<PAGE>
DRAFT
- --------------------------------------------------------------------------------
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 March 31, 1999
OR
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-11303
SYNBIOTICS CORPORATION
(Exact name of small business issuer as specified in its charter)
California 95-3737816
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11011 Via Frontera
San Diego, California 92127
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (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 April 30, 1999, 9,021,338 shares of Common Stock were outstanding.
Transitional Small Business Disclosure Format: Yes [_] No [X]
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<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 commitment 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 March 31, 1999 to reflect the adjustment
to the license fee revenue.
SYNBIOTICS CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C>
Part I Condensed Consolidated Statement of Operations and Comprehensive
Income - Three months ended March 31, 1999 and 1998 3
Condensed Consolidated Balance Sheet -
March 31, 1999 and December 31, 1998 4
Condensed Consolidated Statement of Cash Flows -
Three months ended March 31, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Management's Discussion and Analysis or Plan of Operation 9
Part II Other Information 16
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Synbiotics Corporation
Condensed Consolidated Statement of Operations and Comprehensive Income (Loss) (unaudited)
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Three Months Ended March 31,
------------------------------------------
1999 1998
----------------- ----------------
<S> <C> <C>
Revenues:
Net sales $ 9,390,000 $ 8,801,000
License fees 61,000
Royalties 3,000 74,000
----------------- ----------------
9,454,000 8,875,000
----------------- ----------------
Operating expenses:
Cost of sales 4,080,000 4,046,000
Research and development 560,000 521,000
Selling and marketing 2,018,000 1,591,000
General and administrative 1,414,000 1,239,000
----------------- ----------------
8,072,000 7,397,000
----------------- ----------------
Income from operations 1,382,000 1,478,000
Other income (expense):
Interest, net (327,000) (258,000)
----------------- ----------------
Income before income taxes 1,055,000 1,220,000
Provision for (benefit from) income taxes 465,000 530,000
----------------- ----------------
Income before extraordinary item 590,000 690,000
Early extinguishment of debt, net of tax 116,000
----------------- ----------------
Net income 706,000 690,000
Cumulative translation adjustment (904,000) (247,000)
----------------- ----------------
Comprehensive (loss) income $ (198,000) $ 443,000
================= ================
Basic income per share:
Income from continuing operations $ 0.06 $ 0.07
Early extinguishment of debt, net of tax 0.01
----------------- ----------------
Net income $ 0.07 $ 0.07
================= ================
Diluted income per share:
Income from continuing operations $ 0.06 $ 0.07
Early extinguishment of debt, net of tax 0.01
----------------- ----------------
Net income $ 0.07 $ 0.07
================= ================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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<PAGE>
Item 1. Financial Statements (continued)
Synbiotics Corporation
Condensed Consolidated Balance Sheet
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<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------- --------------
(unaudited) (audited)
<S> <C> <C>
Assets
Current assets:
Cash and equivalents $ 5,914,000 $ 4,357,000
Securities available for sale 1,372,000 1,613,000
Accounts receivable 5,388,000 4,135,000
Inventories 5,669,000 5,179,000
Deferred tax assets 399,000 341,000
Other current assets 655,000 820,000
------------- --------------
Total current assets 19,397,000 16,445,000
Property and equipment, net 2,033,000 1,774,000
Goodwill 12,920,000 13,372,000
Deferred tax assets 7,460,000 7,873,000
Deferred debt issuance costs 605,000 653,000
Other assets 4,938,000 5,329,000
------------- --------------
$ 47,353,000 $ 45,446,000
============= ==============
Liabilities and Shareholders' Equity:
Current liabilities:
Accounts payable and accrued expenses $ 6,725,000 $ 5,217,000
Current portion of long-term debt 1,000,000 2,000,000
Income taxes payable 113,000
Deferred revenue 242,000
------------- --------------
Total current liabilities 8,080,000 7,217,000
------------- --------------
Long-term debt 6,512,000 6,716,000
Deferred revenue 1,151,000
Other liabilities 1,398,000 1,369,000
------------- --------------
9,061,000 8,085,000
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Mandatorily redeemable common stock 2,317,000 2,287,000
------------- --------------
Non-mandatorily redeemable common stock and other shareholders' equity:
Common stock, no par value, 24,800,000 share authorized,
8,352,000 and 8,246,000 shares issued and outstanding at
March 31, 1999 and December 31, 1998 38,401,000 38,134,000
Common stock warrants 1,003,000 1,003,000
Accumulated other comprehensive (loss) income (408,000) 496,000
Accumulated deficit (11,101,000) (11,776,000)
------------- --------------
Total non-mandatorily redeemable common stock and other shareholders' equity 27,895,000 27,857,000
------------- --------------
$ 47,353,000 $ 45,446,000
============= ==============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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<PAGE>
Item 1. Financial Statements (continued)
Synbiotics Corporation
Condensed Consolidated Statement of Cash Flows (unaudited)
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<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------
1999 1998
------------ -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 706,000 $ 690,000
Adjustments to reconcile net income to net cash provided by (used for) operating activities:
Depreciation and amortization 608,000 534,000
Early extinguishment of debt (200,000)
Changes in assets and liabilities:
Account receivable (1,253,000) (1,454,000)
Inventories (490,000) 638,000
Deferred taxes 355,000 493,000
Other assets 577,000 (149,000)
Accounts payable and accrued expenses 1,637,000 496,000
Income taxes payable 113,000 23,000
Deferred revenue 1,393,000
Other liabilities 29,000
------------ -------------
Net cash provided by operating activities 3,475,000 1,271,000
------------ -------------
Cash flows from investing activities:
Acquisition of property and equipment (343,000) (212,000)
Proceeds from sale of securities available for sale 241,000 414,000
------------ -------------
Net cash (used for) investing activities (102,000) 202,000
------------ -------------
Cash flows from financing activities:
Payments of long-term debt (1,050,000) (250,000)
Mandatorily redeemable stock issuance costs (16,000)
Proceeds from issuance of common stock, net 138,000 (66,000)
------------ -------------
Net cash (used for) financing activities (912,000) (332,000)
------------ -------------
Net increase in cash and equivalents 2,461,000 1,141,000
Effect of exchange rates on cash (904,000) (247,000)
Cash and equivalents - beginning of period 4,357,000 2,190,000
------------ -------------
Cash and equivalents - end of period $ 5,914,000 $ 3,084,000
============ =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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<PAGE>
Item 1. Financial Statements (continued)
SYNBIOTICS CORPORATION
Notes to Condensed Consolidated Financial Statements (unaudited)
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Note 1 - Interim Financial Statements:
The accompanying condensed consolidated balance sheet as of March 31, 1999 and
the condensed consolidated statements of operations and comprehensive income and
of cash flows for the three months ended March 31, 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>
March 31, December 31,
1999 1998
----------- -------------
(unaudited) (audited)
<S> <C> <C>
Raw materials $2,265,000 $2,219,000
Work in progress 839,000 904,000
Finished goods 2,565,000 2,056,000
---------- ----------
$5,669,000 $5,179,000
========== ==========
</TABLE>
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<PAGE>
Item 1. Financial Statements (continued)
SYNBIOTICS CORPORATION
Notes to Condensed Consolidated Financial Statements (unaudited)
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Note 4 - Income per Share:
The following is a reconciliation of net income and share amounts used in the
computations of income per share:
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
---- ----
(unaudited) (unaudited)
<S> <C> <C>
Basic net income used:
Income from continuing operations $ 590,000 $ 690,000
Less accretion of mandatorily redeemable common stock (31,000) (36,000)
---------- ----------
Income from continuing operations used in computing basic income
from continuing operations per share 559,000 654,000
Early extinguishment of debt, net of tax 116,000
---------- ----------
Net income used in computing basic net income per share $ 675,000 $ 654,000)
========== ==========
Diluted net income used:
Income from continuing operations $ 590,000 $ 690,000
Less accretion of mandatorily redeemable common stock (31,000) (36,000)
Add interest upon assumed conversion of debt 2,000
---------- ----------
Income from continuing operations used in computing diluted income
from continuing operations per share 559,000 656,000
Early extinguishment of debt, net of tax 116,000
---------- ----------
Net income used in computing diluted net income per share $ 675,000 $ 656,000
========== ==========
Shares used:
Weighted average common shares outstanding used in computing basic income per share 8,920,000 8,414,000
Weighted average options and warrants to purchase common stock as determined by
application of the treasury method 349,000 444,000
Weighted average shares of common stock issued upon assumed conversion of debt 321,000
---------- ----------
Shares used in computing diluted income per share 9,269,000 9,179,000
========== ==========
</TABLE>
Warrants to purchase 284,000 shares of common stock at $4.54 per share have been
excluded from the shares used in computing diluted net income per share for the
three months ended March 31, 1999 and 1998 as their exercise price is higher
than the weighted average market price for those periods.
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<PAGE>
Item 1. Financial Statements (continued)
Synbiotics Corporation
Notes to Condensed Consolidated Financial Statements (unaudited)
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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:
Three Months Ended March 31,
----------------------------
1999 1998
---- ----
(unaudited) (unaudited)
Diagnostics $ 7,390,000 $ 7,191,000
Vaccines 1,758,000 1,610,000
Instruments 242,000
Other revenues 64,000 74,000
----------- -----------
$ 9,454,000 $ 8,875,000
=========== ===========
The following are revenues and long-lived asset information by geographic area:
Three Months Ended March 31,
----------------------------
1999 1998
---- ----
(unaudited) (unaudited)
Revenues:
United States $ 6,396,000 $ 6,357,000
France 1,404,000 1,622,000
Other foreign countries 1,654,000 896,000
----------- -----------
$ 9,454,000 $ 8,875,000
=========== ===========
March 31, December 31,
----------- ------------
1999 1998
---- ----
(unaudited) (audited)
Long-lived assets:
United States $15,224,000 $13,038,000
France 5,272,000 8,090,000
----------- -----------
$20,496,000 $21,128,000
=========== ===========
The Company had sales to one customer totaling $1,806,000 during the three
months ended March 31, 1999. During the three months ended March 31, 1998, sales
to two customers totaled $3,035,000.
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<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation
The information contained in this Management's Discussion and Analysis or Plan
of Operation and elsewhere in this Quarterly Report on Form 10-QSB/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
$11,101,000 at March 31, 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. 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
. 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.
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<PAGE>
In November 1998, Bio-Trends International, Inc. ("Bio-Trends"), our supplier of
feline leukemia virus ("FeLV") vaccine, declared that our previously exclusive
worldwide rights to the vaccine to be non-exclusive, based on an alleged
insufficiency of marketing expenditures by us. We have filed an arbitration
action against Bio-Trends, seeking a declaration that our rights remain
exclusive. An arbitrator has scheduled the hearing in the action for May 1999.
In addition, in February 1999, Binax, Inc. ("Binax"), the licensor and
manufacturer of our ICT Gold products, purported to invoke a contract clause,
based on number of products marketed, which could conceivably result in our
losing the right to sell the products. We have denied that Binax is entitled to
invoke the clause, but we have entered into negotiations with Binax regarding
the reversion of certain license rights. In the event that we were to lose our
right to sell these products, we believe that we would be able to replace most
of the lost sales with sales of our other canine heartworm diagnostic and FeLV
diagnostic products. Binax has indicated that it does not propose to deprive us
of our right to sell the ICT Gold canine heartworm diagnostic product.
