-----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, H4EHzlrb1jnrGd1gmH8yGuSj8ZPpwr7unrZnJRMg8L1875PVYTyT/MsOjuPB8Mvb A+CjTkP6CfVTsxB0Jg0GPg== 0001017062-98-001116.txt : 19980518 0001017062-98-001116.hdr.sgml : 19980518 ACCESSION NUMBER: 0001017062-98-001116 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 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: 10QSB SEC ACT: SEC FILE NUMBER: 000-11303 FILM NUMBER: 98621783 BUSINESS ADDRESS: STREET 1: 11011 VIA FRONTERA CITY: SAN DIEGO STATE: CA ZIP: 92127 BUSINESS PHONE: 6194513771 10QSB 1 FORM 10QSB QUARTERLY PERIOD ENDED 3/31/98 ================================================================================ U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------- FORM 10-QSB [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998 OR [_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-11303 SYNBIOTICS CORPORATION (Exact name of small business issuer as specified in its charter) California 95-3737816 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 11011 Via Frontera San Diego, California 92127 (Address of principal executive offices) (Zip Code) Issuer's telephone number, including area code: (619) 451-3771 Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] As of April 30, 1998, 8,644,311 shares of Common Stock were outstanding. Transitional Small Business Disclosure Format: Yes [_] No [X] ================================================================================ SYNBIOTICS CORPORATION INDEX Page ---- Part I. Condensed Consolidated Statement of Operations and Comprehensive Income - Three months ended March 31, 1998 and 1997............. 3 Condensed Consolidated Balance Sheet - March 31, 1998 and December 31, 1997............................ 4 Condensed Consolidated Statement of Cash Flows - Three months ended March 31, 1998 and 1997...................... 5 Notes to Condensed Consolidated Financial Statements.............. 6 Management's Discussion and Analysis or Plan of Operation......... 8 Part II. Other Information................................................. 14 -2- Item 1. Financial Statements (continued) -------------------- Synbiotics Corporation Condensed Consolidated Statement of Operations and Comprehensive Income - ----------------------------------------------------------------------- (unaudited) - -----------
Three Months Ended March 31, ----------------------- 1998 1997 ---------- ---------- Net sales $8,801,000 $6,940,000 Cost of sales 4,046,000 3,382,000 ---------- ---------- Gross Profit 4,755,000 3,558,000 ---------- ---------- Operating expenses: Research and development 521,000 307,000 Selling and marketing 1,591,000 1,300,000 General and administrative 1,239,000 664,000 ---------- ---------- 3,351,000 2,271,000 ---------- ---------- Income from operations 1,404,000 1,287,000 Other income (expense): License fees and other 74,000 79,000 Interest, net (258,000) 60,000 ---------- ---------- Income before income taxes 1,220,000 1,426,000 Provision for income taxes 530,000 596,000 ---------- ---------- Net income 690,000 830,000 Cumulative translation adjustment (247,000) ---------- ---------- Comprehensive income $ 443,000 $ 830,000 ========== ========== Basic net income per share $ .08 $ .11 ========== ========== Diluted net income per share $ .07 $ .11 ========== ==========
See accompanying notes to condensed consolidated financial statements. -3- Item 1. Financial Statements (continued) -------------------- Synbiotics Corporation Condensed Consolidated Balance Sheet - -------------------------------------------------------------------------------
March 31, December 31, 1998 1997 ------------ ------------- (unaudited) (audited) Assets Current assets: Cash and equivalents $ 3,084,000 $ 2,190,000 Securities available for sale 2,980,000 3,394,000 Accounts receivable 5,852,000 4,396,000 Inventories 4,549,000 5,187,000 Deferred tax assets 321,000 303,000 Other current assets 512,000 359,000 ----------- ----------- Total current assets 17,298,000 15,829,000 Property and equipment, net 1,244,000 1,102,000 Goodwill 14,532,000 11,542,000 Deferred tax assets 5,905,000 6,417,000 Deferred debt issuance costs 819,000 905,000 Other assets 5,568,000 5,832,000 ----------- ----------- $45,366,000 $41,627,000 =========== =========== Liabilities and Shareholders' Equity Current liabilities: Accounts payable and accrued expenses $ 4,651,000 $ 3,546,000 Current portion of long-term debt 2,000,000 1,000,000 Income taxes payable 48,000 25,000 ----------- ----------- Total current liabilities 6,699,000 4,571,000 ----------- ----------- Long-term debt 7,306,000 7,543,000 ----------- ----------- Mandatorily redeemable common stock 2,774,000 2,756,000 ----------- ----------- Non-mandatorily redeemable common stock and other shareholders' equity: Common stock, no par value, 24,800,000 shares authorized, 8,643,000 and 7,426,000 shares issued and outstanding at March 31, 1998 and December 31, 1997 37,082,000 35,659,000 Common stock warrants 1,003,000 1,003,000 Accumulated other comprehensive income (398,000) (151,000) Accumulated deficit (9,100,000) (9,754,000) ----------- ----------- Total non-mandatorily redeemable common stock and other shareholders' equity 28,587,000 26,757,000 ----------- ----------- $45,366,000 $41,627,000 =========== ===========
See accompanying notes to condensed consolidated financial statements. -4- Item 1. Financial Statements (continued) -------------------- Synbiotics Corporation Condensed Consolidated Statement of Cash Flows (unaudited) - --------------------------------------------------------------------------------
Three Months Ended March 31, ------------------------- 1998 1997 ----------- ----------- Cash flows from operating activities: Net income $ 690,000 $ 830,000 Adjustments to reconcile net income to net cash used for operating activities: Depreciation and amortization 534,000 264,000 Changes in assets and liabilities: Accounts receivable (1,454,000) (3,566,000) Inventories 638,000 490,000 Deferred taxes 493,000 554,000 Other assets (149,000) 273,000 Accounts payable and accrued expenses 496,000 (44,000) Income taxes payable 23,000 Other liabilities (650,000) ----------- ----------- Net cash provided by (used for) operating activities 1,271,000 (1,849,000) ----------- ----------- Cash flows from investing activities: Acquisition of property and equipment (212,000) (68,000) Proceeds from sale of securities available for sale 414,000 658,000 Acquisition of Prisma Acquisition Corp. (1,000,000) ----------- ----------- Net cash (used for) provided by investing activities (798,000) 590,000 ----------- ----------- Cash flows from financing activities: Proceeds from issuance of long-term debt 1,000,000 Payments of long-term debt (250,000) Mandatorily redeemable common stock issuance costs (16,000) Proceeds from issuance of common stock, net (66,000) (40,000) ----------- ----------- Net cash provided by (used for) financing activities 668,000 (40,000) ----------- ----------- Net increase (decrease) in cash and equivalents 1,141,000 (1,299,000) Effect of exchange rates on cash (247,000) Cash and equivalents - beginning 2,190,000 3,050,000 ----------- ----------- Cash and equivalents - end of period $ 3,084,000 $ 1,751,000 =========== ===========
See accompanying notes to condensed consolidated financial statements. -5- Item 1. Financial Statements (continued) -------------------- SYNBIOTICS CORPORATION Notes to Condensed Consolidated Financial Statements (unaudited) - -------------------------------------------------------------------------------- Note 1 - Interim Financial Statements: The accompanying consolidated balance sheet as of March 31, 1998 and the consolidated statements of operations and comprehensive income and of cash flows for the three month periods ended March 31, 1998 and 1997 have been prepared by Synbiotics Corporation (the "Company") and have not been audited. The consolidated financial statements of the Company include the accounts of its wholly-owned subsidiary Synbiotics Europe SAS. All significant intercompany transactions and accounts have been eliminated in consolidation. These financial statements, in the opinion of management, include all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the financial position, results of operations and cash flows for all periods presented. The financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-KSB filed for the year ended December 31, 1997. Interim operating results are not necessarily indicative of operating results for the full year. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Note 2 - Acquisition: On March 6, 1998 the Company acquired by merger Prisma Acquisition Corp. ("Prisma"), a privately-held company located in Rome, NY, which develops, manufactures and markets instruments and reagents used by veterinarians to measure blood chemistry information at the point-of-care. The consideration paid to the stockholders of Prisma was a $1,000,000 convertible note, 458,000 newly issued, unregistered shares of the Company's common stock valued at $1,490,000 (based on the average closing price of Synbiotics' common stock for the thirty trading days prior to March 6, 1998, which was $3.25) and the issuance of options to purchase 157,000 shares of the Company's common stock for $.0016 per share in replacement of Prisma's outstanding stock options. The 157,000 stock options were valued at $609,000 using the Black-Scholes option pricing model. The convertible note (which was issued to only one of the Prisma stockholders) is due March 5, 1999, bears interest at the rate of 5% per year and is unsecured. The note is convertible at any time, at the option of the Company, into a number of unregistered shares of the Company's common stock equal to the outstanding principal and accrued interest divided by the average closing price of the Company's common stock for the thirty trading days immediately prior to the conversion. The note is subordinate to the Company's notes payable to Banque Paribas, which were issued in conjunction with the July 1997 acquisition of the veterinary diagnostics business of Rhone-Merieux, S.A.S. The transaction was accounted for as a purchase. Goodwill arising from the transaction totalled $3,336,000 which is being amortized over an estimated useful life of 15 years utilizing the straight-line method. $2,347,000, representing the common stock and common stock option portion of the of the purchase price and liabilities assumed, is considered a non-cash financing activity for purposes of the statement of cash flows. -6- Item 1.Financial Statements (continued) -------------------- SYNBIOTICS CORPORATION Notes to Condensed Consolidated Financial Statements (unaudited) - -------------------------------------------------------------------------------- Note 3 - Inventories: Inventories consist of the following:
March 31, December 31, 1998 1997 ---------- ------------ Raw materials $2,743,000 $2,639,000 Work in process 839,000 1,235,000 Finished goods 967,000 1,313,000 ---------- ---------- $4,549,000 $5,187,000 ========== ==========
Note 4 - Earnings per Share: The following is a reconciliation of net income and share amounts used in the computations of earnings per share:
Three Months Ended March 31, 1998 1997 ---- ---- (unaudited) (unaudited) Net income used: Net income $690,000 $830,000 Less accretion of mandatorily redeemable common stock (36,000) ---------- ---------- Net income used in computing basic net income per share 654,000 830,000 Add interest upon assumed conversion of debt 2,000 ---------- ---------- Net income used in computing diluted net income per share $656,000 $830,000 ========== ========== Shares used: Weighted average common shares outstanding used in computing basic net income per share 8,414,000 7,392,000 Weighted average options and warrants to purchase common stock as determined by application of the treasury method 444,000 269,000 Weighted average shares of common stock issued upon assumed conversion of debt 321,000 ---------- ---------- Shares used in computing diluted net income per share 9,179,000 7,661,000 ========== ==========
-7- Item 2. Management's Discussion and Analysis or Plan of Operation --------------------------------------------------------- The information contained in this Management's Discussion and Analysis or Plan of Operation and elsewhere in this Annual Report on Form 10-KSB contains both historical financial information and forward-looking statements. Synbiotics does not provide forecasts of future financial performance. While management is optimistic about the Company's long-term prospects, the historical financial information may not be indicative of future financial performance. In fact, future financial performance may be materially different than the historical financial information presented herein. Moreover, the forward-looking statements about future business or future results of operations are subject to significant uncertainties and risks, which could cause actual future results to differ materially from what is suggested by the forward-looking information. The following risk factors should be considered in evaluating the Company's forward-looking statements: Patent Litigation Involving the Company's Canine Heartworm Diagnostic Products - ------------------------------------------------------------------------------ Barnes-Jewish Hospital of St. Louis (the "Hospital") has filed a lawsuit against the Company claiming that the Company infringes a patent owned by the Hospital and is seeking unspecified damages. As previously reported by Synbiotics, the Hospital is the owner of a patent which the Hospital alleges covers the Company's canine heartworm diagnostic products. The Company is also the owner of several patents which cover its canine heartworm diagnostic products. The Company believes that it does not infringe the Hospital's patent, and also believes that the Hospital's patent is invalid. However, in the event that the Company were to lose the lawsuit or enter into an unfavorable settlement agreement, there would be a materially adverse effect on the Company's financial condition and results of operations. In addition, patent litigation is likely to be costly and disruptive even if the Company were to prevail in the litigation. The Hospital had previously sued IDEXX Laboratories, Inc., the Company's primary competitor for canine heartworm diagnostics, for patent infringement under the Hospital's patent; IDEXX's defense involved an assertion that the patent is invalid. On September 28, 1997, IDEXX announced a settlement of this suit for $5,500,000 (an undisclosed portion of which represents royalties on prior sales) and future royalties. No Assurance that Acquired Businesses Can Be Successfully Combined - ------------------------------------------------------------------ There can be no assurance that the anticipated benefits of the 1998 acquisition of Prisma, the 1997 acquisition of the veterinary diagnostics business of SBIO- E, the 1996 acquisition of the business of ICG, or any other future acquisitions (collectively, the "Acquired Business"') will be realized. Acquisitions of businesses involve numerous risks, including difficulties in the assimilation of the operations, technologies and products of the Acquired Business, introduction of different distribution channels, potentially dilutive issuances of equity and/or increases in leverage and risk resulting from issuances of debt securities, the need to establish internally operating functions which had been previously provided pre-acquisition by a corporate parent, accounting charges, operating companies in different geographic locations with different cultures, the potential loss of key employees of the Acquired Business, the diversion of management's attention from other business concerns and the risks of entering markets in which Synbiotics has no or limited direct prior experience. In addition, there can be no assurance that the acquisitions will not have a material adverse effect upon Synbiotics' business, results of operations or financial condition, particularly in the quarters immediately following the consummation of the acquisition due to operational disruptions, unexpected expenses and accounting charges which may be associated with the integration of the Acquired Business and Synbiotics, as well as operating and development expenses inherent in the Acquired Business itself as opposed to integration of the Acquired Business. -8- Competition - ----------- Competition in the animal health care industry is intense. Many competitors, such as Pfizer Animal Health, Merial Animal Health (the successor to Rhone Merieux), Schering-Plough and IDEXX Laboratories, have substantially greater financial, manufacturing, marketing and product research resources than the Company. Large companies in particular have extensive expertise in conducting pre-clinical and clinical testing of new products and in obtaining the necessary regulatory approvals to market products. Competition is based on test sensitivity, accuracy and speed; product price; and similar factors. IDEXX Laboratories requires its distributors not to carry the products of competitors such as Synbiotics. There can be no assurance that such competition will not adversely affect Synbiotics' results of