-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Vg/EZkH6h5juRmu9UPL8idEhxcUAJQS0VK05ZFM+oeaUPkxYnblzvNAT8Jv77yBP u0nl8ww0m9x40GBroGGc4A== 0000898430-96-001091.txt : 19960401 0000898430-96-001091.hdr.sgml : 19960401 ACCESSION NUMBER: 0000898430-96-001091 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960329 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SYNBIOTICS CORP CENTRAL INDEX KEY: 0000719483 STANDARD INDUSTRIAL CLASSIFICATION: IN VITRO & IN VIVO DIAGNOSTIC SUBSTANCES [2835] IRS NUMBER: 953737816 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-11303 FILM NUMBER: 96541512 BUSINESS ADDRESS: STREET 1: 11011 VIA FRONTERA CITY: SAN DIEGO STATE: CA ZIP: 92127 BUSINESS PHONE: 6194513771 10KSB 1 FORM 10-KSB =========================================================================== U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------- FORM 10-KSB [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE YEAR ENDED DECEMBER 31, 1995 OR [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 0-11303 SYNBIOTICS CORPORATION (Name of small business issuer in its charter) CALIFORNIA 95-3737816 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 11011 VIA FRONTERA SAN DIEGO, CALIFORNIA 92127 (Address of principal executive offices) (Zip Code) ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE: (619) 451-3771 SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT: NONE SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT: COMMON STOCK 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 [ ] Check if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] The issuer's revenues for the year ending December 31, 1995 were $14,118,000. The aggregate market value of the voting stock held by non-affiliates of the registrant as of February 29, 1996 was approximately $13,813,000 based on the closing sale price in the over-the-counter market as reported by the Nasdaq National Market. As of February 29, 1996, 5,816,033 shares of Common Stock were outstanding. Transitional Small Business Disclosure Format (check one): Yes [ ] No [X] ============================================================================= PART I ------ ITEM 1. BUSINESS -------- GENERAL Founded in 1982, Synbiotics Corporation (the "Company") has evolved from a research and development company into a developer, manufacturer and marketer of monoclonal antibody based diagnostic products and conventionally derived biological products for use in the animal health care field. The Company has substantially increased its revenue base through the introduction of new products and increasing sales of existing products. The Company currently markets twenty diagnostic test kits and devices for detection of infectious and other diseases in animals, one veterinary immunotherapeutic product and ten vaccines. BUSINESS STRATEGY The core of Synbiotics' development since inception has been monoclonal antibody technology. The Company's near-term strategy is to develop its business through sales of its animal health products and through in-licensing and co-marketing of third parties' animal health products wherever possible. This strategy is intended to provide a base of revenue, build the Company's presence in the marketplace and provide a foundation from which to develop the next generation of diagnostic products. The Company believes it may be able to leverage its expertise developed in the animal health market into other diagnostic areas. In March 1996, the Company acquired an exclusive worldwide license to a number of enabling recombinant DNA and PCR technologies for a variety of diagnostic areas, including animal health, agriculture, aquaculture and food safety. MARKET AND PRODUCT OVERVIEW The Company sells its products both in the United States and in foreign countries. The total number of family owned dogs and cats is estimated to exceed 100 million in the United States alone. The Company believes that the market for sales of diagnostic, therapeutic and vaccine products to United States veterinarians for dogs and cats was approximately $160,000,000 in 1995. The Company believes that its current and intended future products will offer veterinarians an opportunity to improve the quality and expand the scope of veterinary health care services. In March 1995, Synbiotics introduced ICT GOLD/(TM)/, the first third-generation diagnostic test format to be used in the animal health market. This format is more convenient, easier to use and faster than the predominantly used animal health diagnostic formats, while providing the same degree of accuracy. The first test kit, ICT GOLD/(TM)/ HW, which tests for canine heartworm, provides Synbiotics with an opportunity to increase its modest penetration of the $16.5 million U.S. in-clinic stat canine heartworm market. The Company's second ICT GOLD/(TM)/ product, utilizing the ICT GOLD/(TM)/ format for feline leukemia, will be introduced in April 1996. -1- Synbiotics Products Marketed as of December 31, 1995: - -----------------------------------------------------
DIAGNOSTICS: - ------------ ASSURE/(R)//CH - Heartworm antigen test kit (canine and feline) ASSURE/(R)//FeLV - Feline leukemia virus antigen test kit CRF/(R)/ - Canine rheumatoid factor test kit DiroCHEK/(R)/ - Heartworm antigen test kit (canine and feline) D-TEC/(R)/ BRUCELLA A. - Brucella abortus antibody test kit (bovine and bison) D-TEC/(R)/ CB - Canine brucellosis antibody test kit EstruCHEK/(R)/ - Progesterone test kit (bovine, canine and equine) FUNGASSAY/(R)/ - Dermatophyte test medium ICT GOLD/TM/ HW - Canine heartworm antigen test kit LAB-EZ/TM//EIA - Equine infectious anemia test kit LEUKASSAY/(R)/ B - Bovine leukemia virus antigen test kit LymeCHEK/TM/ - Canine borrelia burgdorferi antibody test kit MIP/(R)/ COLOR-CHEK - Pregnant mare gonadotropin test kit OVASSAY/(R)/ Plus - Fecal diagnostic system TUBERCULIN/TM/ OT - Mammalian intradermic skin test TUBERCULIN/TM/ PPD - Bovine intradermic skin test UNI-TEC/(R)/ CHW - Heartworm antibody test kit (canine and feline) UNI-TEC/(R)/ FeLV - Feline leukemia virus antigen test kit ViraCHEK/(R)//FeLV - Feline leukemia virus antigen test kit ViraCHEK/(R)//FIV - Feline immunodeficiency virus antigen test kit (not marketed in the United States) BIOLOGICALS: - ------------ CL/MAb 231 - Canine lymphoma monoclonal antibody 231 therapeutic VacSYN/TM//FeLV - Feline leukemia virus (killed) vaccine PANACINE/(R)/ RC - Feline rhinotracheitis (MLV), calicivirus (MLV), panleukopenia (MLV) vaccine PANACINE/(R)/-5 - Feline rhinotracheitis (MLV), calicivirus (MLV), panleukopenia (MLV), chlamydia (MLV), leukemia (killed) vaccine PANAVAC/(R)/ RC - Feline rhinotracheitis (MLV), calicivirus (MLV), panleukopenia (killed) vaccine SENTRYRAB-1/TM/ - Rabies (killed) vaccine (canine and feline) SENTRYPAR/(R)/ - Canine parvovirus (MLV) vaccine SENTRYPAR/(R)/ DHP - Canine distemper (MLV), hepatitis (MLV), parainfluenza (MLV), parvovirus (MLV) vaccine SENTRYPAR/(R)/ DHP/L - Canine distemper (MLV), hepatitis (MLV), parainfluenza (MLV), parvovirus (MLV), lepto (killed) vaccine SENTRYVAC/TM/ DHP - Canine distemper (MLV), hepatitis (MLV), parainfluenza (MLV) vaccine SENTRYVAC/TM/ DHP/L - Canine distemper (MLV), hepatitis (MLV), parainfluenza (MLV), lepto (killed) vaccine
Currently, the Company's most commercially successful products are its canine heartworm diagnostic products. This has caused some seasonality in the Company's business, with sales highest in the December to April time period as distributors purchase these products to sell to veterinarians for the heartworm season. MARKETING The Company markets its products to veterinarians, primarily through independent distributors. The Company's United States distributors have approximately 90 outlets and a total sales force of approximately 600 field sales representatives and approximately 200 telemarketing sales representatives. This allows the Company to focus its major emphasis on developing and manufacturing products. However, this strategy results in a large percentage of -2- sales being to only a few customers. During the year ended December 31, 1995, sales to two distributors totalled 44% of the Company's gross revenues. While the Company currently does not maintain a direct marketing sales force, its internal marketing staff and regional field representatives service the external sales network by training distributor sales representatives, responding to customer technical inquiries, advertising and promoting the Company's products through journals, magazines and direct mail, and organizing training workshops and symposia presentations at trade and professional association meetings. The Company has established its own telemarketing operation to sell its products to domestic market segments not reached by its marketing partners and to gather critical field marketing data. The Company markets its products outside of the U.S. through distributors and on an OEM basis. The Company is increasing its penetration in international markets, primarily focusing on the European and Pacific Rim marketplaces. In January 1996, the Company signed an exclusive distribution agreement with Daiichi Pharmaceutical Co., Ltd. for the distribution of the Company's vaccine and diagnostic products in Japan. This arrangement is not expected to generate significant revenues until 1998. PATENTS AND TRADE SECRETS The Company believes that its proprietary technology is an important competitive factor in its business, and that protection of its intellectual property rights is a high priority. Despite the existence of patent litigation in the monoclonal antibody industry, not involving the Company, the Company believes that the basic hybridoma (the cell that produces the monoclonal antibody) technology is in the public domain and is therefore not patentable. The complex biological and chemical process, however, is subject to numerous improvements, variations and applications of hybridoma technology which may prove to be patentable. Considering the difficulty of enforcing any patent rights to such improvements, and the rapid advancements in the field, the Company generally has sought and will continue to seek to protect its interests by treating its particular variations in the production of monoclonal antibodies as trade secrets. The Company also has pursued and intends to continue aggressively to pursue protection for new products, new methodological concepts, and compositions of matter through the use of patents and trademarks where obtainable. At present, the Company has been granted nine U.S. patents. GOVERNMENT REGULATION Most diagnostic test kits for animal health applications require approval by the United States Department of Agriculture ("USDA"). In addition, the Company manufactures and sells one product which does not require USDA licensing but has been registered with the Center for Veterinary Medicine of the United States Food and Drug Administration ("FDA") . The Company's manufacturing facility has been registered with the FDA and is licensed by the USDA. The Company adheres to Good Manufacturing Practices (GMP) standards. In addition to the foregoing, the Company's operations may be subject to future legislation and/or rules issued by domestic or foreign governmental agencies with regulatory authority relating to the Company's business. The Company has no reason to believe that any such future legislation and/or rules would be materially adverse to its business. COMPETITION Competition in the animal health care industry is intense. Many competitors, such as Pfizer Animal Health, Mallinckrodt Veterinary and IDEXX Laboratories, have substantially greater financial, manufacturing, marketing and product research resources than the Company. Large companies in particular have extensive expertise in conducting -3- pre-clinical and clinical testing of new products and in obtaining the necessary regulatory approvals to market products. Competition is based on test sensitivity, accuracy and speed; product price; and similar factors. IDEXX Laboratories requires its distributors not to carry the products of competitors such as the Company. The Company believes that it is the second-leading competitor in the dog and cat veterinary diagnostic market. RESEARCH AND DEVELOPMENT The Company spent approximately $906,000 and $833,000 on research and development activities during the year ended December 31, 1995 and the nine months ended December 31, 1994, respectively. During the year ended December 31, 1995 and the nine months ended December 31, 1994, the Company contracted for research and development activities with outside parties relating to certain companion animal diagnostic products which utilize licensed technology. EMPLOYEES As of December 31, 1995, the Company had a total of 60 employees, 57 of whom were full-time. RAW MATERIALS The manufacturing of diagnostics, therapeutics and vaccines requires raw materials which are, and have been, readily available from several sources. Certain of the Company's products are manufactured by third parties under the terms of distribution and/or manufacturing agreements. In the event that these third parties are unable to supply the Company with sufficient finished product, the Company has the right, under certain circumstances, under the agreements to use alternate manufacturing sources. OTHER The Company also founded two biotechnology companies, UniSyn Technologies, Inc. (of which the Company is now a less than 5% shareholder) and ImmunoPharmaceutics, Inc. (which was acquired by Texas Biotechnology Corporation during 1994). ImmunoPharmaceutics, Inc. ("IPI") engaged in human drug discovery utilizing proprietary rational drug design technology. On July 25, 1994, IPI, of which the Company was a 41% shareholder, was acquired by Texas Biotechnology Corporation ("TBC") in a triangular merger transaction whereby unregistered shares of TBC common stock were issued in exchange for all of the outstanding stock of IPI. The Company's TBC shares were registered effective December 6, 1995. As of December 31, 1995, the Company owned 7% of TBC's outstanding common stock. ITEM 2. PROPERTIES ---------- The Company leases two buildings in San Diego, California. The buildings contain approximately 49,000 square feet of space, and house the Company's corporate and sales headquarters, executive offices, research and development laboratories and manufacturing facilities. The Company subleases approximately 19,000 square feet of this space to ImmunoPharmaceutics, Inc. Management believes that the remaining 30,000 square feet are adequate for the Company's current level of operations. The Company also leases a telemarketing facility in Kansas City, Missouri. -4- ITEM 3. LEGAL PROCEEDINGS ----------------- Unasserted Claim - ---------------- The Jewish Hospital of St. Louis (the "Hospital") is the owner of a patent which it believes covers the Company's canine heartworm diagnostic products. The Company is also the owner of several patents which cover its canine diagnostic products. The Hospital has notified the Company that it believes the Company's canine heartworm diagnostic products infringe the Hospital's patent, and has offered to license their patent to the Company. The Company believes that it does not infringe the Hospital's patent. The Hospital is currently suing IDEXX Laboratories, Inc., the Company's primary competitor for canine heartworm diagnostics, for patent infringement under the Hospital's patent; IDEXX's defense involves an assertion that the patent is invalid. If the Hospital sues the Company and if the Hospital is successful, the Company could be precluded from selling canine heartworm diagnostic products or be required to pay damages or make additional royalty payments with respect to such sales. The Company's business and results of operations could be materially adversely affected. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --------------------------------------------------- None. PART II ------- ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS -------------------------------------------------------- The Company's common stock is traded on the Nasdaq Stock Market under the symbol SBIO. Price ranges reported are the high and low trade price information as reported by the Nasdaq National Market. No cash dividends have ever been paid, and the Company does not currently anticipate paying cash dividends in the foreseeable future. As of February 29, 1996, there were approximately 490 shareholders of record of the Company's common stock.
