-----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, VlPRx8tnBo+MZ+AMoJdL2WAq1Tw8MJ6lX00aRtwGafE12v5ic7D0u5zARvPvTNPT C55DWwaXyqfnANs3gMbToQ== 0001017062-98-002285.txt : 19981118 0001017062-98-002285.hdr.sgml : 19981118 ACCESSION NUMBER: 0001017062-98-002285 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 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: 98749906 BUSINESS ADDRESS: STREET 1: 11011 VIA FRONTERA CITY: SAN DIEGO STATE: CA ZIP: 92127 BUSINESS PHONE: 6194513771 10QSB 1 FORM 10QSB ================================================================================ 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 September 30, 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 October 31, 1998, 9,005,420 shares of Common Stock were outstanding. Transitional Small Business Disclosure Format: Yes [_] No [X] ================================================================================ SYNBIOTICS CORPORATION INDEX Page ---- Part I - Financial Information Item 1. Financial Statements Condensed Consolidated Statement of Operations and Comprehensive Income - Three and nine months ended September 30, 1998 and 1997 2 Condensed Consolidated Balance Sheet - September 30, 1998 and December 31, 1997 3 Condensed Consolidated Statement of Cash Flows - Nine months ended September 30, 1998 and 1997 4 Notes to Condensed Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis or Plan of Operation 8 Part II - Other Information 15 -1- PART I. FINANCIAL INFORMATION ----------------------------- Item 1. Financial Statements -------------------- Synbiotics Corporation Condensed Consolidated Statement of Operations and Comprehensive Income (unaudited) - --------------------------------------------------------------------------------
Three Months Ended Nine Months Ended September 30, September 30, ----------------------- ------------------------- 1998 1997 1998 1997 ---------- ---------- ----------- ----------- Net sales $6,735,000 $6,146,000 $24,472,000 $17,929,000 Cost of sales 3,820,000 3,387,000 11,725,000 9,648,000 ---------- ---------- ----------- ----------- Gross Profit 2,915,000 2,759,000 12,747,000 8,281,000 ---------- ---------- ----------- ----------- Operating expenses: Research and development 590,000 541,000 1,703,000 1,154,000 Selling and marketing 1,428,000 1,058,000 4,591,000 3,382,000 General and administrative 1,546,000 774,000 3,665,000 2,138,000 Patent litigation settlement 4,601,000 ---------- ---------- ----------- ----------- 3,564,000 2,373,000 14,560,000 6,674,000 ---------- ---------- ----------- ----------- (Loss) income from operations (649,000) 386,000 (1,813,000) 1,607,000 Other income (expense): License fees and other 89,000 79,000 229,000 234,000 Interest, net (358,000) (324,000) (873,000) (218,000) ---------- ---------- ----------- ----------- (Loss) income before income taxes (918,000) 141,000 (2,457,000) 1,623,000 (Benefit from) provision for income taxes (175,000) 261,000 (792,000) 898,000 ---------- ---------- ----------- ----------- Net (loss) income (743,000) (120,000) (1,665,000) 725,000 Cumulative translation adjustment 616,000 (753,000) 556,000 (753,000) ---------- ---------- ----------- ----------- Comprehensive (loss) $ (127,000) $ (873,000) $(1,109,000) $ (28,000) ========== ========== =========== =========== Basic net (loss) income per share $ (.09) $ (.02) $ (.21) $ .09 ========== ========== =========== =========== Diluted net (loss) income per share $ (.09) $ (.02) $ (.21) $ .09 ========== ========== =========== ===========
See accompanying notes to condensed consolidated financial statements. -2- Item 1. Financial Statements (continued) -------------------- Synbiotics Corporation Condensed Consolidated Balance Sheet - --------------------------------------------------------------------------------
September 30, December 31, 1998 1997 ------------- ------------ (unaudited) (audited) Assets Current assets: Cash and equivalents $ 4,507,000 $ 2,190,000 Securities available for sale 1,615,000 3,394,000 Accounts receivable 4,097,000 4,396,000 Inventories 5,490,000 5,187,000 Deferred tax assets 218,000 303,000 Other current assets 732,000 359,000 ------------ ----------- Total current assets 16,659,000 15,829,000 Property and equipment, net 1,614,000 1,102,000 Goodwill 14,028,000 11,542,000 Deferred tax assets 7,356,000 6,417,000 Deferred debt issuance costs 701,000 905,000 Other assets 5,644,000 5,832,000 ------------ ----------- $ 46,002,000 $41,627,000 ============ =========== Liabilities and Shareholders' Equity Current liabilities: Accounts payable and accrued expenses $ 4,889,000 $ 3,546,000 Current portion of long-term debt 2,000,000 1,000,000 Income taxes payable 25,000 ------------ ----------- Total current liabilities 6,889,000 4,571,000 ------------ ----------- Long-term debt 6,920,000 7,543,000 Other liabilities 1,341,000 ------------ ----------- 8,261,000 7,543,000 ------------ ----------- Mandatorily redeemable common stock 2,847,000 2,756,000 ------------ ----------- Non-mandatorily redeemable common stock and other shareholders' equity: Common stock, no par value, 24,800,000 shares authorized, 9,005,000 and 7,426,000 shares issued and outstanding at September 30, 1998 and December 31, 1997, respectively 38,123,000 35,659,000 Common stock warrants 1,003,000 1,003,000 Cumulative translation adjustment 405,000 (151,000) Accumulated deficit (11,526,000) (9,754,000) ------------ ----------- Total non-mandatorily redeemable common stock and other shareholders' equity 28,005,000 26,757,000 ------------ ----------- $ 46,002,000 $41,627,000 ============ ===========