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 we believe will occur 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
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<PAGE>
assimilation of the operations, technologies and products of the Acquired
Business, introduction of different distribution channels, potentially dilutive
issuances of equity and/or increases in leverage and risk resulting from
issuances of debt securities, the need to establish internally operating
functions which had been previously provided pre-acquisition by a corporate
parent, accounting charges, operating companies in different geographic
locations with different cultures, the potential loss of key employees of the
Acquired Business, the diversion of management's attention from other business
concerns and the risks of entering markets in which 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
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<PAGE>
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.
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
-12-
<PAGE>
. 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.
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 first quarter of 1999 increased by $589,000 or 7% over the
first quarter of 1998. The increase reflects an increase in our sales of
diagnostic products of $440,000 and an increase in our vaccine product sales of
$149,000. The increase in our sales of diagnostic products is due to an
increase in canine heartworm diagnostics sales of 9% and an increase in feline
diagnostics sales of 8%. Our 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 sales of our
DiroCHEK(R) products; however, our sales of our canine heartworm diagnostic
products have been impacted by increased competition. The increase in our
feline diagnostic sales was due to a full quarter of sales of our WITNESS(R)
FeLV diagnostic test which we introduced at the end of the first quarter of
1998, offset by a decrease in the sales of our feline heartworm diagnostic test
which we launched in the first quarter of 1998. The increase in our companion
animal diagnostic sales was offset by decreases in large-animal diagnostic sales
for SBIO-E of 14% due to one-time sales in the first quarter of 1998 relating to
the changing of distribution partners. These one-time sales of approximately
$800,000 in the first quarter of 1998 were also at reduced prices which
negatively impacted our gross margins during the first quarter of 1998. Our
increased vaccine sales
-13-
<PAGE>
reflected an increase of 69% in sales of bulk FeLV vaccine (related to the
timing of shipments as requested by our OEM customer), offset by a 6% decrease
in sales of vaccines to private label partners. Our instrument business, which
was acquired in March 1998, contributed 3% of sales for the first quarter of
1999. Our net sales in countries other than the U.S. and France in the first
quarter of 1999 increased by $758,000 or 84% over the first quarter of 1998,
reflecting the transition of SBIO-E's business from distribution to direct
sales.
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 we believe will occur
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 43% during the first
quarter of 1999 compared to 46% during the first quarter of 1998 (i.e., our
gross margin increased to 57% from 54%). The higher gross margin is a direct
result of two factors: i) a high percentage of SBIO-E's sales relate to products
manufactured by SBIO-E rather than by third party manufacturers and ii) SBIO-E's
sales of its large-animal diagnostic products during the first quarter of 1999
carried higher margins than those during the first quarter of 1998, related to
the change in distribution partners mentioned above, which were at reduced
prices and which negatively impacted our gross margins. Our domestic sales
(i.e., exclusive of the SBIO-E sales), during the first quarter of 1999 and 1998
had a 56% gross margin. A significant portion of 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 HW, VetRED(R) and all 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.
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 first quarter of 1999 increased
$39,000 or 7% over the first quarter of 1998. The increase is primarily due to
an increase in personnel costs resulting from the March 1998 acquisition of
Prisma, offset by a decrease in external research and development projects. Our
research and development expenses as a percentage of our net sales were 6%
during the first quarters of 1999 and 1998. We expects 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 first quarter of 1999 increased by
$427,000 or 27% over the first quarter of 1998. The increase is due primarily
to the addition of an outbound telemarketing group during the third quarter of
1998, increased royalties due to the 1998 introduction of 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 first quarter of 1999
and 1998, respectively. We will continue to increase our investment in sales
and marketing to expand our field sales force and our telemarketing and Internet
sales efforts.
Our general and administrative expenses during the first quarter of 1999
increased by $175,000 or 14% over the first quarter of 1998. The increase is
due primarily to an increase in personnel costs resulting from the March 1998
acquisition of Prisma. Our general
-14-
<PAGE>
and administrative expenses as a percentage of our net sales were 15% during the
first quarters of 1999 and 1998. Our royalty income during the first quarter of
1999 decreased $71,000 or 96% from the first quarter of 1999. As a result of the
amended supply agreement with Merial (see above), we will no longer receive
royalties beginning in 1999. Our royalty income totalled $317,000 and $332,000
during 1998 and 1997, respectively.
Our net interest expense during the first quarter of 1999 increased by $69,000
over the first quarter 1998 due to a higher number of days of interest expense
related to the debt incurred to a former stockholder of Prisma and increasing
amortization of debt issuance costs and debt discount, incurred in conjunction
with the acquisition of SBIO-E.
Our combined effective tax rate was 44% during the first quarter of 1999 as
compared to 43% during the first quarter of 1998. The increase in 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.
Financial Condition
We believe that our present capital resources, which included working capital of
$11,319,000 at March 31, 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 March 31,
1999, we had outstanding principal balances on our Banque Paribas debt of
$8,250,000, 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 totalling $84,000, during the first quarter of 1999.
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 our seasonality.
Impact of the Year 2000 Issue
The year 2000 issue is the result of computer programs being written using two
digits rather than four digits to define the applicable year. 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.
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.
-15-
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
No material changes.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
--------
4.3.2 Waiver and Second Amendment to $15,000,000 Credit
Arrangement Among the Registrant, the Banks Named
Therein and Banque Paribas, as Agent, Dated January 12,
1999.
10.9 Employment Contract between Synbiotics Europe, SAS and
Francois Guillemin, dated as of July 22, 1997+.
10.41.2 Third Amendment to Distribution Agreement between the
Registrant and Merial Limited, dated as of July 1,
1998.
27 Financial Data Schedule (for electronic filing purposes
only).
___________________
+ Management contract.
(b) Reports on Form 8-K
-------------------
None.
-16-
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SYNBIOTICS CORPORATION
Date: 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
- ----------- -------
4.3.2 Waiver and Second Amendment to $15,000,000 Credit Agreement Among
the Registrant, the Banks Named Therein and Banque Paribas, as
Agent, dated January 12, 1999.