Year Quarter High Low ---- ------- ---- --- 1994 First Quarter $5.13 $3.13 Second Quarter $4.50 $3.25 Third Quarter $3.63 $2.38 Fourth Quarter $2.75 $1.63 1995 First Quarter $3.13 $1.50 Second Quarter $3.25 $2.38 Third Quarter $5.25 $2.50 Fourth Quarter $4.13 $1.88
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION --------------------------------------------------------- RESULTS OF OPERATIONS Year Ended December 31,1995 Compared to (Twelve-Month) Year Ended December 31, - ------------------------------------------------------------------------------ 1994 - ---- Total revenue for the year ended December 31, 1995 increased $2,011,000 or 17% over the year ended December 31, 1994. The increase comprises a $1,958,000 or 17% increase in product sales and an increase in interest, license fees and other revenue of $53,000 or 14%. The increase in product sales was due primarily to ICT GOLD/(TM)/ HW, the Company's new canine heartworm diagnostic, which was introduced in March 1995 and generated $2,355,000 of sales during 1995 despite not becoming available until midway into the 1995 heartworm selling season. These sales were partly offset by declines in the Company's other canine heartworm diagnostic products, which were caused (for microwell tests) by competition from a major competitor's improved product and (for stat tests) by customer shifts to ICT GOLD/(TM)/ HW. The Company has developed an improved DiroCHEK/(R)/ canine heartworm diagnostic, with greater ease-of-use to match the -5- competitor's microwell product modification. Intending to regain unit sales and price points in this important product line, the Company introduced its improved microwell product (called DiroCHEK/(R)/ TF) in January 1996. In addition, in 1995 there was an increase in domestic shipments of bulk feline leukemia vaccine to Rhone Merieux, Inc. (located in Athens, Georgia) of $425,000. License fees and other revenue increased $97,000 or 33% during the year ended December 31, 1995 due to increased royalties earned on certain of the Company's products which are licensed to Rhone Merieux, Inc. The cost of sales as a percentage of product revenue increased to 59% during the year ended December 31, 1995 as compared to 56% for the year ended December 31, 1994. The increase is due primarily to increased unapplied manufacturing overhead, resulting from a larger percentage of product sales during 1995 being generated from products which are manufactured for the Company by third parties. The Company's manufacturing costs are predominantly fixed costs. Among the Company's major products, DiroCHEK/(R)/ canine heartworm diagnostic products are manufactured at Company facilities, whereas ICT GOLD/TM/ HW and all vaccines are manufactured by third parties. In addition to affecting gross margins, this shift in product mix renders the Company relatively more dependent on the third- party manufacturers. The cost of sales percentage was also negatively impacted by the increased domestic shipments of bulk feline leukemia vaccine to Rhone Merieux, Inc. during 1995. The Company has contracted to sell bulk vaccine to Rhone Merieux, Inc. at cost because the Company receives a royalty on Rhone Merieux, Inc.'s resulting product sales in the United States. By contrast, the Company's international sales of bulk feline leukemia vaccine to Rhone-Merieux of France are at a profit, not at cost. Cost of sales as a percentage of product revenue would have been 53% and 51% during the years ended December 31, 1995 and 1994, respectively, if the zero margin bulk sales were not taken into consideration. Finally, the 1995 cost of sales percentage also increased as a result of reduced average selling prices due to increased competition (as to DiroCHEK/(R)/) and promotional programs accounted for as reductions in revenue; the cost of sales percentage suffers when more units of product must be manufactured and sold to achieve the same revenue. All of these factors outweighed the economies of scale associated with the Company's increased 1995 product revenues. In fact, revenues from products manufactured at the Company's facilities actually decreased slightly in 1995. Research and development expenses decreased $185,000 or 17% from the year ended December 31, 1994. The decrease is due primarily to a decrease in contracted research and development resulting from the completion of the development of the Company's ICT GOLD/TM/ HW canine heartworm diagnostic test which was introduced in March 1995. This factor was partly offset by additional research programs with outside research and development contractors. In 1996 the Company intends to introduce several interesting new products, including DiroCHEK/(R)/ TF. Selling and marketing expenses decreased $609,000 or 13% from the year ended December 31, 1994 due primarily to the non-recurrence of significant 1994 advertising and special sales promotion expenses related to the launch of the Company's new vaccine product line. General and administrative expenses decreased $929,000 or 39% from the year ended December 31, 1994. The decrease is due to decreased legal expenses as a result of the settlement of major litigation in December 1994. On June 30, 1995, the Company received 573,000 shares of Texas Biotechnology Corporation ("TBC") common stock resulting from the satisfaction of a certain contingency on May 31, 1995 related to the acquisition of ImmunoPharmaceutics, Inc. ("IPI") by TBC in July 1994. The Company had been a major shareholder of IPI, and had previously recognized a $2,036,000 gain on the transaction for financial reporting purposes. In the second quarter of 1995, the Company recognized an additional gain for financial reporting purposes in the amount of $931,000. The Company may receive an additional 409,000 shares of TBC common stock pending the outcome of -6- certain remaining contingencies. The Company will recognize additional income when, and if, these contingencies are satisfied. Nine Months Ended December 31, 1994 Compared to Nine Months Ended December 31, - ------------------------------------------------------------------------------ 1993 - ---- Total revenue for the nine months ended December 31, 1994 decreased $2,525,000 or 28% from the nine months ended December 31, 1993. The decrease comprises a $2,425,000 or 28% decrease in product sales and a decrease in interest, license fees and other revenue of $100,000 or 24%. (The comparison in this section is of the two respective nine-month periods because in 1994 the Company changed its fiscal year-end from March 31 to December 31.) The decrease in product sales was primarily the result of timing of shipments to distributors. The timing of shipments to distributors is dependent upon, among other things, distributor inventory levels, anticipated seasonal inventory requirements and the timing of both the Company's and its competitors' promotional programs. In the quarter ended March 31, 1993 the Company's manufacturing facility was on back order for several products (particularly canine heartworm diagnostics) which resulted in those products being shipped in the quarter ended June 30, 1993, whereas there was no back order situation in the quarter ended March 31, 1994 and no corresponding benefit to the quarter ended June 30, 1994. Also, the Company strove to make all possible shipments before the end of the March 31, 1994 fiscal year, even if doing so reduced reportable sales for the quarter ended June 30, 1994. Therefore, the period-to- period comparison favors the nine months ended December 31, 1993 over the nine months ended December 31, 1994. In addition, the Company believes that the December 1994 introduction by a competitor of a revised canine heartworm diagnostic kit caused distributors to wait until January 1995 to purchase the Company's heartworm diagnostic products, which they would ordinarily have purchased in December 1994, in order to evaluate the new kit and evaluate Synbiotics' response. Also, international shipments of bulk feline leukemia vaccine to Rhone-Merieux, which bottles and markets the Company's feline leukemia vaccine under its own brand name in certain parts of Europe, decreased by $850,000 from the nine months ended December 31, 1993. Rhone-Merieux had made unusually large purchases in 1993 in anticipation of launching its product in the United Kingdom, and that launch later was delayed. The Company's sales of its own feline leukemia virus products declined in the 1994 period, primarily because of product maturation and because the Company was preliminarily enjoined in 1993 from selling a feline immunodeficiency virus diagnostic which had been sold in combination with the feline leukemia virus diagnostic. That injunction has now become permanent. As a partial counterpart to these decreases, there was an increase in domestic shipments of bulk feline leukemia vaccine to Rhone Merieux, Inc. (located in Athens, Georgia) of $454,000. The decrease in license fees and other revenue of $53,000 or 18% during the nine months ended December 31, 1994 is primarily due to the receipt in the 1993 time period of a final license fee payment related to the Japanese distribution agreement with Kyoritsu Shoji Co., Ltd., which was terminated in January 1994. This factor was partially offset by an increase in royalties earned on certain of the Company's products which were cross-licensed to Rhone Merieux, Inc. in fiscal 1993. -7- Interest income decreased $47,000 or 39% from the nine months ended December 31, 1993 due to less cash being available for investment as the Company made cash withdrawals to meet its operating cash flow requirements. Cost of sales as a percentage of product revenue increased to 62% during the nine months ending December 31, 1994 as compared to 45% for the nine months ended December 31, 1993. The increase is primarily due to the decrease in product sales, as the Company's manufacturing costs are predominantly fixed costs. The increase is also due to the increase in domestic shipments of bulk feline leukemia vaccine to Rhone Merieux, Inc. (located in Athens, Georgia) during the nine months ended December 31, 1994. The Company has contracted to sell bulk vaccine to Rhone Merieux, Inc. at cost because the Company receives a royalty on Rhone Merieux, Inc.'s resulting product sales in the United States. By contrast, the Company's international sales of bulk feline leukemia vaccine to Rhone-Merieux of France are at a profit, not at cost. Cost of sales as a percentage of product revenue would have been 54% and 43% during the nine months ended December 31, 1994 and 1993, respectively, if the zero margin bulk sales were not taken into consideration. Research and development expenses increased $471,000 or 130% over the nine months ended December 31, 1993. The increase is due primarily to the continuing outsourced development of certain companion animal diagnostics utilizing immunochromatographic technology ("ICT") licensed from Binax, Inc. ("Binax"), which began in the quarter ended December 31, 1993, the addition of a research and development manager during the quarter ended December 31, 1993 and increased overhead related to moving the research and development group into larger laboratory facilities. Selling and marketing expenses increased $463,000 or 16% over the nine months ended December 31, 1993 due primarily to sales promotional programs. Marketing competition from large competitors in the biologicals area was particularly heavy in 1994, and the Company was forced to incur substantial expenses to try to respond. Despite its response, the Company experienced disappointing sales of biologicals in the nine-month 1994 period. General and administrative expenses decreased $344,000 or 17% from the nine months ended December 31, 1993. The decrease is due primarily to a decrease in legal expenses. Legal expenses were unusually high in both the 1994 and 1993 periods due to patent litigation brought by IDEXX Laboratories, Inc., the Company's primary competitor, which was settled in December 1994. On July 25, 1994, IPI, of which the Company was a 41% shareholder, was acquired by TBC in a triangular merger transaction whereby unregistered shares of TBC common stock were issued in exchange for all of the outstanding stock of IPI. The Company received approximately 655,000 shares of TBC common stock. As a result of the merger transaction, the Company recognized during the nine months ended December 31, 1994 a gain for financial reporting purposes of approximately $2,036,000. FINANCIAL CONDITION - ------------------- Liquidity and Capital Resources - ------------------------------- Cash provided by operations during the year ended December 31, 1995 was $229,000 as compared to cash used by operations during the (twelve-month) year ended December 31, 1994 of $2,000,000. The increase in cash is directly related to the increase in revenues and decreased legal fees due to the settlement of patent litigation in December 1994, and the resultant reduced net operating loss during the year ended December 31, 1995. These factors were partly offset by the Company's decision to purchase in late 1995 substantial amounts of ICT GOLD/TM/ HW inventory from Binax in advance of 1996 orders; as a result, the Company had relatively higher inventory and relatively lower cash at December 31, 1995. As of December 31, 1995, the Company held 7% of TBC's common stock. TBC filed a Registration Statement on Form S-3, effective December 6, 1995, relating to the shares issued to the former IPI shareholders. On February -8- 27, 1996 and February 28, 1996, the Company sold a total of 614,000 shares of TBC common stock on the American Stock Exchange at an average selling price of $3.573 per share. The net proceeds received from the sale, which totalled $2,169,000, will be used primarily for working capital requirements and to fund business opportunities such as acquisitions. As a result of the sale of the shares, the Company's ownership of TBC was reduced to approximately 3%. The Company's present intention is to hold its remaining TBC stock for investment. Management believes that the Company's present capital resources, which included working capital of $4,154,000 at December 31, 1995, are sufficient to meet its working capital needs through 1996. The working capital figure does not include any of the Company's TBC stock, which was classified as securities available for sale; the 1996 proceeds from selling TBC stock would augment the previous working capital total. The Company's operations have become seasonal due to the success of its canine heartworm diagnostic products. Sales and profits tend to be concentrated in the December to April time period, as veterinarians prepare for the heartworm season. Capital Expenditures - -------------------- Capital expenditures for the year ended December 31, 1995 were not significant. During the nine months ended December 31, 1994 capital expenditures totalled $424,000, of which $242,000 was related to building improvements in the Company's manufacturing facility for biological production laboratories. The Company has no material commitments for capital expenditures in 1996. -9- ITEM 7. FINANCIAL STATEMENTS -------------------- INDEX TO FINANCIAL STATEMENTS -----------------------------
PAGE ---- Report of Independent Accountants 11 Balance Sheet as of December 31, 1995 and 1994 12 Statement of Operations for the year ended December 31, 1995, the nine months ended December 31, 1994 and the year ended March 31, 1994 13 Statement of Cash Flows for the year ended December 31, 1995 the nine months ended December 31, 1994 and the year ended March 31, 1994 14 Statement of Shareholders' Equity for the year ended December 31, 1995, the nine months ended December 31, 1994 and the year ended March 31, 1994 15 Notes to Financial Statements 17
-10- REPORT OF INDEPENDENT ACCOUNTANTS --------------------------------- To the Board of Directors and Shareholders of Synbiotics Corporation In our opinion, the financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Synbiotics Corporation at December 31, 1995 and 1994, and the results of its operations and its cash flows for the year ended December 31, 1995, the nine months ended December 31, 1994 and the year ended March 31, 1994, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP San Diego, California February 15, 1996 -11- Synbiotics Corporation Balance Sheet - --------------------------------------------------------------------------------