See accompanying notes to condensed consolidated financial statements. -3- Item 1. Financial Statements (continued) -------------------- Synbiotics Corporation Condensed Consolidated Statement of Cash Flows (unaudited) - --------------------------------------------------------------------------------
Nine Months Ended September 30, ------------------------- 1998 1997 ----------- ------------ Cash flows from operating activities: Net (loss) income $(1,665,000) $ 725,000 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Depreciation and amortization 1,428,000 1,056,000 Changes in assets and liabilities: Accounts receivable 299,000 (874,000) Inventories (303,000) 1,811,000 Deferred taxes (854,000) 463,000 Other assets (301,000) 690,000 Accounts payable and accrued expenses 1,343,000 154,000 Income taxes payable (25,000) 274,000 Other liabilities 1,341,000 (650,000) ----------- ------------ Net cash provided by (used for) operating activities 1,263,000 3,649,000 ----------- ------------ Cash flows from investing activities: Acquisition of property and equipment (357,000) (224,000) Investment in securities available for sale (188,000) Proceeds from sale of securities available for sale 1,779,000 Acquisition of Prisma Acquisition Corp. (133,000) Acquisition of Synbiotics Europe SAS (10,659,000) ----------- ------------ Net cash provided by (used for) investing activities 1,289,000 (11,071,000) ----------- ------------ Cash flows from financing activities: Proceeds from issuance of long-term debt, net 133,000 11,493,000 Payments of long-term debt (883,000) (1,743,000) Debt issuance costs (949,000) Mandatorily redeemable stock issuance costs (16,000) (493,000) Proceeds from issuance of common stock, net (25,000) (151,000) ----------- ------------ Net cash provided by (used for) financing activities (791,000) 8,157,000 ----------- ------------ Net increase in cash and equivalents 1,761,000 735,000 Effect of exchange rate changes on cash 556,000 (753,000) Cash and equivalents - beginning of year 2,190,000 3,050,000 ----------- ------------ Cash and equivalents - end of period $ 4,507,000 $ 3,032,000 =========== ============
See accompanying notes to condensed consolidated financial statements. -4- 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 September 30, 1998 and the consolidated statements of operations and comprehensive income and of cash flows for the three and nine month periods ended September 30, 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 ("SBIO-E"). 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 - Patent Litigation Settlement: In September 1997, Barnes-Jewish Hospital of St. Louis (the "Hospital") filed a lawsuit against the Company claiming that the Company infringed a patent owned by the Hospital which covers the Company's canine heartworm diagnostic products. On July 28, 1998, the Company entered into a settlement agreement with the Hospital calling for the Company to pay the Hospital or its affiliates $1,600,000 in cash, 333,000 shares of the Company's common stock, and undisclosed future payments and royalties. The Company recorded a one-time pre- tax charge of approximately $3,922,000 in the quarter ended June 30, 1998, and reclassified $463,000 and $679,000 of legal expenses related to the patent litigation during the three and six months ended June 30, 1998, respectively, from general and administrative expenses. $1,000,000, representing the common stock portion of the settlement is considered a non-cash financing activity for purposes of the statement of cash flows. Note 3 - 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. -5- Item 1. Financial Statements (continued) -------------------- Synbiotics Corporation Notes to Condensed Consolidated Financial Statements (unaudited) - -------------------------------------------------------------------------------- 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 $2,848,000 which is being amortized over an estimated useful life of 15 years utilizing the straight-line method. $2,499,000, representing the convertible debt, common stock and common stock option portion of the purchase price and liabilities assumed, is considered a non-cash financing activity for purposes of the statement of cash flows. Note 4 - Securities Available for Sale: Included in current assets are securities available for sale which consist primarily of short-term commercial paper. Note 5 - Inventories: Inventories consist of the following:
September 30, December 31, 1998 1997 ------------- ------------ Raw materials $2,921,000 $2,639,000 Work in process 778,000 1,235,000 Finished goods 1,791,000 1,313,000 ---------- ---------- $5,490,000 $5,187,000 ========== ==========