operations or ability to maintain or increase sales and market share. History of Operating Losses; Accumulated Deficit - ------------------------------------------------ Although the Company's operations were profitable for the years ended December 31, 1997 and 1996, the Company has had a history of losses. Synbiotics has incurred a consolidated accumulated deficit of $9,100,000 at March 31, 1998, even after the release in 1996 of a $7,158,000 valuation allowance related to deferred tax assets. There can be no assurance that Synbiotics can generate sufficient revenue to sustain profitability. Reliance on Third Party Manufacturers - ------------------------------------- Certain of Synbiotics' products (including its ICT Gold(TM), VetRED(R) and WITNESS(R) diagnostic kits and all of its vaccines) are, and certain anticipated new products are expected to be, manufactured by third parties under the terms of distribution and/or manufacturing agreements. The ICT Gold(TM), VetRED(R) and WITNESS(R) products and feline leukemia virus vaccine are licensed to Synbiotics by their respective outside manufacturers. In the event that these third parties are unable (due to operational, licensing, financial or other reasons) to supply Synbiotics with sufficient finished products, Synbiotics would suffer significant disruption of its business. Synbiotics has the right, under certain circumstances, pursuant to the agreements to use alternate manufacturing sources. In some circumstances, however, the Company would lack such a right. If Synbiotics should encounter delays or difficulties in its relationships with manufacturers, the resulting problems could have a material adverse effect on Synbiotics. In fact, a majority of the Company's vaccine products (exclusive of its feline leukemia vaccine products) are manufactured using bulk antigen fluids that have been supplied by a third party. The supply agreement has expired and the Company is currently seeking a replacement supplier for these fluids. The Company believes it has adequate levels of these bulk fluids to meet its manufacturing requirements through the third quarter of 1998. In the event that the Company is unable to locate a replacement supplier, sales of the Company's private label vaccine products, beginning in the fourth quarter of 1998, will be materially adversely affected. Sales and Marketing - ------------------- The Company's product distribution strategy results in a large percentage of sales being to only a few customers. During the year ended December 31, 1997, sales to two distributors totalled 40% of the Company's net sales. In addition, SBIO-E's small animal products are presently sold through distributors, while its large animal products are sold directly to laboratories. There can be no assurance that Synbiotics will be able to establish an adequate sales and marketing capability in any or all targeted markets or that it will be successful in gaining market acceptance of its products. To the extent Synbiotics enters into distributor arrangements, any revenues received by Synbiotics will be dependent on the efforts of third parties and there can be no assurance that such efforts will be successful. IDEXX Laboratories' requirement that its distributors not carry the products of competitors such as Synbiotics has induced certain distributors to stop doing business with Synbiotics in order to carry IDEXX products instead. In addition, Synbiotics' sales of products, on a private-label basis, toward the over-the-counter market may cause an adverse reaction among Synbiotics' regular distributor and veterinarian customers. -9- Attraction of Key Employees - --------------------------- The success of Synbiotics is highly dependent, in part, on its ability to retain highly qualified personnel, including senior management and scientific personnel. Competition for such personnel is intense and the inability to retain additional key employees or the loss of one or more current key employees could adversely affect Synbiotics. Although Synbiotics has been successful in retaining required personnel to date, there can be no assurance that Synbiotics will be successful in the future. Reliance on New and Recent Products - ----------------------------------- Synbiotics relies to a significant extent on new and recently developed products, and expects that it will need to continue to introduce new products to be successful in the future. There can be no assurance that Synbiotics will obtain and maintain market acceptance of its products. With respect to future products, there can be no assurance that such products will meet applicable regulatory standards, be capable of being produced in commercial quantities at acceptable cost or be successfully commercialized. There can be no assurance that new products can be manufactured at a cost or in quantities necessary to make them commercially viable. If Synbiotics were unable to produce internally, or to contract for, a sufficient supply of its new products on acceptable terms, or if it should encounter delays or difficulties in its relationships with manufacturers, the introduction of new products would be delayed, which could have a material adverse effect on Synbiotics. Future Capital Needs; Uncertainty of Additional Funding - ------------------------------------------------------- The development and commercialization of Synbiotics' products requires substantial funds. Synbiotics' future capital requirements will depend on many factors, including cash flow from operations, the need to finance further acquisitions, if any, continued scientific progress in its products and development programs, the cost of manufacturing scale-up, the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims, the cost involved in patent infringement litigation, competing technological and market developments, and the cost of establishing effective sales and marketing arrangements. Synbiotics anticipates that its existing, available cash, cash equivalents and short-term investments will be adequate to satisfy its current capital requirements and fund its current operations, although any large acquisition would require additional capital resources. There can be no assurance that additional financing, if required, will be available on acceptable terms or at all. If additional funds are raised by issuing equity securities, further dilution to then existing shareholders may result. Debt financing would result in increased leverage and risk. In July 1997, the Company obtained $15,000,000 of debt financing from Banque Paribas, of which $11,493,000 was used in connection with the acquisition of SBIO-E. The $15,000,000 included a $5,000,000 revolving line of credit. However, draws on the line of credit are subject to certain requirements and can be used only for certain purposes. Additionally, Banque Paribas requires the Company to maintain certain financial ratios and levels of tangible net worth and also restricts the Company's ability to pay dividends and make loans, capital expenditures or investments without the Bank's consent. If adequate funds are not available, Synbiotics may be required, among other things, to delay, scale back or eliminate one or more of its research and development programs or seek to obtain funds through arrangements with collaborative partners or others even if the arrangements would require Synbiotics to relinquish certain rights to certain of its technologies, product candidates or products that Synbiotics would not otherwise relinquish. -10- Seasonality - ----------- Synbiotics has experienced some seasonality in its business, with sales highest in December to April, the time period in which distributors purchase canine heartworm diagnostic products to sell to veterinarians for the heartworm season. This seasonality may be somewhat reduced by the acquisition of SBIO-E, which is relatively less seasonal. There can be no assurance that such seasonality will not have a material adverse impact on Synbiotics' operations. Patents and Proprietary Technology - ---------------------------------- Synbiotics generally has sought and will continue to seek to protect its interests by treating its particular variations in the production of monoclonal antibodies as trade secrets. Synbiotics also has pursued and intends to continue aggressively to pursue protection for new products, new methodological concepts, and compositions of matter through the use of patents where obtainable. At present, Synbiotics has been granted eleven U.S. patents and has three U.S. patents pending. There can be no assurance that Synbiotics will be issued any additional patents or that, if any