December 31, ----------------------- 1995 1994 ---------- ---------- ASSETS Current assets: Cash and equivalents $ 1,017,000 $ 447,000 Accounts receivable (net of allowance for doubtful accounts of $51,000 and $82,000 at December 31, 1995 and 1994) 1,430,000 1,444,000 Inventories 3,439,000 2,763,000 Securities available for sale 502,000 Other current assets 578,000 963,000 ------------ ------------ Total current assets 6,464,000 6,119,000 Property and equipment, net 879,000 1,329,000 Securities available for sale 2,533,000 942,000 Other assets 1,582,000 1,921,000 ------------ ------------ $ 11,458,000 $ 10,311,000 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 1,613,000 $ 1,662,000 Other current liabilities 697,000 695,000 ------------ ------------ Total current liabilities 2,310,000 2,357,000 ------------ ------------ Commitments (Note 9) Shareholders' equity: Common stock, no par value, 24,800,000 shares authorized, 5,816,000 and 5,803,000 shares issued and outstanding at December 31, 1995 and 1994 29,351,000 29,318,000 Unrealized holding losses from securities available for sale (1,035,000) (1,695,000) Accumulated deficit (19,168,000) (19,669,000) ------------ ------------ Total shareholders' equity 9,148,000 7,954,000 ------------ ------------ $ 11,458,000 $ 10,311,000 ============ ============
See accompanying notes to financial statements. -12- Synbiotics Corporation Statement of Operations - --------------------------------------------------------------------------------
Nine Months Year Ended Ended Year Ended December 31, December 31, March 31, 1995 1994 1994 ------------ ------------ ----------- Revenues: Products $13,676,000 $ 6,233,000 $14,144,000 Interest 46,000 75,000 137,000 License fees and other 396,000 234,000 352,000 ----------- ----------- ----------- 14,118,000 6,542,000 14,633,000 ----------- ----------- ----------- Cost and expenses: Cost of products 8,009,000 3,835,000 6,700,000 Research and development 906,000 833,000 611,000 Selling and marketing 4,147,000 3,338,000 4,264,000 General and administrative 1,486,000 1,630,000 2,701,000 ----------- ----------- ----------- 14,548,000 9,636,000 14,276,000 ----------- ----------- ----------- (Loss) income before gain on disposition of investment in affiliate (430,000) (3,094,000) 357,000 Gain on disposition of investment in affiliate 931,000 2,036,000 ----------- ----------- ----------- Net income (loss) $ 501,000 $(1,058,000) $ 357,000 =========== =========== =========== Net income (loss) per share $ .09 $ (.18) $ .06 =========== =========== =========== Weighted average shares outstanding 5,832,000 5,803,000 5,859,000 =========== =========== ===========
See accompanying notes to financial statements. -13- Synbiotics Corporation Statement of Cash Flows - --------------------------------------------------------------------------------
Nine Months Year Ended Ended Year Ended December 31, December 31, March 31, 1995 1994 1994 ------------- ------------- ------------ Cash flows from operating activities: Net income (loss) $ 501,000 $(1,058,000) $ 357,000 Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Depreciation and amortization 1,028,000 677,000 1,003,000 Gain on disposition of investment in affiliate (931,000) (2,036,000) Changes in assets and liabilities: Accounts receivable 14,000 1,691,000 (1,297,000) Receivables from affiliates 88,000 (58,000) Inventories (676,000) (615,000) (504,000) Other assets 334,000 (472,000) (172,000) Accounts payable and accrued expenses (43,000) (379,000) 878,000 Other liabilities 2,000 (8,000) 40,000 ---------- ----------- ----------- Net cash provided by (used for) operating activities 229,000 (2,112,000) 247,000 ---------- ----------- ----------- Cash flows from investing activities: Acquisition of property and equipment (189,000) (424,000) (295,000) Investment in securities available for sale 502,000 (502,000) Loans to affiliate (150,000) (1,200,000) Payment received on loans to affiliate 600,000 ---------- ----------- ----------- Net cash provided by (used for) investing activities 313,000 (1,076,000) (895,000) ---------- ----------- ----------- Cash flows from financing activities: Principal payments of long-term debt (3,000) Proceeds from issuance of common stock, net 28,000 634,000 ---------- ----------- ----------- Net cash provided by financing activities 28,000 631,000 ---------- ----------- ----------- Net increase (decrease) in cash 570,000 (3,188,000) (17,000) Cash and equivalents - beginning 447,000 3,635,000 3,652,000 ---------- ----------- ----------- Cash and equivalents - ending $1,017,000 $ 447,000 $ 3,635,000 ========== =========== ===========
See accompanying notes to financial statements. -14- Synbiotics Corporation Statement of Shareholders' Equity - --------------------------------------------------------------------------------
UNREALIZED HOLDING LOSSES FROM COMMON STOCK SERIES B COMMON STOCK SECURITIES ----------------------- --------------------- AVAILABLE ACCUMULATED SHARES AMOUNT SHARES AMOUNT FOR SALE DEFICIT TOTAL --------- ----------- ------ ------- ------------ ------------ ------------ Balance at March 31, 1993 5,248,000 $28,671,000 2,000 $ 1,000 $(18,968,000) $ 9,704,000 Issuance of subscribed common stock 530,000 Collection of receivable for subscribed common stock 570,000 570,000 Issuance of common stock pursuant to exercise of stock options 23,000 73,000 73,000 Cancellation of stock options 2,000 2,000 Conversion of Series B common stock to common stock 2,000 1,000 (2,000) (1,000) Net income for the year 357,000 357,000 --------- ----------- ------ ------- ------------ ------------ Balance at March 31, 1994 5,803,000 29,317,000 (18,611,000) 10,706,000 Cancellation of stock options 1,000 1,000 Unrealized holding losses from securities available for sale $(1,695,000) (1,695,000) --------- ----------- ------ ------- ------------ ------------ ------------ Net loss for the period (1,058,000) (1,058,000) Balance at December 31, 1994 5,803,000 29,318,000 - - (1,695,000) (19,669,000) 7,954,000 Issuance of common stock pursuant to exercise of stock options 13,000 33,000 33,000 Unrealized holding gains from securities available for sale 660,000 660,000
-15- Synbiotics Corporation Statement of Shareholders' Equity - --------------------------------------------------------------------------------
UNREALIZED HOLDING LOSSES FROM COMMON STOCK SERIES B COMMON STOCK SECURITIES ----------------------- --------------------- AVAILABLE ACCUMULATED SHARES AMOUNT SHARES AMOUNT FOR SALE DEFICIT TOTAL --------- ----------- ------ ------- ------------ ------------ ------------ Net income for the year 501,000 501,000 --------- ----------- ------ ------- ------------ ------------ ------------ Balance at December 31, 1995 5,816,000 $29,351,000 - $ - $ (1,035,000) $(19,168,000) $ 9,148,000 ========= =========== ====== ======= ============ ============ ============
See accompanying notes to financial statements. -16- Synbiotics Corporation Notes to Financial Statements - ------------------------------------------------------------------------------ NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES: THE COMPANY Synbiotics Corporation (the "Company"), incorporated in 1982, is an animal health business which develops, manufactures and markets biological products and monoclonal antibody based diagnostic products for use in the animal health care field. The Company's principal markets are veterinarians and veterinary clinical laboratories in the United States and Europe. The Company's products are sold primarily to wholesale distributors. INVENTORIES Inventories are stated at the lower of cost or market; cost is determined using the first-in, first-out method. PROPERTY AND EQUIPMENT Property and equipment, including leasehold improvements, are recorded at cost. Maintenance costs are charged to operations as incurred. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of five to eight years or the lease terms, if shorter. CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES Effective April 1, 1994, the Company adopted Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115") on a prospective basis. In accordance with SFAS 115, the Company determines the appropriate classification of its U.S. Government and equity securities at the time of acquisition and reevaluates such designation as of each balance sheet date. The Company has recorded these investments at fair market value as it has designated them as "available for sale". Unrealized holding losses on these investments, which are classified as a separate component of shareholders' equity, totalled $1,035,000 and $1,695,000 at December 31, 1995 and 1994, respectively. PATENTS AND LICENSES Patent and license costs are amortized ratably over the life of the respective patent or license. INVESTMENTS IN FORMER AFFILIATES UniSyn Technologies, Inc. ("UniSyn"), of which the Company was a 23% shareholder at March 31, 1994, provides research, pilot and production scale bioreactors and disposables, and contract production, for the manufacture and purification of mammalian cell-derived products. In June 1994, the Company entered into a bridge loan agreement whereby $150,000 was loaned to UniSyn. In December 1994, UniSyn issued additional shares of voting stock through a private placement offering, which reduced the Company's effective ownership to 6%. In connection with this private placement, the Company converted into common stock all of its shares of convertible preferred stock, and exchanged the $150,000 note receivable into convertible preferred stock. The conversion of the note receivable is considered to be a non-cash investing activity for the purposes of the statement of cash flows. As a result of the change in effective ownership, the Company began utilizing the cost method to account for its investment in UniSyn, which is included in other assets at December 31, 1995 and 1994. -17- Synbiotics Corporation Notes to Financial Statements - ------------------------------------------------------------------------------ ImmunoPharmaceutics, Inc. ("IPI"), of which the Company was a 41% shareholder at March 31, 1994, is engaged in human drug discovery utilizing proprietary rational drug design technology. In July 1994, IPI was acquired by Texas Biotechnology Corporation (Note 3). REVENUE RECOGNITION Revenue from products is recognized when the products are shipped. ADVERTISING COSTS The Company recognizes the production costs of advertising at the time such charges are incurred. Advertising expense totalled $629,000, $393,000 and $706,000 during the year ended December 31, 1995, the nine months ended December 31, 1994 and the year ended March 31, 1994, respectively. STOCK-BASED COMPENSATION In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation", which is effective for years beginning after December 15, 1995. SFAS 123 defines a fair value based method of accounting for an employee stock option or similar equity instrument and encourages all entities to adopt that method of accounting for all of their employee stock compensation plans. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" and including pro forma disclosures of net income and earnings per share as if the fair value method had been applied. The Company has elected to continue to measure its stock-based compensation in accordance with APB 25 and, accordingly, does not expect the adoption of SFAS 123 to have a significant effect on its financial position or results of operations. INCOME TAXES The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. NET INCOME (LOSS) PER SHARE Computations of net income (loss) per share are based on the weighted average number of common shares outstanding during each year. Shares issuable upon the exercise of outstanding stock options have not been considered in the computations for the nine months ended December 31, 1994 because their effect is anti-dilutive. STATEMENT OF CASH FLOWS For purposes of this statement, cash includes cash investments which are highly liquid and, generally, have an original maturity of three months or less. -18- Synbiotics Corporation Notes to Financial Statements - ------------------------------------------------------------------------------ USE OF ESTIMATES 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 - CHANGE IN FISCAL YEAR: During 1994, the Company changed its fiscal year from March 31 to December 31. Accordingly, the Company's transition period, which ended on December 31, 1994, includes the nine months from April 1 to December 31, 1994. The Company's full fiscal year ending March 31, 1994 includes twelve months. The following unaudited results of operations for the year ending December 31, 1994 and the nine months ending December 31, 1993 include all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for that period.
NINE MONTHS YEAR ENDED ENDED DECEMBER 31, DECEMBER 31, 1994 1993 ---- ---- (unaudited) (unaudited) Revenues: Products $11,718,000 $8,658,000 Interest 90,000 122,000 License fees and other 299,000 287,000 ----------- ---------- 12,107,000 9,067,000 ----------- ---------- Cost and expenses: Cost of products 6,519,000 3,918,000 Research and development 1,091,000 362,000 Selling and marketing 4,756,000 2,875,000 General and administrative 2,415,000 1,974,000 ----------- ---------- 14,781,000 9,129,000 ----------- ---------- Loss before gain on disposition of investment in affiliate (2,674,000) (62,000) Gain on disposition of investment in affiliate 2,036,000 ----------- ---------- Net loss $ (638,000) $ (62,000) =========== ========== Net loss per share $ (.11) $ (.01) =========== ==========
-19- Synbiotics Corporation Notes to Financial Statements - ------------------------------------------------------------------------------ NOTE 3 - DISPOSITION OF INVESTMENT IN AFFILIATED COMPANY: In February 1994, the Company entered into a bridge loan agreement whereby $600,000 was loaned to IPI. The note was due on March 31, 1994, bore interest at the rate of prime plus 1% and was secured by substantially all of the assets of IPI. On July 25, 1994, IPI, of which the Company was a 41% shareholder, was acquired by Texas Biotechnology Corporation ("TBC") in a triangular merger transaction whereby unregistered shares of TBC common stock were issued in exchange for all of the outstanding stock of IPI. The Company's TBC shares were registered effective December 6, 1995. The carrying value of the Company's investment in IPI had previously been reduced to zero due to the application of the equity method of accounting for the investment in IPI. In conjunction with the acquisition by TBC, the Company exchanged its $600,000 note receivable from IPI into voting stock of IPI, which is considered to be a non-cash investing activity for purposes of the statement of cash flows. As a result of the transaction, the Company received approximately 655,000 shares of TBC common stock. The Company valued its investment in TBC, which is accounted for utilizing the cost method, at $4.025 per share, and, as a result, recognized a gain for financial reporting purposes of approximately $2,036,000. On June 30, 1995, the Company received an additional 573,000 shares of TBC common stock resulting from the satisfaction of a certain contingency on May 31, 1995 related to the acquisition of IPI by TBC. Accordingly, the Company recognized a gain for financial reporting purposes in the amount of $931,000, based on the closing price of TBC common stock on May 31, 1995 of $1.625 per share as reported on the American Stock Exchange. The Company may receive an additional 409,000 shares of TBC common stock (the "Contingent Shares") pending the outcome of certain remaining contingencies. No amounts have been recorded related to the Contingent Shares, and no amounts will be recorded until such time as the contingencies are satisfied. NOTE 4 - PRODUCT AGREEMENTS: In December 1992, the Company entered into an agreement with SmithKline Beecham Animal Health, a division of SmithKline Beecham Corporation, whereby the Company acquired certain distribution, manufacturing and licensing rights to ten companion animal biological products in exchange for $1,000,000. As of December 31, 1995, $453,000 had been paid, and the remaining $547,000, which is included in other liabilities, will be paid based on sales of the acquired products. Any remaining balance, plus interest in the amount of $150,000, shall be due and payable in October 1996. Sales of the related products, which commenced in November 1993, totalled $757,000, $258,000 and $618,000 during the year ended December 31, 1995, the nine months ended December 31, 1994 and the year ended March 31, 1994, respectively. -20- Synbiotics Corporation Notes to Financial Statements - ------------------------------------------------------------------------------ NOTE 5 - COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS:
December 31, ----------------- 1995 1994 ---- ---- Inventories: Raw materials $ 665,000 $ 576,000 Work in process 633,000 756,000 Finished goods 2,141,000 1,431,000 ----------- ----------- $ 3,439,000 $ 2,763,000 =========== =========== Property and equipment: Laboratory equipment $ 2,098,000 $ 1,968,000 Leasehold improvements 1,826,000 1,826,000 Office equipment 468,000 529,000 ----------- ----------- 4,392,000 4,323,000 Less accumulated depreciation and amortization (3,513,000) (2,994,000) ----------- ----------- $ 879,000 $ 1,329,000 =========== ===========
Depreciation expense was $639,000, $381,000 and $426,000 during the year ended December 31, 1995, the nine months ended December 31, 1994 and the year ended March 31, 1994, respectively.