-6- Item 1. Financial Statements (continued) -------------------- Synbiotics Corporation Notes to Condensed Consolidated Financial Statements (unaudited) - -------------------------------------------------------------------------------- Note 6 - 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 Nine Months Ended September 30, September 30, ------------------------ ------------------------- 1998 1997 1998 1997 ----------- ----------- ----------- ----------- (unaudited) (unaudited) (unaudited) (unaudited) Net (loss) income used: Net (loss) income $(743,000) $(120,000) $(1,665,000) $ 725,000 Less accretion of mandatorily redeemable common stock (37,000) (36,000) (107,000) (36,000) --------- --------- ----------- --------- Net (loss) income used in computing basic and diluted net (loss) income per share $(780,000) $(156,000) $(1,772,000) $ 689,000 ========= ========= =========== ========= Shares used: Weighted average common shares outstanding used in computing basic net (loss) income per share 8,838,000 7,790,000 8,632,000 7,591,000 Weighted average options and warrants to purchase common stock as determined by application of the treasury method 372,000 --------- --------- ----------- --------- Shares used in computing diluted net (loss) income per share 8,838,000 7,790,000 8,632,000 7,963,000 ========= ========= =========== =========
Weighted average options and warrants to purchase common stock as determined by the application of the treasury method and weighted average shares of common stock issuable upon assumed conversion of debt totalling 722,000 shares, 373,000 shares and 672,000 shares have been excluded from the shares used in computing diluted net (loss) income per share for the three months ended September 30, 1998 and 1997 and the nine months ended September 30, 1998, respectively, as their effect is anti-dilutive. In addition, warrants to purchase 284,000 shares of common stock at $4.54 per share have been excluded from the shares used in computing diluted net (loss) income per share for the three and nine months ended September 30, 1998 and 1997 as their exercise price is higher than the weighted average market price for those periods, and in addition their effect is anti-dilutive for the three months ended September 30, 1998 and 1997 and for the nine months ended September 30, 1998. -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 Quarterly Report on Form 10-QSB contains both historical financial information and forward-looking statements. Synbiotics does not provide forecasts of future financial performance. While management is optimistic about the Company's long-term prospects, the historical financial information may not be indicative of future financial performance. In fact, future financial performance may be materially different than the historical financial information presented herein. Moreover, the forward-looking statements about future business or future results of operations are subject to significant uncertainties and risks, which could cause actual future results to differ materially from what is suggested by the forward-looking information. The following risk factors should be considered in evaluating the Company's forward-looking statements: Patent Litigation Involving the Company's Canine Heartworm Diagnostic Products - ------------------------------------------------------------------------------ In October 1997, Barnes-Jewish Hospital of St. Louis (the "Hospital") filed a lawsuit against the Company claiming that the Company infringed a patent owned by the Hospital which covers the Company's canine heartworm diagnostic products. On July 28, 1998, the Company entered into a settlement agreement with the Hospital calling for the Company to pay the Hospital or its affiliates $1,600,000 in cash, 333,000 shares of the Company's common stock, and undisclosed future payments and royalties. The Company recorded a one-time pre- tax charge of approximately $3,922,000 in the quarter ended June 30, 1998. The charge will be materially adverse to the Company's results of operations for the year ending December 31, 1998. 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. 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. -8- History of Operating Losses; Accumulated Deficit - ------------------------------------------------ Although the Company's operations were profitable for the years ended December 31, 1997 and 1996, the Company has had a history of losses. Due to the settlement with the Hospital, the Company will report a loss for 1998. Synbiotics has incurred a consolidated accumulated deficit of $11,526,000 at September 30, 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 now believes it has adequate levels of these bulk fluids to meet its manufacturing requirements through the first quarter of 1999. 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 second quarter of 1999, 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. 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. -9- 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. Seasonality - ----------- Synbiotics has experienced some seasonality in its business, with sales higher in the first half of the year, the time period in which distributors purchase canine heartworm diagnostic products to sell to veterinarians for the heartworm season, than in the second half of the year. 