10.9 Employment Agreement between Synbiotics Europe, SAS and Francois
Guillemin, dated as of July 22, 1997+.
10.41.2 Third Amendment to Distribution Agreement between the Registrant
and Merial Limited, dated as of July 1, 1998.
27 Financial Data Schedule (for electronic filing purposes only).
______________________
+ Management contract.
<PAGE>
Exhibit 4.3.2
-------------
WAIVER AND SECOND AMENDMENT
TO
$15,000,000 CREDIT AGREEMENT
AMONG
SYNBIOTICS CORPORATION,
THE BANKS NAMED THEREIN
AND
PARIBAS,
AS AGENT
JANUARY 12, 1999
<PAGE>
WAIVER AND SECOND AMENDMENT TO CREDIT AGREEMENT
This Waiver and Second Amendment to Credit Agreement (this "Agreement") is
entered into as of January 12, 1999, by and among Synbiotics Corporation, a
California corporation ("Synbiotics"), the banks referred to in the Credit
Agreement (as defined below) (collectively, the "Banks") and Paribas, as agent
(the "Agent"). For all purposes of this Agreement, capitalized terms used
herein shall have the respective meanings set forth in the Credit Agreement,
dated as of July 9, 1997, among Synbiotics, the Banks and the Agent, as amended
as of March 6, 1998 (the "Credit Agreement").
RECITALS
--------
A. Synbiotics and Barnes-Jewish Hospital (the "Hospital"), a Missouri
not-for-profit corporation with headquarters in St. Louis, Missouri, have
entered into a Settlement Agreement, Stipulation to Settlement Order Under Seal,
Release and License (the "BJH Settlement") effective as of July 28, 1998,
whereby Synbiotics and the Hospital have agreed to fully and finally settle all
of the controversies between them as described in Schedule 4.4 of the Credit
Agreement.
B. In connection with and pursuant to the BJH Settlement, Synbiotics has
issued to the Hospital two promissory notes (collectively, the "BJH Notes").
C. Synbiotics and Prisma Acquisition Corp., a Delaware corporation
("Prisma") have combined into a single company through the statutory merger of
Prisma with and into Synbiotics (the "Merger").
D. In connection with the Merger, Synbiotics has sold and issued to
BioQuest Venture Leasing Partnership, L.P., a limited partnership organized
under the laws of the State of Delaware ("BioQuest") a $1,000,000 convertible
promissory note (the "BioQuest Note") in exchange for 482 shares of common stock
of Prisma.
E. The Agent and the Banks hereby desire to (i) waive any default under
the Credit Agreement that may result from the transactions contemplated by the
BJH Settlement, the Merger and the other transactions referred to in this
Agreement and (ii) amend the Credit Agreement as set forth herein.
AGREEMENT
---------
NOW, THEREFORE, in consideration of the mutual promises and agreements contained
in this Agreement and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree to
the above Recitals and as follows:
1. Conditions Precedent. This Agreement shall not become effective
--------------------
until, and shall become effective when, each of the following conditions
precedent (the "Conditions Precedent") have been satisfied, to the Agent's and
each of the Banks, satisfaction (the date such Conditions Precedent are
satisfied, the "Closing Date"):
1.1. Confirmation of Covenants and Representations and Warranties.
-------------------------------------------------------------
All of the covenants, representations, and warranties of Synbiotics contained in
the Loan Documents (except as expressly modified by this Agreement) and this
Agreement remain true and correct and enforceable in all respects and shall
remain true and correct and enforceable in all respects after giving effect to
this Agreement.
1.2. Closing Documents. Synbiotics shall have delivered the
-----------------
following documentation to each Bank and the Agent:
2
<PAGE>
(a) in order to perfect the Agent's and Banks, security interest in
certain licensed patents of Synbiotics as a result of the BJH Settlement, an
amendment to the Patent Security Agreement (as defined in the Security
Agreement), naming the Agent as secured party with respect to all such licensed
patents of Synbiotics, to be filed in the Patent and Trademark Office; and
(b) copies of (i) the February 9, 1998 amendments to Synbiotics' by-
laws, (ii) the August 4, 1998 amendments to Synbiotics, articles of
incorporation and (iii) the certificate of determination, and any amendments to
the certificates of determination, with respect to Synbiotics' preferred stock,
if any, which shall, in each case (i), (ii) and (iii), be reasonably
satisfactory to the Agent and the Banks.
1.3. Fees and Expenses. (a) The Agent shall have received a working
-----------------
fee in connection with the negotiation, preparation, approval, execution and
delivery of this Amendment equal to $40,000 for the account of the Agent.
2. Waiver. The Agent and the Banks hereby waive any default by
------
Synbiotics of the following provisions of the Credit Agreement:
2.1. BJH Settlement. Sections 4.5, 4.71 4.14, 4.15, 4.18, and 4.21
--------------
of the Credit Agreement solely to the extent such default would be caused by the
terms of the BJH Settlement or the preceding litigation or the contingent
liability that existed before the BJH Settlement in relation to such preceding
litigation.
2.2. Plans. The first sentence of Section 4.12 of the Credit
Agreement solely to the extent such default would be caused by the existence of
Plans not previously disclosed to the Agent and the Banks. Synbiotics hereby
represents and warrants that all Plans have been in compliance with the
provisions of Section 4.12 since the Closing Date.
2.3. Ownership of Property. Section 4.19 of the Credit Agreement
---------------------
solely to the extent such default would be caused by the failure of Synbiotics
to amend Schedule 4.19 to set forth Synbiotics' leasehold interest in certain
real property in Rome, New York.
2.4. Amended Provisions. Any other provision of the Credit Agreement
------------------
which is expressly amended by this Agreement solely to the extent such default
would be caused by the failure of Synbiotics to amend such provision as
contemplated by this Agreement prior to such default.