December 31, ----------------- 1995 1994 ---- ---- Other assets: Patents $ 79,000 $ 142,000 Licenses 1,556,000 1,825,000 Other 525,000 917,000 ----------- ----------- 2,160,000 2,884,000 Less current portion (578,000) (963,000) ----------- ----------- $ 1,582,000 $ 1,921,000 =========== ===========
Accumulated amortization of patents and licenses was $1,406,000 and $1,016,000 at December 31, 1995 and 1994, respectively. -21- Synbiotics Corporation Notes to Financial Statements - ------------------------------------------------------------------------------
December 31, ----------------------- 1995 1994 ---- ---- Accounts payable and accrued liabilities: Accounts payable $1,101,000 $1,235,000 Accrued vacation 125,000 109,000 Accrued compensation 72,000 78,000 Other 315,000 240,000 ---------- ---------- $1,613,000 $1,662,000 ========== ==========
NOTE 6 - RELATED PARTY TRANSACTIONS: The Company charged its former affiliates, UniSyn and IPI, and currently charges IPI, now a wholly-owned subsidiary of TBC (Note 3), for shared costs including, but not limited to, rent, utilities and property taxes. In addition, the Company charged IPI for employee benefits, insurance and certain administrative services during the nine months ended December 31, 1994 and the year ended March 31, 1994. Such charges to UniSyn, which terminated in June 1993, totalled $51,000 during the year ended March 31, 1994. IPI was charged $357,000, $388,000 and $624,000 during the year ended December 31, 1995, the nine months ended December 31, 1994 and the year ended March 31, 1994, respectively. In June 1991, the Company entered into a three year agreement with IPI whereby IPI provided certain raw materials and/or services to the Company. The agreement called for guaranteed quarterly payments of $50,000, totalling $200,000 per year. Raw materials received by the Company were not significant during the year ended March 31, 1994. During the nine months ended December 31, 1994 and the year ended March 31, 1994, the Company charged $33,000 and $200,000, respectively, to income relating to the agreement. The agreement was terminated in May 1994. NOTE 7 - SHAREHOLDERS' EQUITY: SERIES B COMMON STOCK In March 1994, all outstanding shares of Series B common stock were converted into shares of common stock. STOCK OPTION PLANS The Company had adopted a series of non-qualified and incentive stock option plans (the "Predecessor Plans"). In April 1995, the Company adopted the 1995 Stock Option/Stock Issuance Plan (the "1995 Plan") whereby an aggregate of 1,300,000 shares of the Company's common stock, inclusive of all optioned shares that were exercisable and/or issuable under the Predecessor Plans, were reserved for issuance. No further option grants may be made under the Predecessor Plans. The 1995 Plan is administered by the Board of Directors and provides that exercise prices shall not be less than 85 percent (non-qualified options) and 100 percent (incentive options) of the fair market value of the shares at the date of grant. Options will generally vest at the rate of 1/16th of the granted shares in each continuous quarter of employment and have an exercise period not more than ten years from date of grant. At -22- Synbiotics Corporation Notes to Financial Statements - ------------------------------------------------------------------------------ December 31, 1995 options to purchase 620,000 shares are exercisable and 383,000 shares are available for future grant under the 1995 Plan. The following is a summary of the stock option plans' activity:
SHARES OF COMMON STOCK OPTION PRICES UNDERLYING PER SHARE OPTIONS ------------- ------------ March 31, 1993 $2.45-$9.25 519,000 Options granted $3.25-$4.88 92,000 Options canceled $2.55-$5.50 (20,000) Options exercised $2.45-$3.72 (23,000) ------- March 31, 1994 $2.45-$9.25 568,000 Options granted $2.38-$3.88 193,000 Options canceled $2.45-$7.87 (45,000) ------- December 31, 1994 $2.45-$9.25 716,000 Options granted $1.63-$3.25 209,000 Options canceled $2.45-$6.59 (13,000) Options exercised $2.00-$3.72 (13,000) ------- December 31, 1995 $1.63-$9.25 899,000 =======
NOTE 8 - INCOME TAXES: The Company did not record a provision for Federal income taxes during the year ended December 31, 1995 and the nine months ended December 31, 1994 due to net operating losses for tax purposes. The Company did not record a provision for Federal income taxes during the year ended March 31, 1994 due to the utilization of net operating loss carryforwards. The provisions for state income taxes were $2,000 during the year ended December 31, 1995, the nine months ended December 31, 1994 and the year ended March 31, 1994, and represent minimum franchise taxes and are included in general and administrative expenses. -23- Synbiotics Corporation Notes to Financial Statements - ------------------------------------------------------------------------------ Deferred tax assets comprise the following:
DECEMBER 31, ------------------------------- 1995 1994 --------------- ------------- Federal: Net operating loss carryforwards $ 5,626,000 $ 5,487,000 Equity in losses of investees 714,000 1,031,000 Investment tax, research and development and alternative minimum tax credit carryforwards 859,000 848,000 --------------- ------------- 7,199,000 7,366,000 Less valuation allowance (7,199,000) (7,366,000) --------------- ------------- $ - $ - State: Net operating loss carryforwards $ 634,000 $ 721,000 Equity in losses of investees 195,000 282,000 Investment tax and research and development credit carryforwards 216,000 215,000 --------------- ------------- 1,045,000 1,218,000 Less valuation allowance (1,045,000) (1,218,000) --------------- ------------- $ - $ - =============== =============
A reconciliation of the provision for income taxes to the amount computed by applying the statutory federal income tax rate to income before income taxes follows:
NINE MONTHS YEAR ENDED ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, MARCH 31, 1995 1994 1994 ------------ ------------ ----------- Amounts computed at statutory Federal rate $ 170,000 $(360,000) $ 121,000 State income taxes, net of Federal benefit 31,000 (98,000) 33,000 (Deductions) income for financial reporting purposes for which there is no current tax (benefit) provision (201,000) 458,000 Utilization of Federal net operating loss carryforwards (121,000) Utilization of state net operating loss carryforwards (33,000) State minimum franchise tax 2,000 2,000 2,000 ------------ ------------ ----------- $ 2,000 $ 2,000 $ 2,000 ============ ============ ===========
-24- Synbiotics Corporation Notes to Financial Statements - ------------------------------------------------------------------------------ The net changes in the valuation allowances for the year ended December 31, 1995 for Federal and state deferred tax assets were a decrease of $167,000 and $173,000 for Federal and state tax purposes, respectively, and are due to the net operating loss incurred during the year ended December 31, 1995, offset by the realization of a portion of the equity in losses of IPI due to the acquisition by TBC (Note 3). In addition, the valuation allowance for state deferred tax assets was further reduced due to the expiration of a portion of the state net operating loss carryforwards. The net changes in the valuation allowances for the nine months ended December 31, 1994 for Federal and state deferred tax assets were an increase of $167,000 and a decrease of $64,000 for Federal and state tax purposes, respectively. The changes are due to the net operating loss incurred during the nine months ended December 31, 1994, offset by the realization of a portion of the equity in losses of IPI due to the acquisition by TBC (Note 3). The Company has available Federal net operating loss carryforwards at December 31, 1995 of approximately $16,548,000, which expire between 2001 and 2010. Available state net operating loss carryforwards at December 31, 1995 total approximately $6,816,000, which expire between 1996 and 2000. If certain substantial changes in the Company's ownership should occur, there would be an annual limitation on the amount of carryforwards which can be utilized. Unused investment tax and research and development credits at December 31, 1995 aggregate approximately $1,075,000 and expire between 1998 and 2006. NOTE 9 - COMMITMENTS: The Company leases office, laboratory and manufacturing facilities and equipment under operating leases. The facilities leases provide for escalating rental payments. Future minimum rentals under noncancelable operating leases as of December 31, 1995 are $435,000, all of which are due in 1996. Total rent expense under noncancelable operating leases was $377,000, $282,000 and $351,000 during the year ended December 31, 1995, the nine months ended December 31, 1994 and the year ended March 31, 1994, respectively. NOTE 10 - SIGNIFICANT CUSTOMERS: The Company had sales to two customers totalling 44% of gross revenues during the year ended December 31, 1995. During the nine months ended December 31, 1994, sales to two customers totalled 35% of gross revenues. Sales totalling 40% of gross revenues during the year ended March 31, 1994 were made to two customers. Sales to foreign customers totalled 12%, 13%, 15% of product revenues during the year ended December 31, 1995, the nine months ended December 31, 1994 and the year ended March 31, 1994, respectively. The Company grants credit to all of its customers, substantially all of whom are in the animal health products industry. -25- ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND --------------------------------------------------------------- FINANCIAL DISCLOSURE -------------------- None. PART III -------- ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; -------------------------------------------------------------- COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT ------------------------------------------------- Directors
Name; Positions; Business Experience During the Director Past Five Years; Directorships in Reporting Companies Since Age - ------------------------------------------------------------------------------------- -------- --- Patrick Owen Burns................................................................... 1988 58 Vice President of R&D Funding Corp, an affiliate of Prudential Securities Inc., and Senior Vice President of Prudential Securities Inc. since 1986; Director of Ecogen, Inc., Creative BioMolecules, Inc. and Texas Biotechnology Corporation. James C. DeCesare.................................................................... 1993 64 President and Chief Operating Officer of Boehringer Ingelheim Animal Health from 1986 to 1992 when he retired; currently a consultant to the animal health and pharmaceutical industries. M. Blake Ingle, Ph.D................................................................. 1994 53 President and Chief Executive Officer of Canji, Inc. March 1993 to February 1996; Acting President of Telios Pharmaceuticals, Inc. December 1994 to June 1995; President and Chief Executive Officer of IMCERA Group, Inc. (now known as Mallinckrodt Group Inc.) from 1991 to 1993; President and Chief Operating Officer of IMCERA Group, Inc. (now known as Mallinckrodt Group Inc.) from 1990 to 1991; Director of Corvas International, Inc. Robert J. Kunze...................................................................... 1995 60 General Partner, H&Q Life Science Ventures, a San Francisco based investment banking and venture capital firm, since 1987; Director of Intelligent Surgical Lasers, Inc. and Abaxis, Inc. Donald E. Phillips................................................................... 1987 63 Chairman of the Board of Directors of the Company since August 1994; Vice Chairman of the Board of Directors of the Company from 1993 to August 1994; a consultant to IMCERA Group, Inc. (now known as Mallinckrodt Group Inc.) from 1988 to 1990, when he retired; Director of Potash Corporation of Saskatchewan (Canada).
-26-
Name; Positions; Business Experience During the Director Past Five Years; Directorships in Reporting Companies Since Age - ------------------------------------------------------------------------------------- ------- --- Robert L. Widerkehr.................................................................. 1992 58 President and Chief Executive Officer of the Company since August 1992; Senior Vice President and Chief Operating Officer of the Company from 1991 to 1992; Vice President for the U.S. and Canada of SmithKline Beecham Animal Health from 1989 to 1991.
The Board of Directors of the Company held a total of ten meetings during the fiscal year ended December 31, 1995. Except for Mr.Kunze, each director attended more than seventy-five percent (75%) of the meetings of the Board of Directors (and the Board committees of which he was a member) held during the time he was a member of the Board. The Company currently has Compensation and Audit Committees of the Board of Directors. The Company does not have a Nominating Committee of the Board of Directors. The current membership of each committee is as follows: Compensation Committee Audit Committee James C. DeCesare Patrick Owen Burns, Chairman M. Blake Ingle, Ph.D., Chairman Robert J. Kunze Donald E. Phillips Donald E. Phillips The function of the Compensation Committee is to review the Company's compensation policies. The Audit Committee oversees the Company's accounting and financial reporting policies, reviews with the independent accountants the accounting principles and practices followed, reviews the annual audit and financial results and makes recommendations to the Board regarding any of the preceding. The Audit Committee met three times and the Compensation Committee met once during the fiscal year ended December 31, 1995. Dr. Ingle became an executive officer of Telios Pharmaceuticals, Inc. in December 1994, shortly after that company's primary product failed a clinical trial. In January 1995, Telios filed a voluntary bankruptcy petition. The Company believes these facts do not impugn Dr. Ingle's ability or integrity in any way. For their services as directors, each of the outside directors of the Company received fees of $1,000, plus $500 for travel, for each Board of Directors meeting attended, except for Mr. Burns. Fees payable to Mr Burns are paid instead to R&D Funding Corp. Outside directors do not receive any fees for committee meetings attended as committee members. Employee directors do not receive any fees for attendance at meetings of the Board of Directors or committee meetings. In addition, Mr. Phillips was paid fees of $24,996 during the fiscal year ended December 31, 1995 pursuant to consulting agreement with the Company. On July 12, 1995, pursuant to the Automatic Grant Program under the 1995 Stock Option/Stock Issuance Plan (the "1995 Plan"), Mr. Burns, Mr. DeCesare, Dr. Ingle and Mr. Phillips were each granted an option to purchase 7,000 shares of Common Stock at $2.75 per share. The options, which expire on July 12, 2005, vest ratably over a one-year period following the grant date. On November 2, 1995, pursuant to the Automatic Grant Program under the 1995 Plan, Mr. Kunze was granted an option to purchase 7,000 shares of Common Stock at $3.25 per share. The option, which expires on November 2, 2005, vests ratably over a one-year period following the grant date. -27- Executive Officers and Significant Employees
NAME, AGE, AND BUSINESS EXPERIENCE POSITION DURING THE PAST FIVE YEARS - --------------------------------------- ------------------------------------ Executive Officers President and Chief Executive Officer - Robert L. Widerkehr (58) since August 1992 Formerly, Senior Vice President and Chief Operating Officer for the Company 1991 - 1992; Vice President for the U.S. and Canadian operations of SmithKline Beecham Animal Health 1989 - 1991 Vice President - Finance, Chief Michael K. Green (40) Financial Officer Formerly, Senior Manager with Price and Secretary - since May 1991 Waterhouse 1980 - 1991 Significant Employees Corporate Controller and Chief Keith A. Butler (34) Accounting Officer - Formerly, Manager with Price since March 1991 Waterhouse 1984 -1991 Director of Research and Development - John A. Cutting (57) since August 1995 Formerly, Senior Manager of Research and Development for the Company November 1993 - August 1995; Director of Research of AVID Therapeutics, Inc., 1992 - November 1993; Senior Scientist, Virology of Solvay Animal Health, 1985 - 1992 Director of Operations - Clifford Frank (46) since September 1992 Formerly, Manager of Manufacturing for the Company 1991 - 1992; President of Akorn Pharmaceuticals and President of Walnut Pharmaceuticals, a division of Akorn Pharmaceuticals, 1990 - 1991 Manager - Business Development and Gregory A. Soulds (49) International Marketing - since Formerly, Vice President - Marketing 1992 (with the Company since 1983) and Sales for the Company 1989 - 1992
Compliance With Section 16(a) of the Securities Exchange Act of 1934 Section 16(a) of the Securities Exchange Act of 1934 requires the Company's officers and directors, and persons who own more than 10% of a registered class of the Company's equity securities, to file reports of ownership and changes in ownership of the Company's equity securities with the Securities and Exchange Commission. Officers, directors -28- and greater than 10% shareholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. Based solely on its review of the copies of such forms furnished to the Company, or written representations that no Forms 5 were required, the Company believes that during the fiscal year ended December 31, 1995, all Section 16(a) filing requirements applicable to its officers, directors and greater than 10% beneficial owners were complied with, with the following exception: On November 2, 1995 Mr. Kunze became a director of the Company, at which time a Form 3 should have been filed. However, due to an oversight by the Company the Form 3 was not filed until March 22, 1996. ITEM 10. EXECUTIVE COMPENSATION ---------------------- The following table provides certain summary information concerning the compensation earned by the Company's President and Chief Executive Officer and its Vice President - Finance (the "Named Executive Officers") for services rendered in all capacities to the Company for the fiscal year ended December 31, 1995, the nine month fiscal year ended December 31, 1994 and the fiscal year ended March 31, 1994: SUMMARY COMPENSATION TABLE
Long-Term Annual Compensation Compensation --------------------------------------------------------- Awards Other Securities Name and Annual Underlying All Other Principal Fiscal Compen- Options/ Compensa- Position Year Salary ($)/(1)/ Bonus ($) sation ($) SARS (#) tion ($)/(2)/ - -------------------- ---------- --------------- --------- ----------- ----------- ------------- Robert L. Widerkehr 1995 $179,375 - $2,188/(3)/ 30,000 $3,587 President and Chief 1994/(4)/ $131,250 - $8,750/(3)/ 22,000 $2,625 Executive Officer 1994 $135,000 $19,280 $8,750/(3)/ 78,000 $2,700 Michael K. Green 1995 $101,853 - - 25,000 $2,213 Vice President 1994/(4)/ $ 73,805 - - 15,000 $1,476 1994 $ 93,721 $10,677 - - $1,874
(1) Includes amounts deferred under the 401(k) Compensation Deferral Savings Plan pursuant to Section 401(k) of the Internal Revenue Code of 1986, as amended. (2) Consists of matching contributions made by the Company to Mr. Widerkehr's 401(k) account and Mr. Green's 401(k) account. (3) Forgiveness of a loan made to Mr. Widerkehr to defray relocation expenses. The loan was fully forgiven as of December 31, 1995. (4) Information is for the nine month fiscal year ended December 31, 1994. -29- The following table contains information concerning the grant of stock options to the Named Executive Officers: OPTION/SAR GRANTS IN LAST FISCAL YEAR Individual Grants
Number of % of Total Securities Options/SARs Underlying Granted to Options/SARs Employees in Exercise Name Granted (#)/(1)/ Fiscal Year Price ($/Sh) Expiration Date - --------------------- --------------- -------------- ------------ ---------------- Robert L. Widerkehr 30,000 18.02% $2.63 04/27/05 Michael K. Green 25,000 15.02% $2.63 04/27/05
(1) The options become exercisable ratably over a two-year period following the date of grant. The grant date for the options listed in the above table is April 27, 1994. The option has a maximum term of 10 years, subject to earlier termination in the event of optionee's cessation of service with the Company. The following table provides information, with respect to the Named Executive Officers, concerning the exercise of options during the last fiscal year and unexercised options held as of the end of the fiscal year. No shares were acquired on exercise of options by the Named Executive Officers during the fiscal year ended December 31, 1995. AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR VALUES
Number of Securities Underlying Value of Unexercised in-the-Money Unexercised Options/SARs Options/SARs at December 31, 1995 (#) at December 31, 1995/(1)/ ------------------------------- --------------------------------- Name Exercisable Unexercisable Exercisable Unexercisable - --------------------- ------------- --------------- ------------- ---------------- Robert L. Widerkehr 214,500 65,500 $ - $ - Michael K. Green 25,937 24,063 $ - $ -
(1) Value is defined as market price of the Company's Common Stock at fiscal year end less exercise price. The closing sale price of the Company's Common Stock at December 31, 1995 was $2.38. -30- ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT -------------------------------------------------------------- The following table sets forth the beneficial ownership of the Company's Common Stock as of March 20, 1996, of each of the Company's directors, director nominees, 5% shareholders and the Named Executive Officers, and of the directors and executive officers of the Company as a group. Except as noted, each person has sole investment and voting power over the shares shown. Percentages are calculated in accordance with the method set forth in the Securities and Exchange Commission's rules.