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. -10- 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. In 1997, the Hospital filed a lawsuit asserting that the Company's key canine heartworm diagnostic tests infringe its patent. The lawsuit was settled in July 1998 (see above). There can be no assurance that other third parties will not assert other infringement claims against Synbiotics in the future or that any such assertions will not result in costly litigation or require Synbiotics to obtain a license to intellectual property rights of such parties. There can be no assurance that any such licenses would be available on terms acceptable to Synbiotics, if at all. Furthermore, parties making such claims may be able to obtain injunctive or other equitable relief that could effectively block Synbiotics' ability to further develop, or commercialize, its products in the United States and abroad. Such claims could 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, 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 is 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. -11- 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 third quarter of 1998 increased by $589,000 or 10% over the third quarter of 1997. The increase in net sales comprises an increase in diagnostic product sales of $127,000 or 3% and an increase in vaccine product sales of $462,000 or 26%. The increased diagnostic product sales were due to a 33% increase in companion animal diagnostic sales, resulting primarily from the introduction of the Company's WITNESS(R) products in the U.S., offset by a decrease in large animal diagnostics. This decrease comprises a decrease in sales of tuberculin diagnostic products resulting from contract renegotiations with the USDA, and from initial distributor loading in the third quarter of 1997 as a result of the SBIO-E acquisition. The increased vaccine sales comprises an increase of 36% in sales of vaccines to private label partners and an increase of 117% in sales of bulk feline leukemia vaccine (related to the timing of shipments as requested by OEM customers), offset by a 54% decrease in sales of other vaccine products resulting from 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 ethical distributors and focused its efforts on selling vaccines to private label partners for resale to the over-the-counter market and through catalogs. Net sales for the nine months ended September 30, 1998 increased by $6,543,000 or 36% over the nine months ended September 30, 1997. The increase in net sales is due to $3,821,000 in sales of diagnostic products acquired in conjunction with the July 1997 acquisition of SBIO-E, an increase in the sales of non-SBIO-E diagnostic products of $2,035,000 and an increase in vaccine product sales of $687,000. The increase in the sales of non-SBIO-E diagnostic products is due to an increase in canine heartworm diagnostics sales of 25% and an increase in feline diagnostics sales of 30%. The increased canine heartworm diagnostics sales were due to products acquired in conjunction with the acquisition of SBIO- E, the introduction of the Company's WITNESS(R) product in the U.S. and further increases in DiroCHEK(R) and ICT Gold(TM). 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. The increased vaccine sales comprises an increase of 42% in sales of vaccines to private label partners and an increase of 35% in sales of bulk feline leukemia vaccine (related to the timing of shipments as requested by OEM customers), offset by a 42% decrease in sales of other vaccine products resulting from the phase-out of sales of most Synbiotics-label vaccines. -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 now believes it has adequate levels of these bulk fluids to meet its manufacturing requirements through the first quarter of 1999. 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 second quarter of 1999, will be materially adversely affected. The cost of sales as a percentage of net sales was 57% during the third quarter of 1998 compared to 55% during the third quarter of 1997 (i.e., gross margin decreased to 43% from 45%). The lower gross margin is due to the increased sales of bulk vaccine to an OEM distributor which have no margin; instead, Company receives a royalty on the sales of the OEM distributor's product. The gross margin, exclusive of the no margin bulk vaccine sales, would have been 48% and 47% for the third quarter of 1998 and 1997, respectively. The cost of sales as a percentage of net sales was 48% during the nine months ended September 30, 1998 compared to 54% during the nine months ended September 30, 1997 (i.e., gross margin increased to 52% from 46%). The higher gross margin is a direct result of two factors: i) the fact that a high percentage 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 nine months end September 30, 1998 had a 50% gross margin as compared to 43% during the nine months ended September 30, 1997. The increased margin on 1998 domestic sales is due primarily to increases in the Company's average selling prices as a result of the non-recurrence of the severe price competition encountered during the second quarter of 1997, the non-recurrence of distributor promotional programs and the general price increase in January 1998. 