3. Amendments.
----------
3.1 Definitions. (a) The following shall be added as new definitions
-----------
in alphabetical order to Section 1.1 of the Credit Agreement:
"BJH Settlement" shall mean the Settlement Agreement, Stipulation to
Settlement Order Under Seal, Release and License, effective as of July 28, 1998,
whereby Synbiotics and the Hospital have agreed to fully and finally settle all
of the controversies between them as described in Schedule 4.4 of the Credit
Agreement. The terms and conditions of the BJH Settlement shall not be amended
without the consent of the Agent as long as either Paribas or Imperial Bank are
Banks.
"BioQuest Note" shall mean the $1,000,000 promissory note issued by
Synbiotics to BioQuest Venture Leasing Partnership, L.P., dated as of March 6,
1998, which is convertible, at the option of Synbiotics, into the common stock
of Synbiotics.
"BJH Notes" shall mean, collectively, the two promissory notes issued
by Synbiotics to the Hospital in connection with and pursuant to the BJH
Settlement.
3
<PAGE>
"Date-Sensitive Data" means any data of any type that includes date
information or which is otherwise derived from or dependent on date information.
"Date-Sensitive System" means any software or hardware system or
component, including any electronic or electronically controlled system, that
processes any Date-Sensitive Data and that is installed, in development or on
order.
"Hospital" shall mean Barnes-Jewish Hospital, a Missouri not-for-
profit corporation with headquarters in St. Louis, Missouri.
"SL Guaranty" shall mean the guaranty by the Borrower of the
obligations of Serge Leterme, an employee of the Borrower, to Imperial Bank
under that certain short term home purchase loan dated September 14, 1998.
"SL Loan" shall mean the $75,000 loan made by the Borrower to Serge
Leterme, an employee of the Borrower, in order to cover his relocation expenses
to San Diego, California.
(b) The defined term "Consolidated EBITDA" shall be and is hereby
amended by replacing the word "and" in the seventh line thereof with 11,11 and
by inserting the following language at the end thereof:
"and (iv) with respect to the Borrower, the costs and expenses incurred by
the Borrower in connection with the BJH Settlement (including without
limitation the issuance of the BJH Notes) in an amount not to exceed
$4,746,000; provided, however, that any loans and advances made after
-----------------
October 31, 1998 by the Borrower and its Subsidiaries to their employees in
accordance with Section 6.8(c) shall be deducted from Consolidated EBITDA
for purposes of Section 6.1."
(c) The defined term "Consolidated Net Income" shall be and is hereby
amended by inserting the following language at the end thereof:
"For purposes of Section 6.1(e)(ii)(b) only, the $4,746,000 in costs and
expenses incurred by the Borrower in connection with the BJH Settlement
shall not be deducted for purposes of determining Consolidated Net Income."
(d) The defined term "Consolidated Tangible Net Worth" shall be and
is hereby amended by inserting the following language at the end thereof:
"For purposes of Section 6.1(e) only, (i) the amounts outstanding under the
BioQuest Note shall constitute Consolidated Tangible Net Worth and (ii) the
after-tax effect of the $4,746,000 costs and expenses at the time incurred
by the Borrower in connection with the BJH Settlement shall be added to
Consolidated Tangible Net Worth."
(e) The defined term "Eligible Accounts Receivable" shall be and is
hereby amended by inserting the following language at the end of clause (p)
thereof:
"; provided, however, that accounts from RM, an Affiliate of the Borrower,
shall be considered to be Eligible Accounts Receivable to the extent
provided for in clause (1) above.
(f) The defined term "Indebtedness" shall be and is hereby amended by
inserting the following language at the end thereof:
"provided, however, that the amounts outstanding under the BioQuest Note
-----------------
and the BJH Notes shall not constitute Indebtedness for purposes of Section
6.1"
4
<PAGE>
3.2 Section 4.16.
------------
(a) Section 4.16 of the Credit Agreement shall be and is hereby
amended by inserting the following after the word "Subsidiary" in the sixth line
thereof:
", as of the Closing Date. Schedule 4.16(b) hereto sets forth the number
of authorized and issued shares of capital stock of the Borrower and each
of its Subsidiaries and the registered owner(s) of each such Subsidiary, as
of October 30, 1998."
(b) Section 4.16 of the Credit Agreement shall be and is hereby
further amended by replacing the word "and" on the twenty-first line thereof
with "," and adding the following at the end thereof:
", and (iv) preferred stock purchase rights issued pursuant to any
shareholder rights plan previously approved by the Agent."
3.3 Schedule 4.19. Schedule 4.19 of the Credit Agreement shall be
-------------
and is hereby amended by deleting item number 4 in its entirety and inserting
the following in replacement thereof:
"4. 1721 Black River Road; C.A. Kaplan Real Estate
Rome, NY 13440 1300 Floyd Avenue
315-337-6014 Rome, NY 13440"
3.4 Section 6.16. The following shall be added as a new Section 6.16
------------
to the Credit Agreement:
"Section 6.16 Conversion of BioQuest Note. The Borrower shall not
---------------------------
repay the BioQuest Note and shall instead convert such note into the common
stock of Borrower in accordance with the terms thereof."