AMOUNT AND NATURE OF BENEFICIAL PERCENT NAME AND ADDRESS OF BENEFICIAL OWNER OWNER OF CLASS ------------------------------------ ----------- --------- Patrick Owen Burns/(1) (3)/ 504,053 8.1% c/o R&D Funding Corp 1 Seaport Plaza 16th Floor New York, NY 10292 James C. DeCesare/(3)/ 24,250 * 5260 S. Landings Drive, #200 Ft. Myers, FL 33919 Michael K. Green/(3)/ 30,000 * c/o Synbiotics Corporation 11011 Via Frontera San Diego, CA 92127 M. Blake Ingle, Ph.D./(3)/ 10,250 * Plaza Del Mar 300-6 12526 High Bluff Drive San Diego, CA 92130 Robert J. Kunze/(2)(3)/ 492,541 8.0% c/o H&Q Life Science Ventures One Bush Street San Francisco, CA 94104 Donald E. Phillips/(3)/ 38,750 * 372 Fannin Landing Circle Brandon, MS 39042 Robert L. Widerkehr/(3)/ 231,625 3.7% c/o Synbiotics Corporation 11011 Via Frontera San Diego, CA 92127
-31-
AMOUNT AND NATURE OF BENEFICIAL PERCENT NAME AND ADDRESS OF BENEFICIAL OWNER OWNER OF CLASS ------------------------------------ ----------- --------- Daniel F. Cain 350,000 5.7% 1719 Centennial Road Fort Collins, CO 80525 Gruber & McBaine Capital Management/(4)/ 586,300 9.5% c/o John P. Broadhurst, Esq. Shartsis, Friese & Ginsburg One Maritime Plaza 18th Floor San Francisco, CA 94111 H&Q Life Science Ventures 489,041 7.9% One Bush Street San Francisco, CA 94104 Mallinckrodt Group Inc. 458,806 7.4% 7733 Forsyth Boulevard St. Louis, MO 63105 Edward T. Maggio, Ph.D./(5)/ 461,999 7.5% c/o ImmunoPharmaceutics, Inc. 11011 Via Frontera San Diego, CA 92127 PruTech Research and Development Partnership II 460,303 7.4% 3945 Freedom Circle Suite 800 Santa Clara, CA 95054 All executive officers and directors as a group/(1)(2)(3)/ (7 persons) 1,331,469 21.5%
/*/ Less than one percent. (1) Includes 460,303 shares of Common Stock held by PruTech Research and Development Partnership II, which is a public research and development partnership sponsored by R&D Funding Corp. Mr. Burns is a Vice President of R&D Funding Corp, and disclaims any beneficial ownership of these shares. (2) Includes 489,041 shares of Common Stock held by H&Q Life Science Ventures, a California limited partnership. Mr. Kunze is a general partner of H&Q Life Science Ventures. (3) Includes options to purchase shares of Common Stock, which are exercisable on or before May 31, 1996, as follows: Mr. Burns - 43,750 shares; Mr. DeCesare - 19,250 shares; Mr. Green - 30,000 shares; Dr. Ingle - 10,250 shares; Mr. Kunze - 3,500; Mr. Phillips - 38,750 shares; Mr. Widerkehr - 229,625 shares. -32- (4) Owned by a group of six persons who granted their respective powers of attorney to Gruber & McBaine Capital Management ("GMCM"), a California corporation, to handle any and all necessary filings in connection with these securities. The direct ownership of these shares is as follows: GMCM - 29,500 shares; Jon D. Gruber ("Gruber") - 68,000 shares; J. Patterson McBaine ("McBaine") - 55,400 shares; Lagunitas Partners ("Lagunitas") - 235,800; GMJ Investments, LP ("GMJ") - 6,500 shares; Proactive Partners, a California Limited Partnership ("Proactive") - 191,100 shares. Gruber and McBaine are the sole directors and sole executive officers of GMCM. GMCM, Gruber and McBaine are the general partners of Lagunitas and GMJ. Gruber and McBaine are general partners in the entity which is the general partner of Proactive. Gruber and McBaine disclaim beneficial ownership of the shares held by GMCM, Lagunitas, GMJ and Proactive except to the extent of their respective pecuniary interests. GMCM disclaims beneficial ownership of the shares held by Gruber, McBaine, Lagunitas and GMJ except to the extent of its pecuniary interest. (5) Includes options to purchase 6,999 shares of Common Stock, which are exercisable on or before May 31, 1996, held by Dr. Maggio. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ---------------------------------------------- Not applicable. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K -------------------------------- (a) Exhibit Index ------------- Exhibits marked with an asterisk have not been included with this Annual Report on Form 10-KSB, but instead have been incorporated by reference to other documents filed by the Company with the Securities and Exchange Commission. The Company will furnish a copy of any one or more of these exhibits, except for Exhibit 27 which is for electronic filing purposes only, to a shareholder who so requests upon receipt of payment for the cost of duplicating and mailing the requested items.
EXHIBIT TITLE METHOD OF FILING ------- ------------------------------------------ ------------------------------------------- 2.1/*/ Plan and Agreement of Merger of Texas Incorporated herein by reference to Exhibit Biotechnology Corporation, TBC Acquisition 2.1 to the Registrant's Current Report on Company No. 1 and ImmunoPharmaceutics, Form 8-K, as amended, dated July 25, 1994. Inc. dated as of June 17, 1994. 3.1 Articles of Incorporation, as amended. Filed herewith. 3.2/*/ Bylaws, as amended. Incorporated herein by reference to Exhibit 3.2 to the Registrant's Quarterly Report on Form 10-QSB for the quarterly period ended June 30, 1995.
-33-
EXHIBIT TITLE METHOD OF FILING - ------- -------------------------------------------- --------------------------------------------- 10.1/*/ Lease of Premises by Registrant located at Incorporated herein by reference to Exhibit 11011 Via Frontera, San Diego, California, 10.1 to the Registrant's Annual Report on dated November 28, 1989. Form 10-K for its fiscal year ended March 31, 1991. 10.4/*+/ 1983 Stock Option Plan. Incorporated herein by reference to the Registrant's Registration Statement on Form S-18, Registration No. 2-83602, dated August 25, 1983. 10.4.1/*+/ First Amendment to 1983 Stock Option Plan. Incorporated herein by reference to Exhibit 10.4.1 to the Registrant's Annual Report on Form 10-K for its fiscal year ended March 31, 1988. 10.5/*+/ 1984 Stock Option Plan. Incorporated herein by reference to Exhibit 10.5 to the Registrant's Registration Statement on Form S-1, Registration No. 33-5292, dated July 16, 1986. 10.5.1/*+/ First and Second Amendments to 1984 Stock Incorporated herein by reference to Exhibit Option Plan. 10.5.1 to the Registrant's Annual Report on Form 10-K for its fiscal year ended March 31, 1988. 10.6/*+/ 1986 Stock Option Plan. Incorporated herein by reference to Exhibit 10.6 to the Registrant's Registration Statement on Form S-1, Registration No. 33-5292, dated July 16, 1986. 10.6.1/*+/ First Amendment to 1986 Stock Option Plan. Incorporated herein by reference to Exhibit 10.6.1 to the Registrant's Annual Report on Form 10-K for its fiscal year ended March 31, 1988. 10.21/*/ Distribution Agreement between Vedco, Inc. Incorporated herein by reference to Exhibit and the Registrant, dated October 15, 1986. 10.21 to the Registrant's Registration Statement on Form S-1, Registration No. 33- 5292, dated July 16, 1986. 10.26/*+/ 1987 Stock Option Plan. Incorporated herein by reference to Exhibit 28 to the Registrant's Registration Statement on Form S-8, Registration No. 33-15712, dated July 9, 1987. 10.26.1/*+/ First Amendment to 1987 Stock Option Plan. Incorporated herein by reference to Exhibit 10.26.1 to the Registrant's Annual Report on Form 10-K for its fiscal year ended March 31, 1988.
-34-
EXHIBIT TITLE METHOD OF FILING - ------- ---------------------------------------------- -------------------------------------------- 10.33/*/ Lease of Premises (expansion) by the Incorporated herein by reference to Exhibit Registrant located at 16410 Via Esprillo, San 10.33 to the Registrant's Annual Report on Diego, California, dated February 25, 1988. Form 10-K for its fiscal year ended March 31, 1988. 10.33.1/*/ First Amendment to Lease of Premises by the Incorporated herein by reference to Exhibit Registrant located at 16410 Via Esprillo, San 10.33.1 to the Registrant's Annual Report on Diego, California, dated August 9, 1988. Form 10-K for its fiscal year ended March 31, 1989. 10.36/*/ Marketing Agreement between the Registrant Incorporated herein by reference to Exhibit and Bio-Trends International, Inc., dated May 10.36 to the Registrant's Annual Report on 10, 1989. Form 10-K for its fiscal year ended March 31, 1989. 10.36.1/*/ Distribution Agreement between the Incorporated herein by reference to Exhibit Registrant and Bio-Trends International, Inc., 10.36.1 to the Registrant's Annual Report on dated February 7, 1990. Form 10-K for its fiscal year ended March 31, 1990. 10.39/*/ Distribution Agreement between the Incorporated herein by reference to Exhibit Registrant and Bio-Trends International, Inc., 10.39 to the Registrant's Annual Report on dated August 1, 1990. Form 10-K for its fiscal year ended March 31, 1991. 10.40/*/ Framework Agreement between Pitman- Incorporated herein by reference to Exhibit Moore, Inc. and the Registrant, dated June 26, 7.01 to the Registrant's Current Report on 1992. Form 8-K dated July 13, 1992, as amended Form 8 on November 4, 1992 and December 10, 1992. 10.41/*/ Agreement between the Registrant and Rhone Incorporated herein by reference to Exhibit Merieux, dated July 9, 1992. 7.01 to the Registrant's Current Report on Form 8-K dated July 23, 1992. 10.43/*+/ 1991 Stock Option Plan, as amended Incorporated herein by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-8, Registration No. 33-55992, dated December 21, 1992. 10.44/*/ Purchase Agreement between SmithKline Incorporated herein by reference to Exhibit Beecham Animal Health and the Registrant, 7.01 to the Registrant's Current Report on dated December 10, 1992. Form 8-K dated December 30, 1992. 10.46/*/ Agreement Regarding Licensing, Incorporated herein by reference to Exhibit Development, Marketing and Manufacturing 10.46 to the Registrant's Quarterly Report on between the Registrant and Binax, Inc., dated Form 10-QSB for the quarter ended as of June 30, 1993. December 31, 1993.