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 third quarter of 1998 increased by $49,000 or 9% over the third quarter of 1997, and increased during the nine months ended September 30, 1998 by $549,000 or 48% over the nine months ended September 30, 1997. The increases are primarily due to the acquisitions of SBIO-E and Prisma, which have their own research and development groups, as well as increased contracted research and development expenses. Research and development expenses as a percentage of net sales were 9% during the third quarter of 1998 and 1997, and were 7% and 6% during the nine months ended September 30, 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 third quarter of 1998 increased by $370,000 or 35% over the third quarter of 1997, and increased during the nine months ended September 30, 1998 by $1,209,000 or 36% over the nine months ended September 30, 1997. The increases are 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 21% and 17% during the third quarter of 1998 and 1997, respectively, and were 19% during the nine months ended September 30, 1998 and 1997. General and administrative expenses during the third quarter of 1998 increased by $627,000 or 81% over the third quarter of 1997, and increased during the nine months ended September 30, 1998 by $1,382,000 or 65% over the nine months ended September 30, 1997. The increases are due primarily to amortization of goodwill and additional payroll costs related to the acquisitions of SBIO-E and Prisma, as well as increased legal expenses. General and administrative expenses as a percentage of net sales were 21% and 13% during the third quarter of 1998 and 1997, respectively, and were 14% and 12% during the nine months ended September 30, 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. -13- On July 28, 1998, the Company entered into a settlement agreement with the Hospital calling for the Company to pay the Hospital or its affiliates $1,600,000 in cash, 333,000 shares of the Company's common stock, and undisclosed future payments and royalties. The Company recorded a one-time pre- tax charge of approximately $3,922,000 in the quarter ended June 30, 1998, and reclassified $463,000 and $679,000 of legal expenses related to the patent litigation during the three and six months ended June 30, 1998, respectively, from general and administrative expenses. Other income (expense) during the third quarter of 1998 decreased by $24,000 from the third quarter of 1997, and decreased during the nine months ended September 30, 1998 by $660,000 from the nine months ended September 30, 1997, due primarily to interest expense related to the debt incurred in conjunction with the acquisition of SBIO-E. The Company recognized a benefit from income taxes of $792,000 during the nine months ended September 30, 1998, as compared to a provision for income taxes of $898,000 for the nine months ended September 30, 1997. The benefit from income taxes in 1998 is a result of a deferred tax asset related to the patent litigation settlement , offset by 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. 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 $9,770,000 at September 30, 1998, are sufficient to meet its current working capital needs, pay the patent litigation settlement 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 first half of the year, 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 second quarter of 1999. 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. However, the Company has also determined that its current information system is inadequate to meet its growth goals and objectives. The Company is currently in the process of evaluating -14- enterprise resource planning systems, and expects to make its final selection in the fourth quarter of 1998. The capital expenditure related to the new system will be material to the Company's financial condition in 1999. 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. The Company is currently in the process of determining the year 2000 compliance status of its major suppliers and customers. The Company has sent letters requesting the status of the suppliers and vendors year 2000 compliance, and has yet to receive any responses. In the event that these suppliers and customers fail to become year 2000 compliant, there could be a material adverse impact on the Company's results of operations and financial condition beginning in 2000. PART II. OTHER INFORMATION --------------------------- Item 1. Legal Proceedings ----------------- None. Item 2. Changes in Securities --------------------- On August 4, 1998, the Company issued 333,333 shares of newly issued unregistered Synbiotics common stock to Barnes-Jewish Hospital Foundation as partial consideration for the settlement of a patent infringement lawsuit. The shares of common stock were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933; however, the shares were later registered for resale on a Registration Statement on Form S-3 which was declared effective on September 25, 1998. Item 3. Defaults Upon Senior Securities ------------------------------- None. Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- The Annual Meeting of Shareholders was held on July 30, 1998. The following matters were submitted to a vote, with the results indicated below:
(a) Election of directors: Broker Nominee For Against Abstain Withheld Non-votes ------- --- ------- ------- -------- --------- Patrick Owen Burns 7,623,841 n/a n/a 489,098 0 Kenneth M. Cohen 7,624,041 n/a n/a 488,898 0 James C. DeCesare 7,248,422 n/a n/a 864,517 0 Brenda D. Gavin, DVM 7,245,772 n/a n/a 867,167 0 M. Blake Ingle, Ph.D. 7,624,241 n/a n/a 488,698 0 Donald E. Phillips 7,622,141 n/a n/a 490,798 0
- -15- (b) Approval of the amendment of Article Fourth of the Company's Restated Articles of Incorporation (creation of "blank check" Preferred Stock"): For: 4,411,332 Against: 1,286,521 Abstain: 30,075 Broker Non-votes: 2,916,382 Item 5. Other Information ----------------- On September 8, 1998 Mr. Skip Klein was elected to the Board of Directors. Mr. Klein, 37, is a health care analyst for The Kaufmann Fund, which he joined in June of 1998. Previously, Mr. Klein was the portfolio manager of the T. Rowe Price Health Sciences Fund since its inception in 1995, and a health care analyst at T. Rowe Price since 1989. Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits -------- 3.1.1 Certificate of Amendment of Articles of Incorporation, filed August 4, 1998. 10.64.1 Waiver and First Amendment to $15,000,000 Credit Agreement Among the Registrant, the Banks Named Therein and Banque Paribas, as Agent, dated March 6, 1998. 10.70 Settlement Agreement, Stipulation to Settlement Order Under Seal, Release and License Between Barnes-Jewish Hospital and the Registrant, dated as of July 28, 1998./(1)/ 27 Financial Data Schedule (for electronic filing purposes only). ----------------------------- (1) 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 Securities Exchange Act of 1934, as amended. (b) Reports on Form 8-K ------------------- None. -16- SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SYNBIOTICS CORPORATION Date: November 13, 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) -17- EXHIBIT INDEX Exhibit No. Exhibit - ----------- ------- 3.1.1 Certificate of Amendment of Articles of Incorporation, filed August 4, 1998. 10.64.1 Waiver and First Amendment to $15,000,000 Credit Agreement Among the Registrant, the Banks Named Therein and Banque Paribas, as Agent, dated March 6, 1998. 10.70 Settlement Agreement, Stipulation to Settlement Order Under Seal, Release and License Between Barnes-Jewish Hospital and the Registrant, dated as of July 28, 1998./(1)/ 27 Financial Data Schedule (for electronic filing purposes only). ------------------------- (1) 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 Securities Exchange Act of 1934, as amended. EX-3.1.1 2 CERTIFICATE OF AMENDMENT OF ARTICLES OF INC. CERTIFICATE OF AMENDMENT Exhibit 3.1.1 OF ------------- ARTICLES OF INCORPORATION OF SYNBIOTICS CORPORATION Kenneth M. Cohen and Michael K. Green certify that: 1. They are the president and secretary, respectively, of Synbiotics Corporation, a California corporation. 2. Article FOURTH of the Articles of Incorporation of this corporation is amended in its entirety to read as follows: "FOURTH: The corporation is authorized to issue two classes of stock, to be designated, respectively, "Common Stock" and "Preferred Stock". The total number of shares which the corporation is authorized to issue is 49,800,000 shares. 24,800,000 shares shall be Common Stock and 25,000,000 shares shall be Preferred Stock. The Preferred Stock may be issued from time to time in one or more series. The Board of Directors is hereby authorized to fix or alter the dividend rights, dividend rate, conversion rights, voting rights, rights and terms of redemption (including sinking fund provisions), redemption price or prices, and the liquidation preferences of any wholly unissued series of Preferred Stock, and the number of shares constituting any such series and the designation thereof, or any of them; and to increase or decrease the number of shares of any series subsequent to the issuance of shares of that series, but not below the number of shares of such series then outstanding. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status that they had prior to the adoption of the resolution originally fixing the number of shares of such series." 3. The foregoing amendment and restatement of articles of incorporation has been duly approved by the Board of Directors. 4. The foregoing amendment of the Articles of Incorporation has been duly approved by the required vote of shareholders in accordance with Section 902 of the California Corporations Code. The current total number of outstanding shares of the corporation is 8,644,310 shares of Common Stock. (No shares of Series B Common Stock are outstanding). The number of shares voting in favor of the amendment equaled or exceeded the vote required. The percentage vote required was more than 50 percent of all outstanding shares. No shares of Preferred Stock are outstanding. -1- 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. DATED: July 30, 1998 /s/ Kenneth M. Cohen --------------------------- Kenneth M. Cohen, President /s/ Michael K. Green --------------------------- Michael K. Green, Secretary -2- EX-10.64.1 3 WAIVER AND FIRST