. Take-Over Price shall mean the greater of (i) the Fair Market Value per
--------------- -------
share of Common Stock on the date the option is surrendered to the
Corporation in connection with a Hostile Take-Over or (ii) the highest
reported price per share of Common Stock paid by the tender offeror in
effecting such Hostile Take-Over. However, if the surrendered option is an
Incentive Option, the Take-Over Price shall not exceed the clause (i) price
per share.
A-3
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1999 AND THE RELATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND CASH FLOWS FOR THE SIX
MONTHS ENDED JUNE 30, 1999 INCLUDED ELSEWHERE IN THIS FORM 10-QSB/A AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 5,610
<SECURITIES> 1,384
<RECEIVABLES> 5,162
<ALLOWANCES> 87
<INVENTORY> 5,620
<CURRENT-ASSETS> 18,589
<PP&E> 6,048
<DEPRECIATION> 4,022
<TOTAL-ASSETS> 45,624
<CURRENT-LIABILITIES> 5,683
<BONDS> 6,314
2,349
0
<COMMON> 39,172
<OTHER-SE> (10,413)
<TOTAL-LIABILITY-AND-EQUITY> 45,624
<SALES> 17,726
<TOTAL-REVENUES> 17,857
<CGS> 7,486
<TOTAL-COSTS> 15,238
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 613
<INCOME-PRETAX> 2,006
<INCOME-TAX> 942
<INCOME-CONTINUING> 1,064
<DISCONTINUED> 0
<EXTRAORDINARY> 116
<CHANGES> 0
<NET-INCOME> 1,180
<EPS-BASIC> .12
<EPS-DILUTED> .12
</TABLE>