patents are issued, they will provide Synbiotics with significant protection or will not be challenged. Even if such patents are enforceable, Synbiotics anticipates that any attempt to enforce its patents would be time consuming and costly. Moreover, the laws of some foreign countries do not protect Synbiotics' proprietary rights in its products to the same extent as do the laws of the United States. The patent positions of biotechnology companies, including Synbiotics, are uncertain and involve complex legal and factual issues. Additionally, the coverage claimed in a patent application can be significantly reduced before the patent is issued. As a consequence, there can be no assurance that any of Synbiotics' future patent applications will result in the issuance of patents or, if any patents issue, that they will provide significant proprietary protection or will not be circumvented or invalidated. Because patent applications in the United States are maintained in secrecy until patents issue and publication of discoveries in the scientific or patent literature often lag behind actual discoveries, Synbiotics cannot be certain that it was the first inventor of inventions covered by its pending patent applications or that it was the first to file patent applications for such inventions. Moreover, Synbiotics may have to participate in interference proceedings declared by the U.S. Patent and Trademark Office to determine priority of invention that could result in substantial cost to Synbiotics, even if the eventual outcome is favorable to Synbiotics. There can be no assurance that Synbiotics' patents would be held valid by a court of competent jurisdiction. An adverse outcome of any patent litigation could subject Synbiotics to significant liabilities to third parties, require disputed rights to be licensed from or to third parties or require Synbiotics to cease using the technology in dispute. A patentholder has filed a lawsuit asserting that the Company's key canine heartworm diagnostic tests infringe its patent (see above). There can be no assurance that such patentholder or other third parties will not assert other infringement claims against Synbiotics in the future or that any such assertions will not result in costly litigation or require Synbiotics to obtain a license to intellectual property rights of such parties. There can be no assurance that any such licenses would be available on terms acceptable to Synbiotics, if at all. Furthermore, parties making such claims may be able to obtain injunctive or other equitable relief that could effectively block Synbiotics' ability to further develop, or commercialize, its products in the United States and abroad. Such claims could result in the award of substantial damages. Defense of any lawsuit or failure to obtain any such license could have a material adverse effect on Synbiotics. Finally, litigation, regardless of outcome, could result in substantial cost to, and a diversion of efforts by, Synbiotics. Government Regulation - --------------------- Synbiotics' business is subject to substantial regulation by the United States government (see Item 1 - Business--Government Regulation of the Company's Annual Report on Form 10-KSB for the year ended December 31, 1997, -11- which is hereby incorporated by reference). In addition, Synbiotics' operations may be subject to future legislation and/or rules issued by domestic or foreign governmental agencies with regulatory authority relating to Synbiotics' business. There can be no assurance that Synbiotics will be found in compliance with any of the various regulations to which it is subject. For marketing outside the United States, Synbiotics will be subject to foreign regulatory requirements in such foreign jurisdictions, which vary widely from country to country. There can be no assurance that Synbiotics will meet and sustain compliance with any such requirements. Product Liability and Insurance - ------------------------------- The design, development and manufacture of Synbiotics' products involve an inherent risk of product liability claims and associated adverse publicity. Synbiotics has obtained liability insurance for potential product liability associated with the commercial sale of its products. There can be no assurance, however, that Synbiotics will be able to obtain or maintain such insurance. Although Synbiotics currently maintains general liability insurance, there can be no assurance that the coverage limits of Synbiotics' insurance policies will be adequate. Product liability insurance is expensive, difficult to obtain and may not be available in the future on acceptable terms or at all. A successful claim brought against Synbiotics in excess of Synbiotics' insurance coverage could have a material adverse effect upon Synbiotics. Hazardous Materials - ------------------- Synbiotics' research and development involves the controlled use of hazardous materials, chemicals and various radioactive compounds. Although Synbiotics believes that its safety procedures for handling and disposing of such materials comply with the standards prescribed by local state and federal regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident, Synbiotics could be held liable for any damages that result and any such liability could exceed the resources of Synbiotics. Synbiotics may incur substantial costs to comply with environmental regulations. Results of Operations Net sales for the first quarter of 1998 increased by $1,861,000 or 27% over the first quarter of 1997. The increase in net sales is primarily due to $2,321,000 in sales of diagnostic products acquired in conjunction with the July 1997 acquisition of SBIO-E. However, the sales of non-SBIO-E diagnostic products decreased 6% during the first quarter of 1998 due to a decrease in canine heartworm diagnostics sales of 12%, offset by an increase in feline diagnostics sales of 69%. The decreased canine heartworm diagnostics sales were due to the non-recurrence of distributor promotional programs which were in place during the first quarter of 1997, although this factor was somewhat offset by a general price increase in January 1998. Rather than utilizing promotional programs to provide incentive for distributors to buy in anticipation of the heartworm season, the Company has implemented an incentive program based on the growth of annual distributor sales. One object of this incentive program, in addition to growing the Company's sales to its distributors, is to reduce the seasonality of the sales of its heartworm products. The increase in feline diagnostic sales was due to the introduction of the Company's feline heartworm diagnostic test and WITNESS(R) feline leukemia diagnostic test. Sales of vaccine products during the first quarter of 1998 decreased $147,000 or 8% as compared to the first quarter of 1997. The decreased vaccine sales comprises an increase of 44% in sales of vaccines to private label partners during the first quarter of 1998, offset by a 30% decrease in other vaccine sales due to decreased sales of bulk feline leukemia vaccine (related to the timing of shipments as requested by OEM customers), and the phase-out of sales of most Synbiotics-label vaccines. Sales of vaccines have been negatively impacted by severe competition from Pfizer, Fort Dodge and Solvay who manufacture their own vaccine products, whereas the Company's vaccines are all manufactured by third parties. During the fourth quarter of 1997, the Company stopped selling its vaccines (except for its feline leukemia vaccines) to distributors and focused its efforts on selling vaccines to private label partners for resale to the over-the-counter market and through catalogs. -12- A majority of the Company's vaccine products (exclusive of its feline leukemia vaccine products) are manufactured using bulk antigen fluids that have been supplied by a third party. The supply agreement has expired and the Company is currently seeking a replacement supplier for these fluids. The Company believes it has adequate levels of these bulk fluids to meet its manufacturing requirements through the third quarter of 1998. In the event that the Company is unable to locate a replacement supplier, sales of the Company's private label vaccine products, beginning in the fourth quarter of 1998, will be materially adversely affected. The cost of sales as a percentage of net sales was 46% during the first quarter of 1998 compared to 49% during the first quarter of 1997 (i.e., gross margin increased to 54% from 51%). The higher gross margin is a direct result of two factors: i) the fact that 86% of SBIO-E's sales relate to products manufactured by