AMENDMENT TO CREDIT AGREEMENT Exhibit 10.64.1 --------------- WAIVER AND FIRST AMENDMENT TO $15,000,000 CREDIT AGREEMENT AMONG SYNBIOTICS CORPORATION, THE BANKS NAMED THEREIN AND BANQUE PARIBAS, as Agent March 6, 1998 WAIVER AND FIRST AMENDMENT TO CREDIT AGREEMENT This Waiver and First Amendment to Credit Agreement (this "Agreement") is entered into as of March 6, 1998, by and among Synbiotics Corporation, a California corporation ("Synbiotics"), the banks referred to in the Credit Agreement (as defined below) (collectively, the "Banks") and Banque Paribas, as agent (the "Agent"). For all purposes of this Agreement, capitalized terms used herein shall have the respective meanings set forth in the Credit Agreement, dated as of July 9, 1997, among Synbiotics, the Banks and the Agent (the "Credit Agreement"). RECITALS -------- A. Synbiotics, Prisma Acquisition Corp., a Delaware corporation ("Prisma"), Robert A. Behrens and each of the stockholders of Prisma have entered into an Agreement and Plan of Reorganization, dated as of February 27, 1998, whereby Synbiotics and Prisma will combine into a single company through the statutory merger of Prisma with and into Synbiotics (the "Merger"). B. In anticipation of the Merger, Synbiotics and BioQuest Venture Leasing Partnership, L.P., a limited partnership organized under the laws of the State of Delaware (the "Holder") have entered into a Note Purchase Agreement, dated as of March 6, 1998 (the "Note Agreement") whereby Synbiotics has agreed to sell and issue to the Holder a $1,000,000 convertible promissory note (the "Note") in exchange for 482 shares of common stock of Prisma. C. The Agent and the Banks hereby desire to (i) waive any default under the Credit Agreement that may result from the transactions contemplated by the Merger and the Note Agreement and (ii) amend the Credit Agreement as set forth herein. AGREEMENT --------- NOW, THEREFORE, in consideration of the mutual promises and agreements contained in this Agreement and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree to the above Recitals and as follows: 1. Conditions Precedent. This Agreement shall not become effective -------------------- until, and shall become effective when, each of the following conditions precedent (the "Conditions Precedent") have been satisfied, to the Agent's and each of the Banks' satisfaction (the date such Conditions Precedent are satisfied, the "Closing Date"): 2 1.1. Confirmation of Covenants and Representations and Warranties. ------------------------------------------------------------ All of the covenants, representations, and warranties of Synbiotics contained in the Loan Documents (except as expressly modified by this Agreement) and this Agreement remain true and correct and enforceable in all respects and shall remain true and correct and enforceable in all respects after giving effect to this Agreement. 1.2. Closing Documents. Synbiotics shall have delivered the following ------------------ documentation to each Bank and the Agent: (i) in order to perfect t-he Agent's and Banks' security interest in certain assets of Prisma as a result of the Merger, copies of financing statements (Form UCC-1), naming the Agent as secured party with respect to such assets of Prisma, to be filed in the appropriate offices in New York; and (ii) in order to perfect the Agent's and Banks' security interest in certain intellectual property of Prisma as a result of the Merger, amendments to each of the Patent Security Agreement, Copyright Security Agreement and Trademark Security Agreement (in each case as defined in the Security Agreement), naming the Agent as secured party with respect to all patents, copyrights and trademarks of Prisma, to be filed in the Patent and Trademark Office and United States Copyright office, as appropriate. 2. Waiver. The Agent and the Banks hereby waive any default by ------ Synbiotics of the following provisions of the Credit Agreement that may result from the transactions contemplated by the Merger or the Note Agreement: 2.1. Indebtedness. Section 6.2 of the Credit Agreement solely to the ------------ extent such default would be caused by the incurrence of Indebtedness by Synbiotics under the Note or the assumption by Synbiotics of the Indebtedness of Prisma incurred prior to the Merger and as set forth on Schedule 2.1 hereto. 2.2. Liens. Section 6.3 of the Credit Agreement solely to the extent ------ such default would be caused by the assumption by Synbiotics of the Liens of Prisma incurred prior to the Merger and as set forth on Schedule, 2.2 hereto. 2.3. Restrictions on Fundamental Chancres. Section 6.4 of the Credit ------------------------------------ Agreement solely to the extent such default would be caused by the Merger or by the purchase of the common stock of Prisma pursuant to the Note Agreement. 2.4. Contingent Obligations. Section 6.6 of the Credit Agreement ---------------------- solely to the extent such default would be caused by the 3 assumption by Synbiotics of the Contingent Obligations of Prisma incurred prior to the Merger and as set forth on Schedule 2.4 hereto. 