3.5 Section 6.1. Section 6.1(d) shall be and is hereby amended by
-----------
deleting such section in its entirety and inserting the following in replacement
therefor:
"(d) Capital Expenditures. Other than with respect to Prisma
--------------------
Capital Expenditures, which are covered by the following sentence, the
Borrower shall not make or incur (or commit to make or incur) and shall not
permit any of its Subsidiaries to make or incur (or commit to make or
incur) Capital Expenditures (i) in the 1998 fiscal year which exceed, in
the aggregate, $1,000,000, (ii) in the 1999 fiscal year which exceed, in
the aggregate, $1,000,000 in connection with the Borrower's Date-Sensitive
System (the "DSS Capex") and $1,000,000 in connection with any other
Capital Expenditures (the "Other Capex"), and (iii) in the 2000 fiscal year
and any fiscal year thereafter which exceed, in the aggregate, $1,000,000
for such fiscal year; provided that if the maximum amount set forth above
--------
for any period in clauses (ii) and (iii) exceeds the aggregate amount of
Capital Expenditures made or incurred (or committed to be made or incurred)
during such period (such excess, the "CE Excess"), then the maximum amount
set forth above for the following period (but not any subsequent periods)
shall be increased by the amount of CE Excess; provided further, that
----------------
calculations of CE Excess during the 1999 fiscal year shall only be made
with respect to Other Capex and not DSS Capex. The Borrower shall not make
or incur (or commit to make or incur) and shall not permit any of its
Subsidiaries to make or incur (or commit to make or incur) Prisma Capital
Expenditures other than Prisma Capital Expenditures which do not exceed, in
the aggregate, $250,000 in each of the Borrower's 1998 and 1999 fiscal
years; provided, however, that Prisma Capital Expenditures in the 2000
--------
fiscal year and any fiscal year thereafter shall be applied against the
limitation set forth in clause (iii) ."
3.5 Section 6.2. (a) Section 6.2(f) of the Credit Agreement shall be
-----------
and is hereby (i) re-lettered as Section 6.2(i) and (ii) amended by replacing
"(e)" with "(h)".
5
<PAGE>
(b) The following shall be added as new Sections 6.2(f), (g), and (h)
of the Credit Agreement:
"(f) Indebtedness under the BioQuest Note;
(g) Indebtedness under the BJH Notes;
(h) Indebtedness under the SL Guaranty, provided such guaranty shall
terminate on or prior to November 13, 1998;"
3.6 Section 6.4.
-----------
(a) Section 6.4(b) of the Credit Agreement shall be and is hereby
amended by adding the following language at the end thereof:
"provided, however, this Section 6.4(b) shall not apply to the Borrower's
-----------------
acquisition of a nonexclusive license to certain patents of the Hospital,
as more fully described in attachment 1 to the Second Amendment to Patent
Security Agreement, dated as of October 23, 1998, between the Agent and the
Borrower"
(b) Section 6.4(c) of the Credit Agreement shall be and is hereby
amended by inserting the following language at the end thereof:
"except for the amendments to the Borrower's (i) bylaws of February 9,
1998, (ii) articles of incorporation of August 4, 1998 and (iii)
certificates of determination with respect to the Borrower's preferred
stock"
3.7 Section 6.5. Section 6.5 of the Credit Agreement shall be and is
-----------
hereby amended by inserting the following language at the end thereof:
"and (iii) sales of contract rights in connection with the transaction with
Merial LLC allowing Merial LLC to use certain distribution channels and to
receive the benefits of the Borrower's strategic position in the supply of
feline leukemia virus vaccine in North America and Central America"
3.8 Section 6.6. The introductory paragraph of Section 6.6 of the
-----------
Credit Agreement shall be and is hereby amended by replacing "6.2(f)" with
"6.2(h) or (i)".
3.9 Section 6.7. Section 6.7 of the Credit Agreement shall be and is
-----------
hereby amended by inserting the following language at the end thereof:
"and (iii) the Borrower may distribute and/or redeem shares of its common
stock or other equity interests (or rights to acquire other equity
interests) in the Borrower pursuant to any shareholder rights plan
previously approved by the Agent."
3.10 Section 6.8. (a) Section 6.8(c) of the Credit Agreement shall be
-----------
and is hereby amended by deleting such section in its entirety and inserting the
following in replacement therefor:
"(c) loans and advances by the Borrower and its Subsidiaries to their
employees for the purpose of providing for relocation expenses."
(b) The following shall be added as new Sections 6.8(e) and (f) of
the Credit Agreement:
"(e) subsequent to October 31, 1998 or as otherwise agreed to by the
Lenders, loans and advances by the Borrower and its Subsidiaries to
their employees in the ordinary course of its business not exceeding
$1,000 per employee at any one time outstanding; and
6
<PAGE>
(f) the issuance of the BJH Notes and the BioQuest Note and the
acquisition of Prisma Acquisition Corp., a Delaware corporation."
3.11 Section 6.10. Section 6.10 of the Credit Agreement shall be and
------------
is hereby amended by inserting the following sentence at the end thereof:
"The foregoing shall not apply to the conversion of the BioQuest Note into
common stock of the Borrower or to the scheduled complete or partial
forgiveness, based on time of continued service, of the SL Loan or of any
other loans and advances by the Borrower and its Subsidiaries to their
employees for the purpose of providing for relocation expenses."
3.12 Section 6.11. Section 6.11 of the Credit Agreement shall be and
------------
is hereby amended by inserting the following language at the end thereof:
"with the exception of the veterinary diagnostics instrumentation business
of Prisma Acquisition Corp., a Delaware corporation, acquired by the
Borrower"
3.13 Schedule 4.16(b). Schedule 4.16 of the Credit Agreement shall be
----------------
and is hereby amended to include the schedule entitled "Schedule 4.16(b)", which
is attached hereto as an additional schedule to the Credit Agreement.
4. Representations, Warranties and Covenants of Synbiotics. In addition
-------------------------------------------- ----------
to the representations and warranties contained in the Loan Documents,
Synbiotics makes the following undertakings, representations and warranties to
the Agent and the Banks, which undertakings, representations and warranties
shall survive the execution of this Agreement and shall continue in full force
and effect until the full and final satisfaction and discharge of all
obligations of Synbiotics under this Agreement and under the other Loan
Documents:
4.1 No Further Modifications. Synbiotics expressly acknowledges and
------------------------
agrees that neither the Agent nor any Bank shall have any obligation, and have
made no commitment, to further waive, modify or amend the Credit Agreement or
other Loan Documents, except as expressly set forth in this Agreement. Except
as otherwise provided in this Agreement or pursuant to the Credit Agreement,
Synbiotics will not sell, assign, pledge, exchange or dispose of any of the
Collateral in any manner whatsoever or attempt to do any of the foregoing or
agree to any modification or cancellation of, or substitution for, any of the
Collateral.