SBIO-E rather than by third party manufacturers, and ii) the Company's domestic sales (i.e., exclusive of the SBIO-E sales), during the first quarter of 1998 had a 56% gross margin as compared to 51% during the first quarter of 1997. The increased margin on 1998 domestic sales is due primarily to the non- recurrence of a decrease in average selling prices for certain potentially short-dated vaccines during the first quarter of 1997, as well as the general price increase discussed above. The Company's manufacturing costs are predominantly fixed costs. Among the Company's major products, DiroCHEK(R) canine heartworm diagnostic products are manufactured at Company facilities, whereas ICT GOLD(TM) HW, VetRED(R), WITNESS(R) and all vaccines are manufactured by third parties. In addition to affecting gross margins, outsourcing of manufacturing renders the Company relatively more dependent on the third-party manufacturers. Research and development expenses during the first quarter of 1998 increased $214,000 or 70% over the first quarter of 1997. The increase is primarily due to the acquisition of SBIO-E, which has its own research and development group, as well as increased contracted research and development expenses. Research and development expenses as a percentage of net sales were 6% and 4% during the first quarter of 1998 and 1997, respectively. The Company expects its research and development expenses to increase during the remainder of 1998 due to further development of Prisma's product line. Selling and marketing expenses during the first quarter of 1998 increased by $291,000 or 22% over the first quarter of 1997. The increase is due primarily to the acquisition of SBIO-E, which has its own sales and marketing group. Selling and marketing expenses as a percentage of net sales were 18% and 19% during the first quarter of 1998 and 1997, respectively. General and administrative expenses during the first quarter of 1998 increased by $575,000 or 87% over the first quarter of 1997. The increase is due primarily to amortization of goodwill, additional payroll costs related to the acquisition of SBIO-E and legal expenses related to the Hospital patent litigation. General and administrative expenses as a percentage of net sales were 15% and 10% during the first quarter of 1998 and 1997, respectively. The Company expects the Prisma acquisition to increase its general and administrative expenses, without commensurate sales increases, for the remainder of 1998. Other income (expense) during the first quarter of 1998 decreased by $323,000 from the first quarter of 1997 due primarily to interest expense related to the debt incurred in conjunction with the acquisition of SBIO-E. The combined effective tax rate was 43% during the first quarter of 1998 as compared to 42% during the first quarter of 1997. The increase in the effective rate is due to a decrease in deferred state tax assets resulting from enacted tax rate changes, as well as foreign income taxes related to the operations of SBIO-E. The Company believes that earnings before interest, taxes, depreciation and amortization ("EBITDA") is an important and meaningful tool in comparing its performance from year to year. While there are many interpretations in the financial community as to the proper calculation of EBITDA, the Company calculates EBITDA as net income plus the sum of 1) interest expense, 2) income tax expense, 3) depreciation expense and 4) amortization expense. However, it should be noted that EBITDA is not an equivalent of, nor a substitute for, cash flow. EBITDA for the -13- first quarter of 1998 was $1,869,000 as compared to $1,690,000 for the first quarter of 1997, an increase of $179,000 or 11%. The increase is due, in addition to the above factors, to the interest on the debt issued in conjunction with the acquisition of SBIO-E and a larger amount of goodwill amortization during the first quarter of 1998 (due to the amortization related to the SBIO-E and Prisma acquisitions). Because SBIO-E is such a large part of the post- acquisition Company, and because of the significant amount of long-term debt the Company incurred in connection with the acquisition, historical results of operations will not necessarily be comparable to results of operations in the near-term future. Financial Condition Management believes that the Company's present capital resources, which included working capital of $10,490,000 at March 31, 1998, are sufficient to meet its current working capital needs and service the debt related to the acquisitions of SBIO-E and Prisma through 1998. However, pursuant to a debt agreement with Banque Paribas, the Company is required to maintain certain financial ratios and levels of tangible net worth and is also restricted in its ability to pay dividends and make loans, capital expenditures or investments without Banque Paribas' consent. The Company's operations have become seasonal due to the success of its canine heartworm diagnostic products. Sales and profits tend to be concentrated in the December to April time period, as distributors prepare for the heartworm season by purchasing diagnostic products for resale to veterinarians. This seasonality may be somewhat reduced by the newly acquired European operations and later by the Prisma instrumentation business, which are relatively less seasonal. Impact of the Year 2000 Issue - ----------------------------- The year 2000 issue is the result of computer programs being written using two digits rather than four digits to define the applicable year. Any of the Company's computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculation causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices or engage in similar normal business activities. The Company has determined that the financial and manufacturing systems used in its U.S. operations are not year 2000 compliant. However, the software manufacturer has provided the necessary software to make the systems year 2000 compliant, and the Company plans on implementing the software changes in the third quarter of 1998. As the Company has an ongoing maintenance agreement with the software vendor, which includes the year 2000 software changes, the Company does not expect to have a material impact on its results of operations related to implementing the software changes. The computer systems of SBIO-E are not affected by the year 2000 issue as new systems had to be acquired subsequent to the acquisition and those systems were already year 2000 compliant. PART II. OTHER INFORMATION --------------------------- Item 1. Legal Proceedings: ------------------ No material developments. -14- Item 2. Changes in Securities: ---------------------- In conjunction with the March 6, 1998 acquisition of Prisma, the Company issued 458,345 shares of newly issued unregistered Synbiotics common stock to the former shareholders of Prisma, issued stock options to purchase 157,053 shares of unregistered Synbiotics common stock at an exercise price of $.0016 per share to the employees of Prisma, and issued a $1,000,000 note to one of the former Prisma shareholders which is convertible into the number of unregistered shares of Synbiotics common stock equal to the outstanding principal and accrued interest divided by the average closing price of the Company's common stock for the thirty trading days immediately prior to the conversion. The shares of common stock issued or issuable in conjunction with this transaction were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933. Item 3. Defaults Upon Senior Securities: -------------------------------- None. Item 4. Submission of Matters to a Vote of Security Holders: ---------------------------------------------------- None. Item 5. Other Information: ------------------ None. Item 6. Exhibits and Reports on Form 8-K: --------------------------------- (a) Exhibits -------- 2.1 Agreement and Plan of Reorganization By and Among the Registrant, Prisma Acquisition Corp. and the Stockholders and an Optionholder of Prisma Acquisition Corp., dated as of February 27, 1998/(1)/. 2.2 Agreement of Merger By and Between Prisma Acquisition Corp. and the Registrant, dated as of March 6, 1998/(2)/. 10.67 Note Purchase Agreement By and Between the Registrant and BioQuest Venture Leasing Partnership, L.P., dated as of March 6, 1998/(3)/. 10.68 Convertible Promissory Note By the Registrant to BioQuest Venture Leasing Partnership, L.P., dated March 6, 1998/(4)/. 10.69 Employment Agreement between the Registrant and Robert A. Behrens, dated as of March 6, 1998. 