-35-
EXHIBIT TITLE METHOD OF FILING - --------- --------------------------------------------- --------------------------------------------- 10.47/*/ Amendment No. One to Agreement Regarding Incorporated herein by reference to Exhibit Licensing, Development, Marketing and 10.47 to the Registrant's Quarterly Report on Manufacturing between the Registrant and Form 10-QSB for the quarter ended Binax, Inc., dated December 9, 1993. December 31, 1993. 10.48 Amendment No. Two to Agreement Filed herewith. Regarding Licensing, Development, Marketing and Manufacturing between the Registrant and Binax, Inc., dated as of July 27, 1994. 10.50/*+/ 1995 Stock Option/Stock Issuance Plan, as Incorporated herein by reference to Exhibit amended. 10.50 to the Registrant's Quarterly Report on Form 10-QSB for the quarterly period ended September 30, 1995. 10.51/*+/ Form of Notice of Grant/Stock Option Incorporated herein by reference to Exhibit Agreement, as used under the 1995 Stock 99.2 to the Registrant's Registration Statement Option/Stock Issuance Plan. on Form S-8, Registration No. 33-61103, dated July 17, 1995. 10.52 Contract Manufacturing Agreement, dated as Certain confidential portions of this exhibit of March 31, 1995. have been omitted by means of blacking out the text (the "Mark"). This exhibit has been filed separately with the Secretary of the Commission without the Mark pursuant to the Company's Application Requesting Confidential Treatment under Rule 24b-2 under the Securities Exchange Act of 1934, as amended. 11.1 Computation of Earnings Per Share. Filed herewith. 23.1 Consent of Independent Accountants. Filed herewith. 27 Financial Data Schedule. Filed herewith for electronic filing purposes only.
/*/ Incorporated by reference. /+/ Management contract or compensatory plan or arrangement. (b) Reports on Form 8-K ------------------- None. -36- SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: March 28, 1996 SYNBIOTICS CORPORATION By /s/ Michael K. Green ------------------------------ Michael K. Green Vice President - Finance In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ Robert L. Widerkehr Chief Executive Officer, President and Director March 28, 1996 - ------------------------ Robert L. Widerkehr /s/ Michael K. Green Chief Financial Officer March 28, 1996 - ------------------------ Michael K. Green /s/ Keith A. Butler Chief Accounting Officer and Corporate Controller March 28, 1996 - ------------------------ Keith A. Butler /s/ Patrick Owen Burns Director March 28, 1996 - ------------------------ Patrick Owen Burns /s/ James C. DeCesare Director March 28, 1996 - ------------------------ James C. DeCesare /s/ M. Blake Ingle Director March 28, 1996 - ------------------------ M. Blake Ingle /s/ Robert J. Kunze Director March 28, 1996 - ------------------------ Robert J. Kunze /s/ Donald E. Phillips Director March 28, 1996 - ------------------------ Donald E. Phillips
-37- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. EXHIBITS TO FORM 10-KSB UNDER SECURITIES EXCHANGE ACT OF 1934 SYNBIOTICS CORPORATION EXHIBIT INDEX Exhibit No. Exhibit - ----------- ------- 2.1/*/ Plan and Agreement of Merger of Texas Biotechnology Corporation, TBC Acquisition Company No. 1 and ImmunoPharmaceutics, Inc. dated as of June 17, 1994. 3.1 Articles of Incorporation, as amended. 3.2/*/ Bylaws, as amended. 10.1 Lease of Premises by Registrant located at 11011 Via Frontera, San Diego, California, dated November 28, 1989. 10.4/*/ 1983 Stock Option Plan. 10.4.1/*/ First Amendment to 1983 Stock Option Plan. 10.5/*/ 1984 Stock Option Plan. 10.5.1/*/ First and Second Amendments to 1984 Stock Option Plan. 10.6/*/ 1986 Stock Option Plan. 10.6.1/*/ First Amendment to 1986 Stock Option Plan. 10.21/*/ Distribution Agreement between Vedco, Inc. and the Registrant, dated October 15, 1986. 10.26/*+/ 1987 Stock Option Plan. 10.26.1/*/ First Amendment to 1987 Stock Option Plan. 10.33/*/ Lease of Premises (expansion) by the Registrant located at 16410 Via Esprillo, San Diego, California, dated February 25, 1988. 10.33.1/*/ First Amendment to Lease of Premises by the Registrant located at 16410 Via Esprillo, San Diego, California, dated August 9, 1988. 10.36/*/ Marketing Agreement between the Registrant and Bio-Trends International, Inc., dated May 10, 1989. 10.36.1/*/ Distribution Agreement between the Registrant and Bio-Trends International, Inc., dated February 7, 1990. 10.39/*/ Distribution Agreement between the Registrant and Bio-Trends International, Inc., dated August 1, 1990. 10.40/*/ Framework Agreement between Pitman-Moore, Inc. and the Registrant, dated June 26, 1992. 10.41/*/ Agreement between the Registrant and Rhone Merieux, dated July 9, 1992. 10.43/*/ 1991 Stock Option Plan, as amended. Exhibit No. Exhibit - ----------- ------- 10.44/*/ Purchase Agreement between SmithKline Beecham Animal Health and the Registrant, dated December 10, 1992. 10.46/*/ Agreement Regarding Licensing, Development, Marketing and Manufacturing between the Registrant and Binax, Inc., dated as of June 30, 1993. 10.47/*/ Amendment No. One to Agreement Regarding Licensing, Development, Marketing and Manufacturing between the Registrant and Binax, Inc., dated December 9, 1993. 10.48 Amendment No. Two to Agreement Regarding Licensing, Development, Marketing and Manufacturing between the Registrant and Binax, Inc., dated as of July 27, 1994. 10.50/*/ 1995 Stock Option/Stock Issuance Plan, as amended. 10.51/*/ Form of Notice of Grant/Stock Option Agreement, as used under the 1995 Stock Option/Stock Issuance Plan. 10.52 Contract Manufacturing Agreement, dated as of March 31, 1995. Certain confidential portions of this exhibit have been omitted by means of blacking out the text (the "Mark"). This exhibit has been filed separately with the Secretary of the Commission without the Mark pursuant to the Company's Application Requesting Confidential Treatment under Rule 24b-2 under the Exchange Act. 11.1 Computation of Earnings Per Share. 23.1 Consent of Independent Accountants. 27 Financial Data Schedule (for electronic filing purposes only). - ------------- /*/ Incorporated by reference. EX-3.1 2 RESTATED ARTICLES OF INCORPORATION EXHIBIT 3.1 ----------- RESTATED ARTICLES OF INCORPORATION of SYNBIOTICS CORPORATION Robert L. Widerkehr and Michael K. Green certify that: 1. They are the president and secretary, respectively, of Synbiotics Corporation, a California Corporation. 2. The articles of incorporation of this corporation are amended and restated to read as follows: FIRST: That the name of the corporation is: SYNBIOTICS CORPORATION SECOND: That the purpose of the corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code. THIRD: That the county in the State of California where the principal office for the transaction of the business of the corporation shall be located is San Diego County. FOURTH: Capitalization: --------------- A. The total number of shares which the corporation is authorized to issue is 25,000,000. B. 24,800,000 shares of the stock authorized hereinabove are hereby designated "Common Stock", and 200,000 shares of the stock authorized hereinabove are hereby designated "Series B Common Stock". C. Notwithstanding any other provisions of these Articles of Incorporation to the contrary, the rights, preferences, privileges and restrictions of Common Stock and Series B Common Stock shall be identical in all respects, except as follows: 1. Voting Rights. On all matters submitted to a vote of the holders of this corporation's stock, each share of Common Stock shall entitle the holder thereof to one vote, and each share of Series B Common Stock shall entitle the holder thereof to one-tenth vote. 2. Liquidation Preference. In the event of any liquidation, dissolution or winding up of this corporation, whether voluntary or involuntary, the holders of Common Stock shall be entitled to receive, prior and in -1- preference to any distribution of the assets of the corporation to the holders of Series B Common Stock by reason of their ownership thereof, the greater of (a) ten dollars for each share of Common Stock then held by them or (b) an amount for each share of Common Stock then held by them equal to ten times the amount which, after such distribution, would remain available for distribution to holders of Series B Common Stock for each share of Series B Common Stock then held by them. If, upon the occurrence of such event, the assets available for distribution among the holders of the stock are insufficient to permit the payment to the holders of Common Stock of the aforesaid preferential amount, then the entire amount of assets available for distribution to the holders of the stock shall be distributed among the holders of Common Stock in proportion to the number of shares of Common Stock then held by each of them. 3. Dividends. No dividends may be declared or paid with respect to any share of Series B Common Stock. D. Upon the occurrence of any of the following events, each share of Series B Common Stock shall automatically be converted into or reconstituted as one share of Common Stock. 1. Immediately prior to the effectiveness of any merger or consolidation of the corporation with or into another corporation, or any reorganization, as defined in Section 181 of the California Corporations Code, in which the corporation is directly or indirectly the acquired company, or any sale of all or substantially all of the assets of the corporation; 2. The last day of any twelve-month period ending March 31, June 30, September 30 or December 31 in which this corporation realizes revenues, excluding interest income and the effects on income before taxes of the conversion of the Series B Common Stock into Common Stock, of at least $10,000,000; or 3. The last day of any twelve-month period ending March 31, June 30, September 30 or December 31 in which this corporation realizes income before taxes and extraordinary items (but excluding interest income and the effects on income before taxes of the conversion of Series B Common Stock) of at least $2,000,000. E. Each conversion of Series B Common Stock hereunder shall be effected by the surrender at the office of this corporation or any transfer agent for such shares of the certificate or certificates therefor, duly endorsed, in such form and accompanied by such documents, if any, as the corporation may require. This corporation shall, as soon as practicable thereafter, issue and deliver at such office a certificate or certificates representing the number of shares of Common Stock into which such shares are convertible hereunder. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the Series B Common Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon -2- such conversion shall be treated for all purposes as the record holder or holders of shares of Common Stock on such date. F. In the event of any stock split, reverse stock split or other subdivision or combination of the Common Stock payable in Common Stock, an appropriate pro rata adjustment or adjustments shall be made in the voting rights and liquidation preference set forth in section D hereinabove. No fractional shares shall be issued upon conversion of Series B Common Stock. In lieu of any fractional shares to which a shareholder would otherwise be entitled, this corporation shall pay cash equal to such fraction multiplied by the then fair market value per share of Series B Common Stock as determined in good faith by the corporation's Board of Directors. FIFTH: The liability of the directors of the corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. SIXTH: The corporation is authorized to provide indemnification of agents (as defined in Section 317 of the Corporations Code) for breach of duty to the corporation and its stockholders through Bylaw provision or through agreements with the agent, or both, in excess of the indemnification otherwise permitted by Section 317 of the Corporations Code, subject to the limits on such excess indemnification set forth in Section 204 of the Corporations Code. 3. The foregoing amendment and restatement of articles of incorporation has been duly approved by the board of directors. 4. The foregoing amendment and restatement of articles of incorporation does not itself alter or amend the articles of incorporation in any respect except to omit the names and addresses of the first directors and of the initial agent for service of process; and therefore (pursuant to Sections 905 and 910 of the Corporations Code) does not require any approval of the outstanding shares. We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of our own knowledge. DATE: December 15, 1995 /s/ Robert L. Widerkehr ------------------------------ Robert L. Widerkehr, President /s/ Michael K. Green ------------------------------ Michael K. Green, Secretary -3- EX-10.48 3 AMENDMENT NO. 2/AGREEMENT RE LICENSING, ETC. Exhibit 10.48 ------------- AMENDMENT NUMBER TWO TO AGREEMENT REGARDING LICENSING, DEVELOPMENT, MARKETING AND MANUFACTURING This Amendment Number Two to Agreement Regarding Licensing, Development, Marketing and Manufacturing ("Amendment"), is made and entered into as of July 27, 1994 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 (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. 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 sixth sentence of Section 4.1.2(a) of the Agreement is hereby amended and restated to read as follows (with newly added language indicated by underscoring): Synbiotics shall have the right, in its sole discretion, to terminate any development project for a Synbiotics Sublicensed Product anytime during the sixth month or the ninth month of the development term (except with respect ------------------ to the Sensor CH (Canine Heartworm Antigen Test) product, as to which --------------------------------------------------------------------- Synbiotics shall have such right at any time during the sixth, ninth, tenth ------------------------------------------------------------------------- or eleventh month of the development term), and such product will cease ------------------------------------------- being a Synbiotics Product hereunder; provided, however, that Binax shall have no right to develop, market, license or distribute such former Synbiotics Sublicensed Product unless Binax acquires such rights from Synbiotics on terms acceptable to Synbiotics. -1- 2. The third sentence of Schedule 4.1 of the Agreement is hereby amended to read as follows (with newly added language indicated by underscoring): Synbiotics shall have the right, in its sole discretion, to terminate the development project for either or both of the First Two Products any time during the sixth month or the ninth month of the 14-month development term (except with respect to the Sensor CH (Canine Heartworm Antigen Test) --------------------------------------------------------------------- product, as to which Synbiotics shall have such right at any time during ------------------------------------------------------------------------ the sixth, ninth, tenth or eleventh month of the development term). ------------------------------------------------------------------- 3. Except as amended as set forth in Sections 1 and 2 above, the Agreement shall remain unchanged and shall remain in full force and effect. IN WITNESS WHEREOF, the undersigned have executed this Amendment to the Agreement to be effective as of the date first above written. WITNESS: SYNBIOTICS CORPORATION Clifford Frank By: Gregory A. Soulds - -------------------- ------------------- Its: Vice President ------------------- Date: September 22, 1994 ------------------- WITNESS: BINAX, INC. Robert Bruce By: Roger A. Piasio - -------------------- ------------------- Its: President ------------------- Date: September 12, 1994 ------------------- (SIGNATURE PAGE TO AMENDMENT NUMBER TWO TO AGREEMENT REGARDING LICENSING, DEVELOPMENT, MARKETING AND MANUFACTURING) -2- EX-10.52 4 CONTRACT MANUFACTURING AGREEMENT EXHIBIT 10.52 ------------- CONTRACT MANUFACTURING AGREEMENT This Agreement is entered into on this 31st day of March, 1995 by and between [*], an [*] corporation [*] and SYNBIOTICS CORPORATION, 11011 Via Frontera, San Diego, CA 92127-1702, a California corporation ("Customer"). WHEREAS, Customer desires to engage [*] to manufacture certain products and perform other services for Customer pursuant to and in accordance with the terms and conditions of this Agreement, and [*] desires to accept such engagement. NOW, THEREFORE, the parties agree as follows: SECTION 1. PRODUCTION 1.01 [*] agrees to manufacture and sell and Customer agrees to purchase from [*] those products identified on Exhibit A hereto ("Products") pursuant to and in accordance with the terms and conditions of this Agreement. [*] agrees to perform those additional processes, if any, such as packaging and labeling, in connection with the manufacture of the Products as may be described on Exhibit A hereto. [*] agrees to perform such other services for Customer in connection with the Products as may be described on Exhibit A ("Services"). Customer agrees to compensate [*] for performing the Services in the amounts shown in Exhibit D. 1.02 [*] and Customer agree that the Products will be manufactured in accordance with specifications described in Exhibits B and C hereto ("Specifications"). All operations, manufacturing and control procedures shall be done in accordance with applicable United States Department of Agriculture ("USDA") regulations. [*] warrants that the Products delivered to the Customer hereunder shall conform to the description of and Specifications for the Products attached hereto as Exhibit C and to all applicable USDA regulations and requirements therefor. Further, [*] warrants that all containers employed in the packaging of Product will be free of defect when released by [*] for shipment at its plant, but does not warrant the condition of such containers after handling by common carrier or others. 