4.2 No Default. No Default or Event of Default under the Loan
----------
Documents has occurred and is continuing or will occur by giving effect hereto
and the execution of this Agreement will not result in any Default, Event of
Default or in any breach of any of the terms, conditions or provisions of or
constitute a default under any indenture, mortgage, deed of trust or other
agreement or instrument to which Synbiotics is a party or by which it or its
property is bound or any order of any court or administrative agency entered in
any proceeding to which Synbiotics is a party or by which it or its property may
be bound or to which it or its property may be subject.
5. Miscellaneous.
-------------
5.1. Notices, etc. Any and all notices, requests, certificates and
------------
other instruments executed and delivered after the execution and delivery of
this Agreement may refer to the Credit Agreement without making specific
reference to this Agreement but nevertheless all such references shall include
this Agreement unless the context otherwise requires.
5.2. Headings. The descriptive headings of the various Sections or
--------
parts of this Agreement are for convenience only and shall not affect the
meaning or construction of any of the provisions hereof.
7
<PAGE>
5.3. Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the laws of California.
5.4. Counterparts. The execution hereof by the parties hereto shall
------------
constitute a contract between the parties heretofore the uses and purposes
hereinabove set forth, and this Agreement may be executed in any number of
counterparts, each executed counterpart constituting an original, but all
together only one agreement.
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the day and the year first written.
SYNBIOTICS CORPORATION
By: /s/ Michael Green
----------------------
Name: Michael Green
Title: V.P. Finance
(signatures continued on next page)
S-1
<PAGE>
PARIBAS,
as Agent and as a Bank
By: /s/ John W. Kopcha
-----------------------
Name: John W. Kopcha
Title: Vice President
By: /s/ Marc A. Preiser
-----------------------
Name: Marc A. Preiser
Title: Assistant Vice President
(signatures continued on next page)
S-2
<PAGE>
IMPERIAL BANK, as a Bank
By: /s/ Leila Ghoroghchi
------------------------
Name: Leila Ghoroghchi
Title: Vice President
S-3
<PAGE>
Schedule 4.16b
Corporate Structure; Capitalization
-----------------------------------
(at 10/31/98)
Authorized Issued
----------- ------
1. Pre-Acquisition
---------------
Synbiotics Corporation 24,800,000 7,393,000
Common Stock
2. Post-Acquisition
----------------
Synbiotics Corporation 24,800,000 9,005,420
Common Stock
Synbiotics Corporation 25,000,000 -0-
Preferred Stock
Synbiotics Europe 47,500,000 FF 47,500,000 FF
(R.M. - Diagnostics S.A.S.)
Common Stock.
<PAGE>
Exhibit 10.9
------------
Translation from French
-----------------------
EMPLOYMENT CONTRACT
BETWEEN
SYNBIOTICS EUROPE SAS, whose registered office is at 299, avenue Jean Jaures,
69007 Lyon, registered with the Lyons RCS under number 412 381 212, and
represented by Mr. Kenneth M. Cohen, fully empowered for the purposes hereof,
pursuant to a decision of the Partners dated July 29, 1997,
Hereinafter referred to as the "Company"
ON THE ONE HAND
AND
Mr. Francois Guillemin, residing at 76, boulevard des Belges, 69006 Lyon, born
on February 18, 1950, a French national, Social Security No. 150026938608410,
ON THE OTHER HAND.
WITNESSETH:
-----------
Pursuant to an employment contract dated March 30, 1977, Mr. Guillemin was hired
by Rhone-Merieux. Most recently, Mr. Guillemin held the position of delegate
responsible veterinarian in the diagnostics department of Rhone-Merieux. This
department was contributed to the Company on July 9, 1997 in the form of the
contribution of an autonomous branch of activity, thus the purpose of this
contract is to define the duties and conditions of Mr. Guillemin's employment
with the Company.
This contract cancels and supersedes any employment contract or any agreement or
understanding of any kind whatsoever which might have been entered into
previously with the Company or the legal entities of which it has become the
assign, it being understood that Mr. Guillemin shall under this contract retain
the benefits he had acquired prior to the contribution.
IT HAS BEEN DECIDED AND AGREED AS FOLLOWS:
------------------------------------------
1. Mr. Guillemin shall be hired by the Company as Director of Research &
Development for an indefinite term. His seniority under his employment contract
dated March 30, 1977 shall be taken over by the Company.
<PAGE>
2. As Director of Research & Development, and responsible pharmacist
veterinarian, Mr. Guillemin shall have the following responsibilities, the list
hereinafter being not limitative or exhaustive:
- - participation in preparing the Company's research and study program;
- - filing of the applications for authorization to market regulated products;
- - organization and supervision, in particular, of the manufacture, packaging,
storage, control and delivery of regulated products.
Mr. Guillemin shall report regularly on the developments in his activities to
the Committee responsible for research & development.
3. Mr. Guillemin shall receive a gross annual compensation of FF 832,510,
payable in 14 installments. Mr. Guillemin's gross annual compensation has been
agreed in view of the nature of his duties and responsibilities and shall be
independent of the time he will actually devote to performing his duties. This
compensation could be increased every year depending on the results achieved by
Mr. Guillemin and the Company. Mr. Guillemin may not, throughout the entire
term of this contract, carry on any professional activity other than the one
described herein, without first obtaining the Company's written consent.
4. In addition to this fixed compensation, Mr. Guillemin will receive a bonus,
pursuant to the Synbiotics group's senior managers' program, as determined from
time to time.
5. Mr. Guillemin will be granted options covering fifty thousand (50,000)
shares of Synbiotics Corporation. The purchase price of these shares will be
the share price at the close of trading on July 9, 1997. Each option shall be
valid for a period of 10 years, Mr. Guillemin being granted an option for 25% of
all the shares mentioned above upon expiration of each of the four first years
of his duties with the Company.