27 Financial Data Schedule (for electronic filing purposes only). _______________ -15- (1) Incorporated herein by reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K dated March 6, 1998. (2) Incorporated herein by reference to Exhibit 2.2 to the Registrant's Current Report on Form 8-K dated March 6, 1998. (3) Incorporated herein by reference to Exhibit 99.1 to the Registrant's Current Report on Form 8-K dated March 6, 1998. (4) Incorporated herein by reference to Exhibit 99.2 to the Registrant's Current Report on Form 8-K dated March 6, 1998. (b) Reports on Form 8-K ------------------- The Company filed a report on Form 8-K dated March 6, 1998 reflecting the acquisition of Prisma Acquisition Corp. pursuant to an agreement and plan of reorganization dated February 27, 1998 and agreement of merger dated March 6, 1998. SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereto duly authorized. SYNBIOTICS CORPORATION Date: May 15, 1998 /s/ Michael K. Green --------------------------------------- Michael K. Green Vice President of Finance and Chief Financial Officer (signing both as a duly authorized officer and as principal financial officer) -16- EXHIBIT INDEX Exhibit No. Exhibit - ----------- ------- 2.1 Agreement and Plan of Reorganization By and Among the Registrant, Prisma Acquisition Corp. and the Stockholders and an Optionholder of Prisma Acquisition Corp., dated as of February 27, 1998/(1)/. 2.2 Agreement of Merger By and Between Prisma Acquisition Corp. and the Registrant, dated as of March 6, 1998/(2)/. 10.67 Note Purchase Agreement By and Between the Registrant and BioQuest Venture Leasing Partnership, L.P., dated as of March 6, 1998/(3)/. 10.68 Convertible Promissory Note By the Registrant to BioQuest Venture Leasing Partnership, L.P., dated March 6, 1998/(4)/. 10.69 Employment Agreement between the Registrant and Robert A. Behrens, dated as of March 6, 1998. 27 Financial Data Schedule (for electronic filing purposes only). ___________________ (1) Incorporated herein by reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K dated March 6, 1998. (2) Incorporated herein by reference to Exhibit 2.2 to the Registrant's Current Report on Form 8-K dated March 6, 1998. (3) Incorporated herein by reference to Exhibit 99.1 to the Registrant's Current Report on Form 8-K dated March 6, 1998. (4) Incorporated herein by reference to Exhibit 99.2 to the Registrant's Current Report on Form 8-K dated March 6, 1998. EX-10.69 2 EMPLOYMENT AGREEMENT Exhibit 10.69 ------------- EMPLOYMENT AGREEMENT -------------------- THIS AGREEMENT is made by and between Synbiotics Corporation, a California corporation ("EMPLOYER"), and Robert A. Behrens ("EMPLOYEE") as of March 6, 1998. R E C I T A L S: ---------------- WHEREAS, EMPLOYER and EMPLOYEE wish to set forth in this Agreement the terms and conditions under which EMPLOYEE is to be employed by EMPLOYER. NOW, THEREFORE, EMPLOYER and EMPLOYEE, in consideration of the mutual promises set forth herein, agree as follows: ARTICLE 1 --------- TERM OF AGREEMENT ----------------- 1.1 Term. The term of this Agreement shall commence on the date ---- first written above and shall continue until terminated pursuant to Article 6. ARTICLE 2 --------- EMPLOYMENT DUTIES ----------------- 2.1 Title/Responsibilities. EMPLOYEE shall serve as an employee of ---------------------- EMPLOYER and hold the position of Vice President and General Manager, Synbiotics Instruments of EMPLOYER, having the powers and responsibilities consistent with such position and reporting to EMPLOYER's Chief Executive Officer, all subject to ultimate direction and management of EMPLOYER's Board of Directors. EMPLOYEE shall also perform all duties which from time to time are assigned to him by EMPLOYER's Chief Executive Officer and/or Board of Directors, and shall provide the Chief Executive Officer and/or Board with periodic reports upon request. EMPLOYEE's job location shall be Rome, New York and/or Southborough, Massachusetts as deemed necessary in the reasonable discretion of EMPLOYEE. In addition, EMPLOYEE will not be required to relocate out of the area of Southborough, Massachusetts without his prior written consent. 2.2 Full Time Attention. EMPLOYEE shall perform his duties hereunder ------------------- in a diligent and professional manner and devote substantially all of his business time and attention, best efforts, energy and skills to EMPLOYER during the time he is employed hereunder as Vice President and General Manager, Synbiotics Instruments of EMPLOYER. During the term of this Agreement EMPLOYEE shall not without the express consent of EMPLOYER's Board of Directors serve or act as a shareholder (except passive holdings of less than 1% of the stock), employee, agent, consultant, officer, director, partner, representative or owner of any other business entity, nor (if it would require more than an insubstantial amount of business time or attention) of any non-profit entity. Notwithstanding the foregoing, the parties hereto hereby acknowledge and agree that EMPLOYEE shall have the ability to devote a reasonable amount of time supporting the efforts of Microlab Systems, Inc., including, but not limited to, serving as director of Microlab Systems, Inc., for so long as such efforts do not in the opinion of EMPLOYER, interfere with his responsibilities for EMPLOYER. 2.3 Compliance with Rules. EMPLOYEE shall comply with all applicable --------------------- governmental laws, rules and regulations and with all of EMPLOYER's policies, rules and/or regulations applicable to all employees of EMPLOYER. ARTICLE 3 --------- COMPENSATION ------------ 3.1 Base Salary. EMPLOYER shall pay semi-monthly to EMPLOYEE a ----------- salary of $140,000 per annum until such time or times as it may discretionarily be raised (but not lowered) upon annual performance/salary review by EMPLOYER's Chief Executive Officer (upon recommendation of its Compensation Committee). 3.2 Additional Compensation (Stock Option). In addition to the -------------------------------------- salary provided in Section 3.1, EMPLOYER hereby grants to EMPLOYEE as additional compensation for EMPLOYEE's services (but not for any capital-raising purposes or in connection with any capital-raising activities), a non-qualified stock option to purchase 50,000 shares of EMPLOYER Common Stock under EMPLOYER's 1995 Stock Option/Stock Issuance Plan, with an exercise price equal to the Fair Market Value per share of EMPLOYER Common Stock on the date first written above, such option to vest in sixteen equal quarterly installments. 3.3 Bonus. In addition to the salary provided in Section 3.1, ----- EMPLOYEE shall participate in any executive incentive bonus plan which EMPLOYER may in its discretion establish for 1998 and future years. ARTICLE 4 --------- OTHER BENEFITS -------------- 4.1 Fringe Benefits. EMPLOYEE shall be entitled during the term of --------------- his employment under this Agreement to all other fringe benefits made available from time to time by EMPLOYER to its executives generally and/or its employees generally, including without limitation participation in EMPLOYER's 401(k) plan and group health insurance plan. 4.2 Expenses. EMPLOYER shall reimburse EMPLOYEE, not less often than -------- monthly, for reasonable out-of-pocket business expenses incurred by EMPLOYEE in the course of his duties hereunder (including, but not limited to, reasonable travel, room and board expenses relating to travel to and from EMPLOYER'S facility located in Rome, New York), upon submission by EMPLOYEE of appropriate expense account reports and substantiating receipts. 2 4.3 Vacation. EMPLOYEE shall be entitled to three weeks paid -------- vacation per full year of service, in accordance with and subject to EMPLOYER's vacation accrual plan and policies. EMPLOYEE acknowledges the "cap" on vacation accruals set forth in such plan and policies. ARTICLE 5 --------- FORMER EMPLOYMENT ----------------- 5.1 No Conflict. EMPLOYEE represents and warrants that the execution ----------- and delivery by him of this Agreement, his employment by EMPLOYER and his performance of duties under this Agreement will not conflict with and will not be constrained by any prior employment or consulting agreement or relationship, or any other contractual obligation. 5.2 No Use of Prior Confidential Information. EMPLOYEE will not ---------------------------------------- intentionally disclose to EMPLOYER or use on its behalf any confidential information belonging to any of his former employers, but during his employment by EMPLOYER he will use in the performance of his duties all information (but only such information) which is generally known and used by persons with training and experience comparable to his own or is common knowledge in the industry or otherwise legally in the public domain. ARTICLE 6 --------- TERMINATION ----------- 6.1 Term. This Agreement (including EMPLOYEE'S employment) shall ---- continue until terminated by either EMPLOYER or EMPLOYEE. Such termination (including termination of EMPLOYEE's employment) shall be effected by written notification and may be effected at any time, with or without Cause, for any reason or no reason. 