1.03 All of the Products shall be manufactured by [*] at its plant located in [*]. 1.04 [*]'s procedures and practices with respect to manufacturing the Products may be inspected by Customer from time to time during normal business hours upon reasonable notice by Customer. Any input or absence of such from the Customer in conjunction with any reviews or observations shall not be deemed to be approval or disapproval of any procedure or practice. [*] has the final responsibility to manufacture the Products pursuant to the Specifications. - ------------ [*] Certain confidential portions of this Exhibit were omitted by means of blackout of the text (the "Mark"). This Exhibit has been filed separately with the Secretary of the Commission without the Mark pursuant to the Company's Application Requesting Confidential Treatment under Rule 24b-2 under the Securities Exchange Act of 1934, as amended. -1- SECTION 2. SPECIFICATION CHANGES 2.01 The Specifications may be changed at any time by mutual agreement of the parties. Any disagreement concerning revisions to the Specifications shall be resolved by mutual discussion and negotiation. Except to the extent the parties may otherwise agree in writing, any increases in costs resulting from Specification changes (including, but not limited to, those relating to packaging, labeling and raw materials) will be passed through to Customer. 2.02 Customer shall be responsible for the design and content of all packaging, labels and Product inserts. [*] shall obtain all required USDA approvals of such packaging, labels and inserts. Packaging design will be done with the advice and consultation of [*] to ensure compatibility with [*]'s equipment. Customer will be responsible for all costs involved in label changes, updates and any other requested changes by Customer. Any obsolete or unused packaging inventory and labels as a result of Customer's changes will be the responsibility of the Customer and Customer will promptly reimburse [*] therefor. SECTION 3. PRICE: PAYMENT 3.01 Customer agrees to compensate [*] for performing the Services in the amounts shown in Exhibit D. 3.02 Prices set forth in Exhibit D will be adjusted upwards for each subsequent contract year by any increase in the Producer Price Index during the twelve month period ending on the last day of the third month preceding the end of the current contract year. [*] will notify Customer of such price adjustments at least 60 days prior to the end of each contract year and will furnish Customer a revised Exhibit D to this Agreement. 3.03 [*] shall also be authorized to pass through any cost increases for raw materials and packaging components provided by [*] to the extent such increases would cause total cost of goods of finished Products to increase by more than 2%. [*] will advise Customer in writing of any such cost increases quarterly at the time [*] confirms in writing Customer's purchase order. Upon Customer's request, [*] will furnish supporting documentation therefor. 3.04 [*] shall notify Customer of the date when Products are ready for shipment to Customer. [*] shall invoice the Customer for Products on the date the Products are shipped, provided, however, that [*] shall immediately invoice Customer for Products for which [*] has not received shipping instructions from Customer and the common carrier selected by Customer has not picked up the Products within fifteen (15) days of notification from [*] to Customer that such Products are ready for shipment. Payment terms shall be net 30 days from the date of each such invoice. An interest charge of one and one-half percent (1 1/2%) per month or portion of a month shall be charged for late payments. 3.05 In the event Customer shall fail to make any payment when due, [*] shall be authorized to commence or undertake judicial or non-judicial actions to collect the delinquent payment. Customer agrees to pay all costs incurred by [*] in any collection action, including reasonable attorneys fees. SECTION 4. LABEL CODES: QUALITY ASSURANCE 4.01 [*] shall code all labels affixed to each unit of the packaged Products to identify the Product batch. A copy of the coded label for each batch along with a report on the date and number and type of units packaged and labeled shall be promptly forwarded to the Customer. -2- 4.02 Prior to shipping any Product to the Customer, [*] shall analyze the Product for the purpose of determining whether it conforms with the Specifications, such analysis to be made in accordance with methods of analysis to be in compliance with each licensed product Outline of Production as expressed in Section V thereof referenced in Exhibits B and C attached hereto. For each batch of Product delivered to the Customer, [*] shall, concurrently with delivery of notice of Product completion pursuant to Section 3.04 above, deliver to the Customer a certificate of analysis specifying the results of the analysis required to show conformity of the Product to Specifications. 4.03 The Customer shall have 30 days after receipt of the Product to inspect the Product and reject the same. If the Product is rejected, written notice must be given to [*] no later than 30 days after receipt by the Customer. In the event it is determined through consultation between both parties, or by a third party acceptable to and at the shared expense of both parties, that any Product shipped by [*] hereunder does not conform with the Specifications, at the Customer's option, (i) [*] shall be relieved of any obligation to deliver any Product with respect to the non-conforming shipment and in such case [*] shall credit against future purchases by Customer the purchase price of such non-conforming Product paid by Customer together with any shipping costs paid by the Customer for delivery of such non-conforming Product, or (ii) [*] shall replace the non-conforming Product with substitute Product which conforms with said Specifications and any other requirements of this Agreement, within the time agreed to by both parties, in which case the Customer shall pay to [*] amounts in accordance with Section 3 hereof based on the substitute shipment. The non-conforming Product shall become the property of and returned to [*] at [*]'s expense. [*] shall dispose of such Product at its own expense according to all appropriate regulations. 4.04 [*] shall substitute Product at no cost to the Customer to complete any Product recall required by subsequent determination that the Product was not produced in accordance with Specifications when released to the Customer or was not produced in compliance with applicable USDA regulations. The Customer shall be responsible for all other recalls. 4.05 [*] shall promptly communicate in writing to Customer all inquiries or complaints about the Products made to [*] by customers of the Customer. Any testing of Products by [*] done as a result of a request or complaint of a customer of the Customer shall be at the Customer's expense, if approved by the Customer in writing prior to the testing. 4.06 All Products with the exception of [*] shall be delivered at least 18 months in advance of the shelf expiration date for such Products. The [*] shall be delivered at least 12 months in advance of the shelf expiration date for the [*]. Unless otherwise specifically and mutually agreed to in writing by both parties, Products with less than the minimum expiration dating may be accepted at the discretion of Customer. Customer is responsible for the cost and handling of all outdated Products. 4.07 The remedies described in this Section 4 are exclusive and in lieu of any other remedy Customer would otherwise have against [*] with respect to defective Products or any breach of [*]'s warranty contained in Section 1.02; provided, that this section shall not limit [*]'s indemnity obligation set forth in Section 13 with respect to third party claims. SECTION 5. FORECASTS; ORDER PROCEDURES; DELIVERIES 5.01 Except to the extent the parties may otherwise agree in writing with respect to a particular shipment, at least sixty (60) days prior to the beginning of each calendar quarter the Customer shall give [*] a firm written purchase order or orders for the types and quantities of the Products for the upcoming calendar quarter with required delivery dates. [*] shall not be obligated to manufacture and supply any quantity or type of Products until it shall have confirmed in writing Customer's purchase order. [*] agrees that with respect -3- to Products covered by a purchase order confirmed by it in writing, the Products shall be available for shipment on the specified delivery dates, except to the extent it is prevented from doing so due to conditions beyond its control as provided in Section 9. The terms and conditions of the Customer's purchase orders shall apply to any Products purchased hereunder, provided they are not in conflict with the terms and conditions of this Agreement. Any terms and conditions on either a Customer purchase order or a [*] acknowledgement or any other document relating to the purchase, sale or transfer of Products between the parties, which are in conflict with, diminish or are additive to any of the terms of this Agreement, shall be null and void and without legal effect unless they are agreed to by way of the signatures of both parties on a single document which plainly expresses an intention to alter such terms (and expressly refers to this Section 5.01 by number). All orders shall be placed in full batch sizes as described in Exhibit D hereto. 5.02 Within 15 days after the date hereof, Customer will furnish [*] a written forecast of the quantities and types of Products that Customer anticipates it will order from [*] during the first twelve (12) months of this Agreement. Each time Customer furnishes its purchase order pursuant to Section 5.01 to [*], Customer will also furnish revised written estimates of the quantities it anticipates it will order during the succeeding twelve (12) month period. The forecasts will not be deemed binding commitments, but are for the purpose of enabling [*] to more effectively schedule the use of its facilities. 5.03 The terms of delivery of the Products shall be F.O.B. [*] plant properly packaged to prevent damage during shipment. [*] shall ship the Products at Customer's expense and in accordance with Customer's instructions. Title and risk of loss of the Products shall pass to the Customer upon the earlier of: (i) delivery of the Products to the insured common carrier selected by Customer, or (ii) seven (7) days following [*]'s notification to Customer that Products are ready for shipment. 5.04 [*] agrees to store the Products as required by the Customer for a period not to exceed thirty (30) days from the date [*] notifies Customer the Products are ready for shipment. With respect to Products that are not picked up by the common carrier designated by Customer's shipping instructions within thirty (30) days from the date [*] notifies Customer the Products are ready for shipment, [*] shall charge a warehousing fee of two (2%) percent of the invoice amount per month or portion thereof until the Product is shipped. SECTION 6. TERM; TERMINATION 6.01 The initial term of this Agreement shall be for a period of sixty (60) months, commencing on the date of this Agreement, and shall automatically renew thereafter for additional renewal terms of twelve (12) months each, unless either party gives written notice to the other at least twelve (12) months prior written notice that it does not wish to renew this Agreement. 6.02 Subject to the provisions of Section 9, if either party hereto shall fail to perform or fulfill, at any time and in the manner herein provided, any obligation or condition required to be performed or fulfilled by such party, and such party fails to remedy such failure within ninety (90) days after receipt of written notice thereof from the nondefaulting party which specifies the particulars of the default, the nondefaulting party may terminate this Agreement, except for those obligations of the parties which by their terms survive termination or expiration hereof. Such termination shall be effective upon delivery of written notice from the nondefaulting party to the defaulting party. 6.03 Upon termination of this Agreement for any reason: (a) Products manufactured pursuant to confirmed purchase orders shall be delivered on the Invoice Delivery Dates and Customer shall pay [*] therefor not later than thirty (30) days thereafter; (b) all raw materials and labeling furnished by Customer shall be promptly returned, paid for by [*] or, if approved by Customer, destroyed by [*] as per USDA guidelines; (c) all costs of unused raw materials, packaging and labeling shall be paid for by Customer unless kept by -4- [*]. All costs of destroying raw materials and labeling or the costs of its returned shipment shall be paid by Customer. SECTION 7. REPRESENTATIONS AND WARRANTIES; COVENANTS 7.01 [*] represents and warrants to Customer that: (a) it is a corporation duly organized, validly existing and in good standing under the laws of the State of [*]; (b) all corporate acts required to execute and deliver this Agreement have been duly taken by [*]; the execution, delivery and performance hereof by [*] has been duly authorized, and the Agreement, as so executed and delivered, is a valid and binding obligation of [*], enforceable against it in accordance with its terms; (c) the execution and delivery of this Agreement by [*], and the performance of its obligations hereunder, does not require the consent of any third party and will not violate, with or without notice, the lapse of time or both, any agreement, contract, license or permit to which [*] is a party or its organizational documents; (d) it has, and will maintain, all required manufacturing establishment designations, permits and licenses; and (e) has the requisite experience, knowledge and expertise, suitable facilities and qualified personnel to manufacture the Products and to perform its other obligations hereunder in a sound, safe, lawful and workmanlike manner. 7.02 Customer represents and warrants to [*] that: (a) it is a corporation duly organized, validly existing and in good standing under the laws of the State of California; (b) all corporate acts required to execute and deliver this Agreement have been duly taken by Customer; the execution, delivery and performance hereof by Customer has been duly authorized, and the Agreement, as so executed and delivered, is a valid and binding obligation of Customer, enforceable against it in accordance with its terms; (c) the execution and delivery of this Agreement by Customer, and the performance of its obligations hereunder, does not require the consent of any third party and will not violate, with or without notice, the lapse of time or both, any agreement, contract, license or permit to which Customer is a party or its organizational documents; and (d) it has legal rights to authorize [*] to manufacture the Products on its behalf pursuant to this Agreement and that the manufacture, sale, packaging and labeling of the Products pursuant to this Agreement will not infringe upon any patent, license, trademark or copyright of any third party. 7.03 [*] covenants and agrees that for the duration of this Agreement: (a) it shall maintain at all times the physical, technological, managerial, human resources and financial capacity to meet all of Customer's reasonably anticipatable demand for Products hereunder; -5- (b) subject to the terms hereof, it will maintain USDA licensure at all times on manufacturing facilities and ascertain and comply with all applicable laws and regulations and standards of industry or professional conduct in connection with the manufacture of Products; and (c) it shall maintain the original copies of the required regulatory documentation provided to [*] by Customer, including licensing documents for the Products, as per USDA guidelines. 7.04 Customer covenants and agrees that it will provide [*] original copies of the required regulatory documentation, including licensing documents for the Products, as per USDA guidelines. SECTION 8. NOTIFICATIONS 8.01 [*] agrees that it will promptly notify the Customer of any contact, claim or other communication by any entity or agency that related to, or may relate to [*]'s ability to perform its responsibilities herein. Any communication, either initiated by [*] or by USDA that references a Product in this Agreement or the submission of any Product will immediately be brought to the attention of the Customer. 8.02 Customer agrees that it will promptly notify [*] of any contact, claim or other communication by any entity or agency that related to, or may relate to Customer's ability to perform its responsibilities herein. Any communication, either initiated by Customer or by USDA that references a Product in this Agreement or the submission of any such Product will immediately be brought to the attention of [*]. SECTION 9. FORCE MAJEURE 9.01 No party shall be held liable or responsible for failure or delay in fulfilling or performing any obligation of this Agreement in case such failure or delay is due to Acts of God, strikes or other labor disputes, governmental regulations or actions, inability to obtain material, labor, equipment or transportation, or any other condition beyond the reasonable control of the affected party, provided such party has taken reasonable steps to avert such causes or conditions. Each party agrees to give the other party prompt written notice of the occurrence and the nature of any such condition, and the extent to which the affected party will be unable fully to perform its obligation hereunder. Each party further agrees to use all reasonable efforts to correct the condition as quickly as possible. 