It is specified that in the event of transfer of the Company, Mr. Guillemin will
have the possibility, without respecting the above-mentioned conditions, of
acquiring the balance of the shares not already acquired by him on the date of
the transfer.
6. The Company shall provide Mr. Guillemin with a company car of the Monospace
type (Renault Espace) for his business and personnel requirements. The Company
shall bear the leasing costs of the vehicle and the reasonable expenses incurred
by Mr. Guillemin for his business activities, upon presentation of the
corresponding receipts, up to an approximate amount of FF 68,000 per year.
7. Mr. Guillemin will have 31 work days of paid vacation per year according to
legal conditions, in addition to the legal holidays granted by labor laws in
France, to be taking depending on work requirements.
8. Mr. Guillemin shall normally carry out his duties at the Company's
registered office in Lyon, it being understood that this place of work may, as
the case may be, be transferred to another place depending on work requirements,
it being understood that such transfer shall not constitute a material
modification of his employment contract.
The parties shall agree reciprocally, in good faith, on the terms and
conditions of this transfer.
9. In view of his duties, Mr. Guillemin will need to travel frequently for
business purposes both in France and abroad, which he declares that he expressly
accepts.
The business expenses on the one hand and the reasonable travel expenses on the
other hand which Mr. Guillemin incurs at such times will be reimbursed to him
upon presentation of receipts, in accordance with the usual practice applicable
within the profession.
<PAGE>
10. Mr. Guillemin undertakes to respect the terms of the confidentiality
undertaking attached to this contract.
11. In the event of termination of this employment contract for dismissal other
than for serious or gross misconduct (faute grave or faute lourde), Mr.
Guillemin shall, in addition to the collective bargaining agreement and legal
severance payments, receive an amount equal to six months of salary.
In any event, the total amount received by Mr. Guillemin shall be equal to the
greater of (a) 12 months of salary or (b) the total amount of the legal and
collective bargaining agreement severance payments.
Moreover, an additional indemnity equal to six months of salary shall be paid to
Mr. Guillemin in the event that the termination of this contract occurs
following the acquisition of the Company by another company, or following any
change of control occurring in the Company's capital.
12. For all that is not provided for herein, the parties refer to the labor
regulations in force in France, and to the provisions of the National Collective
Bargaining Agreement of the Pharmaceutical Industry as extended.
Executed in two originals
In Lyon on October 12, 1997
Signature (preceded by the handwritten words
in French "lu et approuve" - read and approved)
/s/ Francois Guillemin /s/ Kenneth M. Cohen
- ---------------------------- -------------------------
Francois Guillemin For Synbiotics Corporation
<PAGE>
EXHIBIT 10.41.2
---------------
THIRD AMENDMENT
---------------
The Agreement between Merial Limited ("Merial') and Synbiotics Corporation
("Synbiotics"), dated January 1, 1992 and amended on July 27, 1993 and August
22, 1996 (as so amended, the "Agreement"), is amended as follows on March 1,
1999, effective as of July 1, 1998:
A. Paragraph 1.2.3 is amended to add "This includes the right to sell
FeLV "Product" and any FeLV "Product" combination vaccines in the USA through
ethical distributors acting as sales agents toward USA veterinarians; it is
understood, however, that Merial doing so will not prevent Synbiotics from
selling FeLV "Product" and FeLV "Product" combination vaccines through the same
and/or other ethical distributors acting as ethical distributors as contemplated
by the Agreement."
B. Paragraph 3.3.2 as amended is deleted in its entirety.
C. Synbiotics agrees to use its reasonable best efforts and work with
Merial to try to negotiate amendments to Synbiotics' current agreement with Bio-
Trends International, Inc. to allow Bio-Trends International, Inc. and Merial to
deal directly with each other (while preserving Synbiotics' other rights) to
facilitate the operation of Merial's business (as contemplated by the Agreement,
as hereby amended) with respect to the North American/Central American market.
D. In consideration for the above, Merial agrees to pay Synbiotics
$1,600,000 immediately. Royalties paid by Merial to Synbiotics for the quarter
ended September 30, 1998 will be deducted from this amount.
E. Except as expressly amended by this Amendment, the Agreement remains
unchanged and in full force and effect.
Synbiotics Corporation Merial Limited (domesticated in Delaware as
Merial LLC, and the successor in interest to
Rhone Merieux, Inc.)
By /s/ Michael Green By /s/ Donald G. Hildebrand
---------------------- ------------------------
Title V.P. Finance Title V.P. Merial Limited
Print Name Michael Green Print Name Donald G. Hildebrand
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1999 AND THE RELATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND CASH FLOWS FOR THE THREE
MONTHS ENDED MARCH 31, 1999 INCLUDED ELSEWHERE IN THIS FORM 10-QSB/A AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 5,914
<SECURITIES> 1,372
<RECEIVABLES> 5,447
<ALLOWANCES> 59
<INVENTORY> 5,669
<CURRENT-ASSETS> 19,397
<PP&E> 5,960
<DEPRECIATION> 3,927
<TOTAL-ASSETS> 47,353
<CURRENT-LIABILITIES> 8,080
<BONDS> 6,512
2,317
0
<COMMON> 38,401
<OTHER-SE> (10,506)
<TOTAL-LIABILITY-AND-EQUITY> 47,353
<SALES> 9,390
<TOTAL-REVENUES> 9,454
<CGS> 4,080
<TOTAL-COSTS> 8,072
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 327
<INCOME-PRETAX> 1,055
<INCOME-TAX> 465
<INCOME-CONTINUING> 590
<DISCONTINUED> 0
<EXTRAORDINARY> 116
<CHANGES> 0
<NET-INCOME> 706
<EPS-BASIC> 0.07
<EPS-DILUTED> 0.07
</TABLE>