6.2 Severance. If this Agreement and/or EMPLOYEE's employment is --------- terminated as a result of Cause, EMPLOYEE shall be entitled to no severance pay. If this Agreement and/or EMPLOYEE's employment is terminated other than for Cause, EMPLOYEE shall be entitled to severance pay as follows: six months' salary at EMPLOYEE's then base salary rate. Furthermore, if EMPLOYEE is terminated (other than for Cause) in connection with an acquisition of EMPLOYER, EMPLOYEE shall be entitled to additional severance pay of six months' salary at EMPLOYEE's then base salary rate (as well as the severance pay described in the previous paragraph) and all of EMPLOYEE's then unvested EMPLOYER stock options shall immediately become fully vested. "Cause" shall be defined to mean: (a) Death; (b) Voluntary resignation (other than because of a material breach by EMPLOYER of its obligations under this Agreement); 3 (c) EMPLOYEE's repudiation of this Agreement; (d) permanent disability (defined as EMPLOYEE's inability to perform, with or without reasonable accommodation, the essential functions of his position for any 50 business days -- exclusive of vacation days taken -- within any continuous period of 200 days by reason of physical or mental illness or incapacity); (e) EMPLOYEE being formally charged with the commission of a felony, or being convicted of a misdemeanor involving moral turpitude; (f) EMPLOYEE's demonstrable fraud or dishonesty; (g) EMPLOYEE's use of alcohol, drugs or any illegal substance in such a manner as to interfere with the performance of his duties under this Agreement; (h) EMPLOYEE's intentional, reckless or grossly negligent action materially detrimental to the best interest of the EMPLOYER, including any misappropriation or unauthorized use of EMPLOYER's property or improper use or disclosure of confidential information (but excluding any good faith exercise of business judgment); (i) EMPLOYEE's intentional failure to perform material duties under this Agreement if such failure has continued for 15 days after EMPLOYEE has been notified in writing by EMPLOYER of the nature of EMPLOYEE's failure to perform; (j) EMPLOYEE's chronic absence from work for reasons other than illness or permitted vacation; or (k) EMPLOYEE's violation of policies in EMPLOYER's official Employee Handbook, as it may be amended from time to time. Termination for Cause shall be without prejudice to any other right or remedy to which EMPLOYER may be entitled at law, in equity, or under this Agreement. ARTICLE 7 --------- ARBITRATION ----------- 7.1 Final and Binding Arbitration. Any controversy, claim or dispute ----------------------------- between (a) a party to this Agreement, on the one hand, and (b) the other party to this Agreement and/or such second party's parents, subsidiaries or affiliates and/or any of their directors, officers, employees, agents, successors, assigns, heirs, executors, administrators, or legal representatives, on the other hand, arising out of, in connection with, or in relation to (t) the interpretation, validity, performance or breach of this Agreement, (u) EMPLOYEE's stock options and the underlying shares, (v) EMPLOYEE's employment by EMPLOYER, (w) any termination of such 4 employment, (x) any actions during or with respect to EMPLOYEE's work for EMPLOYER, (y) any claims for breach of contract, tort, or breach of the covenant of good faith and fair dealing, or (z) any claims of discrimination or other claims under any federal, state or local law or regulation now in existence or hereinafter enacted and as amended from time to time concerning in any way the subject of EMPLOYEE's employment with EMPLOYER or its termination, shall, at the request of either party, be resolved to the exclusion of a court of law by binding arbitration in San Diego, California, in accordance with Exhibit A hereto. Each of EMPLOYEE and EMPLOYER understands and agrees that the arbitration shall be instead of any civil litigation and that the arbitrator's decision shall be final and binding to the fullest extent permitted by law and enforceable by any court having jurisdiction thereof. The only claims not --- covered by this Section 7.1 are claims for benefits under the workers' compensation laws, claims for unemployment insurance benefits, and matters within the jurisdiction of the California Labor Commissioner, which will be resolved pursuant to those laws. ARTICLE 8 --------- GENERAL PROVISIONS ------------------ 8.1 Governing Law. This Agreement and the rights of the parties ------------- thereunder shall be governed by and interpreted under California law. 8.2 Assignment. EMPLOYEE may not delegate, assign, pledge or ---------- encumber his rights or obligations under this Agreement or any part thereof. 8.3 Notice. Any notice required or permitted to be given under this ------ Agreement shall be sufficient if it is in writing and is sent by registered or certified mail, postage prepaid, or personally delivered, to the following addresses, or to such other addresses as either party shall specify by giving notice under this section: TO EMPLOYER: Chief Executive Officer, Synbiotics Corporation 11011 Via Frontera San Diego, CA 92127 Copy to: Hayden J. Trubitt Brobeck, Phleger & Harrison LLP 550 West C Street, Suite 1300 San Diego, CA 92101 TO EMPLOYEE: Robert A. Behrens 21 Harris Drive Southborough, MA 01772 8.4 Amendment. This Agreement may be waived, amended or supplemented --------- only by an express writing signed by both of the parties hereto. To be valid, EMPLOYER's 5 signature must be by a person specially authorized by EMPLOYER's Board of Directors to sign such particular document. 8.5 Waiver. No waiver of any provision of this Agreement shall be ------ binding unless and until set forth expressly in writing and signed by the waiving party. To be valid, EMPLOYER's signature must be by a person specially authorized by EMPLOYER's Board of Directors to sign such particular document. The waiver by either party of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any preceding or succeeding breach of the same or any other term or provision, or a waiver of any contemporaneous breach of any other term or provision, or a continuing waiver of the same or any other term or provision. No failure or delay by a party in exercising any right, power, or privilege hereunder or other conduct by a party shall operate as a waiver thereof, in the particular case or in any past or future case, and no single or partial exercise thereof shall preclude the full exercise or further exercise of any right, power, or privilege. No action taken pursuant to this Agreement shall be deemed to constitute a waiver by the party taking such action of compliance with any representations, warranties, covenants or agreements contained herein. 8.6 Severability. All provisions contained herein are severable and ------------ in the event that any of them shall be held to be to any extent invalid or otherwise unenforceable by any court of competent jurisdiction, such provision shall be construed as if it were written so as to effectuate to the greatest possible extent the parties' expressed intent; and in every case the remainder of this Agreement shall not be affected thereby and shall remain valid and enforceable, as if such affected provision were not contained herein. 8.7 Headings. Article and section headings are inserted herein for -------- convenience of reference only and in no way are to be construed to define, limit or affect the construction or interpretation of the terms of this Agreement. 8.8 Drafting Party. The provisions of this Agreement have been -------------- prepared, examined, negotiated and revised by each party hereto, and no implication shall be drawn and no provision shall be construed against either party by virtue of the purported identity of the drafter of this Agreement, or any portion thereof. 8.9 No Outside Representations. No representation, warranty, condition, -------------------------- promise, understanding or agreement of any kind with respect to the subject matter hereof has been made by either party, nor shall any such be relied upon by either party, except those contained herein. There were no inducements to enter into this Agreement, except for what is expressly set forth in this Agreement. 