9.02 [*] shall make a good faith best effort to equitably allocate its available resources and production capacity for the manufacture of Products among the Customer and [*]'s other customers (including production for [*]'s own account); provided, [*] shall not be required to take any action that would cause it to become in default under the terms of any third party contract. 9.03 If, as a result of causes or conditions described in this Section, either party is unable fully to perform its obligations hereunder for any consecutive period of three (3) months, the other party shall have the right to terminate this Agreement upon at least thirty (30) days prior written notice. -6- SECTION 10. CONFIDENTIAL INFORMATION 10.01 As used in this paragraph the term, "Confidential Information" shall mean all information disclosed in writing, or by oral communications and confirmed as confidential within thirty (30) days of disclosure, by either party to the other relating to raw materials; product specifications, formulations and compositions; scientific know-how; chemical compound and composition data; manufacturing processes; analytical methodology; product applications including safety and efficacy data; current and future product and marketing plans and projections; and other information of a technical or economic nature related to the Products. 10.02 All Confidential Information disclosed hereunder shall remain the property of the disclosing party and shall be maintained in confidence and not disclosed by the receiving party to any person except to officers, employees and consultants to whom it is necessary to disclose the information for the purpose specified above. Each party shall take all steps it would normally take to protect its own Confidential Information to ensure that the received Confidential Information shall be maintained in confidence and not disclosed. 10.03 Unless otherwise agreed in writing all Confidential Information disclosed hereunder shall be used by the parties only pursuant to and in accordance with this Agreement. 10.04 The obligations of [*] and Customer under this paragraph shall not apply to: (a) Information which, at the time of disclosure, is in the public domain or thereafter becomes within the public domain other than as a result of breach of this Agreement; or (b) Information which either party can establish was in its possession at the time of disclosure; or (c) Information which was received from a third party not under an obligation of confidentiality; or (d) Information which either party can establish was independently developed without reference to the information received hereunder. 10.05 Upon termination of this Agreement, [*] and Customer agree to return to the other all written or other physical embodiments of the Confidential Information, except for one record copy. The obligations under this paragraph shall be binding on any affiliate, parent, subsidiary, successor or assign of [*] or Customer as if a party to the Agreement. The obligations of confidentiality and non-use of the Confidential Information under this Agreement shall continue throughout the term of this Agreement and for a period of two (2) years following the termination or expiration of this Agreement. 10.06 With respect to the Products described in this Agreement, the provisions of this paragraph shall supersede the provisions of that certain Non- Disclosure/Confidentiality Agreement previously entered into between the parties. 10.07 Except to the extent required by law, neither party shall disclose to third parties the subject matter or terms of this Agreement or the negotiations giving rise to this Agreement. SECTION 11. OWNERSHIP OF INTELLECTUAL PROPERTY 11.01 Any and all design, patent, copyright and other relevant ownership and other rights in and to the intellectual property aspects of the Products which are the subject of this Agreement and all modifications, adjustments, changes and derivatives thereto and thereof (collectively, the "Rights") shall belong exclusively to Customer, and no such ownership shall be in [*]. [*] shall own the raw materials and Products, subject to any security interest, until title passes pursuant to Section 5.03. [*] agrees that it does not have, and will not claim, any Rights in any Product delivered pursuant to this Agreement or aspect thereof. [*] covenants that it will not, -7- in the process of manufacturing or testing any product hereunder, violate any Right of any person. [*] agrees not to affix its trademark or trade name (or any trademark or trade name which is not expressly authorized in writing by Customer to be so affixed) on any Product delivered hereunder. SECTION 12. MISCELLANEOUS 12.01 All notices or other communications provided for in this Agreement shall be in writing and shall be considered delivered upon the latest of actual receipt, or personal or courier delivery, or sending by facsimile with confirmation of receipt in good order requested and received, or on the -- fourth business day after they are deposited in the United States mail, certified first class or air mail postage prepaid, addressed to the respective parties as follows: (a) If to [*]: [*] (b) If to Customer: Synbiotics Corporation 16420 Via Esprillo San Diego, CA 92127-1702 ATTN: Clifford Frank Fax (619) 451-3826 With a copy to: Brobeck, Phleger & Harrison 550 West "C" St. Suite 1300 San Diego, CA 92101 ATTN: Hayden J. Trubitt Fax (619) 234-3848 The parties may, at any time, change their addresses or other information in this Section by written notice delivered under this Section. 12.02 [*] is and shall always remain an independent contractor in its performance of this Agreement. The provisions of this Agreement shall not be construed as authorizing or reserving to the Customer any right to exercise any control or direction over the operations, activities, employees, or agents of [*] in connection with this Agreement except to the extent required by law, it being understood and agreed that the control and direction of such operations, activities, employees, or agents shall otherwise remain with [*]. Neither party to this Agreement shall have any authority to employ any person as an employee or agent for or on behalf of the other party to this Agreement, nor any person performing any duties or engaging in any work at the request of such party, shall be deemed to be an employee or agent of the other party to this Agreement. 12.03 Law Governing and Venue: (a) This Agreement shall be governed by and construed in accordance with the laws of the State of California (as to proceedings initiated by [*]) or [*] (as to proceedings initiated by Customer) as if the Agreement had been delivered in such State and all acts performed or required to be performed hereunder have been performed entirely within that State. -8- (b) Any dispute or controversy arising out of or relating to this Agreement, any document or instrument delivered pursuant to, or in connection with, or simultaneously with this Agreement; or any breach of this Agreement or any such document or instrument, shall be resolved (as to proceedings initiated by [*]) in San Diego, California, or (as to proceedings initiated by Customer) in [*]. 12.04 Whenever possible, each provision of this Agreement shall be interpreted in such a manner as to be effective and valid under applicable law, but if any provision hereof shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. 12.05 No modification or waiver of any provision of this Agreement shall be effective unless the modification is made in writing and signed by both parties, and the same shall then be effective only for a period and on the conditions and for the specific instances and purposes specified in such writing. No course of dealing between [*] and the Customer or delay or failure to exercise any rights hereunder shall operate a waiver of such rights or preclude the exercise of any other rights hereunder. 12.06 Termination or expiration of this Agreement shall not relieve either party from any obligation under this Agreement which may have accrued prior thereto or which survives by its terms. 12.07 The captions set forth in this Agreement are for convenience only and shall not be used in any way to construe or interpret this Agreement. 12.08 Neither party to this Agreement may assign this Agreement or its rights or obligations hereunder without the prior written consent of the other party; except that either party may assign its rights and delegate its obligations hereunder without prior consent of the other party to any successor entity by way of merger, consolidation, or reorganization. Any permitted assignee shall assume all obligations of its assignor under this Agreement. No assignment shall relieve either party of responsibility for the performance of any accrued obligation which it has hereunder. Any consent required shall not be unreasonably withheld. 12.09 This Agreement (including the Exhibits hereto) constitute the entire understanding of the parties with respect to the subject matter hereof and supersede all prior negotiations or communications, however given, regarding the subject matter hereof. There are no other understandings, representations or warranties of any kind, express or implied. 12.10 Dispute Resolution, Arbitration: (a) Customer and [*] agree that in the case of a dispute or difference of any kind, the parties in the first instance shall attempt to settle the dispute amicably. All disputes and differences of any kind arising under this Agreement, or arising between the parties including the existence or continued existence of this Agreement and the arbitrability of a particular issue which cannot be settled amicably by the parties shall be submitted to arbitration. The arbitration shall be conducted in [*] (as to proceedings initiated by Customer) or San Diego, California (as to proceedings initiated by [*]), and shall be finally settled in accordance with the Rules of Arbitration of the American Arbitration Association in [*] (as to proceedings initiated by Customer) or San Diego (as to proceedings initiated by [*]) by one or more arbitrators appointed in accordance with the above-mentioned Rules. The decision of the arbitration tribunal shall be final and binding upon the parties and may be enforced in any court of competent jurisdiction, and no party shall seek redress against the other -9- in any court or tribunal except solely for the purpose of obtaining execution of the arbitration award or of obtaining a judgement consistent with the reward. (b) During any adjudication pursuant to Section (a) of this paragraph, the Customer and [*] shall continue to fulfill their respective obligations under this Agreement, unless the subject matter of the dispute is of such a nature that this is by no means possible until the dispute has been finally settled. 12.11 This Agreement is for the benefit of the parties hereto and is not intended to, and shall not be construed as benefitting or creating rights in any person or entity other than the signatories hereto. 12.12 [*] acknowledges and agrees that the legal remedies available to Customer in the event [*] violates the covenants and agreements made in this Agreement would be inadequate and that Customer shall be entitled, without posting any bond or other security, to temporary, preliminary and permanent injunctive relief, specific performance and other equitable remedies in the event of such a violation, in addition to any other remedies which Customer may have at law or in equity. SECTION 13. INDEMNIFICATION 13.01 [*] hereby agrees to defend, indemnify and hold the Customer harmless against any and all expense, including reasonable attorneys fees and court costs, damages, claims and liabilities arising out of (a) any breach of warranty hereunder or material non-fulfillment or non- performance by [*] of any agreement, covenant or obligation of [*] under this Agreement; or (b) [*]'s failure to manufacture a Product in compliance with its Specifications. 13.02 The Customer hereby agrees to defend, indemnify and hold [*] harmless against any and all expense, including reasonable attorney fees and court costs, damages, claims and liabilities arising out of (a) a material non- fulfillment or non-performance by Customer of any agreement, covenant or obligation of Customer under this Agreement; (b) the use by the Customer or customers of the Customer of the Product, sale or distribution by the Customer of any of the Product which has been manufactured in compliance with the Specifications and (c) any alleged patent, trademark or copyright infringement. 13.03 In the event either party incurs, or expects to incur expenses, damages, claims, or liability for which it intends to seek indemnification from the other party, the party claiming indemnification (the "Indemnitee") shall promptly notify the other party (the "Indemnitor") and will permit the Indemnitor at the Indemnitor's sole discretion, to settle any such claim or suit and agrees to the complete control of such defense or settlement by the Indemnitor, and the Indemnitor shall not be responsible for any legal fees or other costs incurred other than as provided in the Agreement. The Indemnitee, its employees and agent(s) shall cooperate fully with the Indemnitor and its legal representatives in the investigation and defense of any claims or suits covered by the indemnification provisions of this Agreement. 13.04 [*] will maintain insurance in amounts meeting statutory requirements to protect [*] and the Customer from claims under any Worker's Compensation Acts and will maintain general comprehensive personal liability insurance in the minimum amount of $500,000 for any one occurrence to protect [*] and Customer from any other damages from personal injury, including death, which may be sustained by [*]'s agents, servants or employees and the general public and/or claims of property damage which might be sustained from any one of them due to the negligence of [*]. [*] shall, upon request, furnish the Customer a certificate of insurance. -10- 13.05 The provision of this Section 13 shall survive the expiration or termination of this Agreement. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed in duplicate by their duty authorized representatives: [*] SYNBIOTICS CORPORATION By [*] By Robert L. Widerkehr -------------------- --------------------- Title President - C.O.O. Title President - C.E.O. -------------------- --------------------- Date 7/3/95 Date 6/30/95 -------------------- --------------------- -11- EXHIBIT A PRODUCTS, PROCESSES, AND SERVICES [*] EXHIBIT B COMPONENT SPECIFICATIONS [*] CONTRACT MANUFACTURING AGREEMENT between [*] and Synbiotics Corporation Date: EXHIBIT C FINISHED PRODUCT SPECIFICATIONS [*] EXHIBIT D PRICE/BATCH SIZE [*] EXHIBIT E Addition of New Products/Process Improvements/Changes - ----------------------------------------------------- a. Addition of New Products Pricing of New Products will be negotiated on a case by case basis. b. Process Improvements/Changes Pricing of New Products will be negotiated on a case by case basis. If additional capital equipment is added at [*] to improve the efficiency of [*]'s manufacture of the Products, and if Customer fund the acquisition cost of this equipment resulting reductions in [*]'s cost of manufacturing the Products, efficiencies will be passed on to Customer in the from of reduced prices for the Products. The specific terms of this arrangement will be agreed to separately by the parties. EX-11.1 5 COMPUTATION OF EARNINGS SYNBIOTICS CORPORATION EXHIBIT 11.1 ------------ COMPUTATION OF (LOSS) EARNINGS PER SHARE
NINE MONTHS YEAR ENDED ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, MARCH 31, 1995 1994 1994 ------------ ------------- ----------- PRIMARY EARNINGS (LOSS) PER SHARE: Net income (loss) per statement of operations $ 501,000 $(1,058,000) $ 357,000 ========== =========== ========== Weighted average number of shares outstanding 5,832,000 5,803,000 5,859,000 ========== =========== ========== Primary net income (loss) per share $ .09 $ (.18) $ .06 ========== =========== ========== FULLY DILUTED EARNINGS (LOSS) PER SHARE:/(1)/ Net income (loss) per statement of operations $ 501,000 $(1,058,000) $ 357,000 ========== =========== ========== Reconciliation of weighted average number of shares per primary computation above, to amount used for fully diluted computation: Weighted average number of shares outstanding, per primary computation 5,832,000 5,803,000 5,859,000 Add - effect of outstanding options and warrants (as determined by the application of the treasury method) 5,000 27,000 - ---------- ----------- ---------- Weighted average number of shares, as adjusted 5,837,000 5,830,000 5,859,000 ========== =========== ========== Fully diluted net income (loss) per share $ .09 $ (.18) $ .06 ========== =========== ==========
/(1)/ This calculation is submitted, for the nine months ended December 31, 1994, in accordance with Regulation S-B Item 601(b)(11) although it is contrary to paragraph 40 of APB Opinion No. 15 because it produces an anti-dilutive result. EX-23.1 6 CONSENT OF PRICE WATERHOUSE EXHIBIT 23.1 ------------ CONSENT OF INDEPENDENT ACCOUNTANTS ---------------------------------- We hereby consent to the incorporation by reference in the Prospectus constituting part of the Registration Statements on Form S-3 (No.'s 33-55990 and 33-68250) and in the Registration Statements on Form S-8 (No.'s 33-10742, 33- 15712, 33-24444, 33-55992, 33-85908 and 33-61103) of Synbiotics Corporation of our report dated February 15, 1996 appearing on page 11 of this Form 10-KSB. PRICE WATERHOUSE LLP San Diego, California March 28, 1996 EX-27 7 FINANCIAL DATA SCHEDULE
5 THE BALANCE SHEET AS OF DECEMBER 31, 1995 AND THE RELATED STATEMENTS OF OPERATIONS, CASH FLOWS AND SHAREHOLDERS' EQUITY FOR THE YEAR ENDED DECEMBER 31, 1995 INCLUDED ELSEWHERE IN THIS FORM 10-KSB. 1,000 YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 1,017 0 1,481 51 3,439 6,464 4,392 3,513 11,458 2,310 0 0 0 29,351 (20,203) 11,458 13,676 14,118 8,009 14,548 0 0 0 501 0 501 0 0 0 501 .09 .09
-----END PRIVACY-ENHANCED MESSAGE-----