8.10 Entire Agreement. This Agreement, together with EMPLOYER's ---------------- standard Proprietary Information and Inventions Agreement, constitutes the entire agreement between the parties pertaining to the subject matter hereof and completely supersedes all prior or contemporaneous agreements, understandings, arrangements, commitments, negotiations and 6 discussions of the parties, whether oral or written (all of which shall have no substantive significance or evidentiary effect). Each party acknowledges, represents and warrants that he or it has not relied on any representation, agreement, understanding, arrangement or commitment which has not been expressly set forth in this Agreement. Each party acknowledges, represents and warrants that this Agreement is fully integrated and not in need of parol evidence in order to reflect the intentions of the parties. The parties specifically intend that the literal words of this Agreement shall, alone, conclusively determine all questions concerning the parties' intent. IN WITNESS WHEREOF, the parties have executed and delivered this Employment Agreement in San Diego, California as of the date first written above. SYNBIOTICS CORPORATION By: /s/ Michael K. Green ------------------------------------------- Michael K. Green, Vice President, Chief Financial Officer, and Secretary /s/ Robert A. Behrens ----------------------------------------------- ROBERT A. BEHRENS Attachment: Exhibit A (Arbitration Procedures) 7 EXHIBIT A --------- ARBITRATION PROCEDURES ---------------------- 1. Agreement to Arbitrate ---------------------- In the event that there is any dispute relating to, regarding or arising in connection with EMPLOYEE's employment with EMPLOYER which cannot be resolved through direct discussion or mediation, regardless of the kind or type of dispute (excluding claims for workers' compensation, unemployment insurance or any matters within the jurisdiction of the California Labor Commissioner), all such disputes shall be submitted exclusively to final and binding arbitration pursuant to the provisions of the Federal Arbitration Act or, if inapplicable, the Uniform Arbitration Act (California Code of Civil Procedure (S) 1280 et seq.), upon request submitted in writing to the President within one year from the date the dispute first arose, or within one year of the date of termination of employment, whichever occurs first. This procedure shall be the exclusive method for resolving all claims relating to the termination of EMPLOYEE's employment, including but not limited to any alleged violations of federal, state and/or local statutes; all claims based upon any purported breach of duty arising in contract or tort, including but not limited to breach of contract, breach of the covenant of good faith and fair dealing, or violation of public policy; and any other alleged violation of an employee's statutory, contractual or common law rights. Any failure to request arbitration in accordance with the foregoing provisions shall constitute a waiver of all rights to raise or present any claims in any form, in any forum, arising out of any dispute that was subject to arbitration. 2. Selection of Arbitrator ----------------------- All disputes subject to arbitration will be resolved by a single arbitrator selected from a list provided by the California Mediation and Conciliation Service from its Employment Arbitration Panel. The parties shall select the arbitrator by alternately striking names from the list, and the last name remaining on the list shall be the arbitrator selected to resolve the dispute. The arbitrator must be selected within thirty (30) days of receipt of the written request for arbitration. The arbitration hearing shall be held in San Diego, California, at a neutral location selected by the parties or, in the event the parties are unable to agree, at a location designated by the arbitrator. 3. Authority of Arbitrator ----------------------- The arbitrator shall only be authorized to exercise the powers specifically enumerated by this procedure and to decide the dispute in accordance with governing principles of law and equity. The arbitrator shall have no authority to modify the powers granted by the terms of this A-1 procedure or to modify the terms of the employee handbook, except as required by law. The arbitrator shall have the authority to rule on motions by the parties, to issue protective orders upon motion of any party or third party, and to determine only the disputes submitted by the parties based upon the grounds presented. Any dispute or argument not presented by the parties is outside the scope of the arbitrator's jurisdiction and any award invoking such disputes or arguments is subject to a motion to vacate; provided, however, the arbitrator shall have exclusive authority to resolve any dispute relating to the validity, interpretation and enforcement of these arbitration procedures. 4. Discovery --------- The arbitrator shall have the power, in addition to determining the merits of the dispute submitted, to permit discovery regarding the subject matter of arbitration and to enforce the rights, remedies, procedures, duties, liabilities and obligations of discovery by the imposition of the same terms, conditions, consequences, liabilities, sanctions and penalties as may be imposed in like circumstances by a Superior Court under the California Code of Civil Procedure. All discovery must be completed thirty (30) days prior to the date set for the arbitration hearing. 5. Hearing Procedure ----------------- The issue(s) submitted to the arbitrator must be set forth in the request for arbitration. The arbitrator shall have no authority to frame the statement of the issue(s). Unless otherwise agreed by the parties, the arbitration hearing shall be governed by the formal rules of evidence contained in the California Evidence Code. The parties shall mutually agree on the number of days required for hearing. The hearing shall be recorded and transcribed verbatim by a certified shorthand reporter. Each party shall bear its own costs with respect to a copy of the transcript of the hearing; however, the parties shall each be responsible for one-half the cost of the court reporter's fee and the arbitrator's copy of the hearing transcript. 6. Post-Hearing Procedure ---------------------- Each party shall have the right to present closing argument at the conclusion of all sworn testimony and, in addition to or in lieu of closing argument, either party shall have the right to submit post-hearing briefs. The due date and procedure for exchanging post-hearing briefs shall be mutually agreed upon by the parties or as directed by the arbitrator. 7. Opinion and Award ----------------- The arbitrator shall issue a written opinion and award within sixty (60) days of closing arguments or the receipt of post-hearing briefs, whichever is later. The arbitration award and opinion shall be signed and dated by the arbitrator and shall decide all issues submitted and set forth the legal principles supporting each aspect of the opinion and award. The arbitrator shall only be permitted to award those remedies in law or equity which are requested by the parties A-2 and which are supported by the credible, relevant evidence. The arbitrator shall have no authority to award punitive or exemplary damages under any circumstances or for any reason. 8. Fees and Costs -------------- Each party shall be responsible for its own attorney's fees, except as provided by law, and for all costs associated with discovery unless otherwise ordered by the arbitrator. Each party shall also be responsible for one-half of the arbitrator's fee and one-half of any costs associated with the facilities for the arbitration hearing. 9. Severability ------------ In the event that any provision of this procedure is determined by the arbitrator or by a court of competent jurisdiction to be illegal, invalid, or unenforceable to any extent, such term or provision shall be enforced to the extent permissible under law and all remaining terms and provisions hereof shall continue in full force and effect. A-3 EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1998 AND THE RELATED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME AND OF CASH FLOWS FOR THE THREE MONTHS THEN ENDED INCLUDED ELSEWHERE IN THIS FORM 10-QSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 3,084 2,980 5,962 110 4,549 17,189 5,159 3,915 45,257 6,699 7,306 2,774 0 37,082 (8,604) 45,257 8,801 8,932 4,046 7,397 0 0 315 1,220 530 690 0 0 0 690 .08 .07
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