2.5. Investments. Section 6.8 of the Credit Agreement solely to the ----------- extent such default would be caused by the $125,000 bridge loan to Prisma or by the purchase of the common stock of Prisma in connection with the Merger or pursuant to the Note Agreement. 3. Amendments. ---------- 3.1 Definitions. The following shall be added as new definitions in ----------- alphabetical order to Section 1.1 of the.Credit Agreement: "Prisma Capital Expenditures" shall mean those Capital Expenditures made or incurred by the Borrower and its Subsidiaries in connection with the Prisma Operations. "Prisma EBITDA" shall mean, with respect to the Borrower, for any period, the Consolidated Net Income of the Borrower and its Subsidiaries that is directly attributable to the Borrower's Prisma Operations for such period, adjusted to add thereto (to the extent deducted from revenues in determining such Consolidated Net Income) (i) consolidated income tax expense, (ii) depreciation and amortization expense, (iii) interest expense and (iv) overhead expense not related to the Borrower's Prisma Operations, in each case determined for such period on a consolidated basis for the Borrower and its Subsidiaries in accordance with GAAP. "Prisma Operations" shall mean the design, manufacture, sale, distribution and related activities of veterinary diagnostic instrumentation and supporting products and services as acquired by the Borrower pursuant to that certain Agreement and Plan of Reorganization, dated as of February 27, 1998, among the Borrower, Prisma Acquisition Corp., a Delaware corporation ("Prisma"), Robert A. Behrens and each of the stockholders of Prisma referred to therein. 3.2 Information Covenants. The following shall be added as a new --------------------- Section 5.1(o) of the Credit Agreement: (o) Financial Statements for Prisma Operations. Within (i) 45 ------------------------------------------- days after the close of each quarterly accounting period in each fiscal year of the Borrower, the Prisma EBITDA and Prisma Capital Expenditures for such quarterly period and for the elapsed portion of the fiscal year ended with the last day of such quarterly period, and in each case setting forth comparative figures for the related periods in the prior fiscal year, (ii) 90 days after the close of each fiscal year of the Borrower, the 4 Prisma EBITDA and Prisma Capital Expenditures for such fiscal year, setting forth comparative figures for the preceding fiscal year and (iii) 30 days after the end of each monthly reporting period in each fiscal year of the Borrower, the Prisma EBITDA and Prisma Capital Expenditures for such monthly reporting period and for the elapsed portion of the fiscal year ended on the last day of such monthly reporting period, setting forth comparative figures for the related periods in the prior fiscal year. 3.3 Financial Covenants. ------------------- (a) Section 6.1(d) of the Credit Agreement shall be and is hereby amended by replacing the word "The" at the beginning thereof with the following words: Other than with respect to Prisma Capital Expenditures, which are covered in the following sentence, the (b) Section 6.1(d) of the Credit Agreement shall be and is hereby amended by adding the following words at the end thereof: The Borrower shall not make or incur (or commit to make or incur) and shall not permit any of its Subsidiaries to make or incur (or commit to make or incur) Prisma Capital Expenditures other than Prisma Capital Expenditures which do not exceed, in the aggregate, $250,000 in each of the Borrower's 1998 and 1999 fiscal years. (c) The following shall be added as a new Section 6.1(f) of the Credit Agreement: (f) Prisma EBITDA. The Borrower shall not permit Prisma ------------- EBITDA to be less than, during any fiscal period listed below, the amount set forth opposite such period:
Period Amount ------ ------ fiscal year 1998 -$950,000 fiscal year 1999 -$ 50,000 fiscal year 2000 $0
4 Representations, Warranties and Covenants of Synbiotics. In addition to ------------------------------------------------------- the representations and warranties-contained in the Loan Documents, Synbiotics makes the following undertakings, representations and warranties to the Agent and the Banks, which undertakings, representations and warranties shall survive the execution of this Agreement and shall continue in full force and effect until the full and final satisfaction and discharge of all obligations of Synbiotics under this Agreement and under the other 5 Loan Documents: 4.1 No Further Modifications. Synbiotics expressly acknowledges and ------------------------ agrees that neither the Agent nor any Bank shall have any obligation, and have made no commitment, to further waive, modify or amend the Credit Agreement or other Loan Documents, except as expressly set forth in this Agreement. Except as otherwise provided in this Agreement or pursuant to the Credit Agreement, Synbiotics will not sell, assign, pledge, exchange or dispose of any of the Collateral in any manner whatsoever or attempt to do any of the, foregoing or agree to any modification or cancellation of, or substitution for, any of the Collateral. 4.2 No Default. No Default or Event of Default under the Loan ---------- Documents has occurred and is continuing or will occur by giving (affect hereto and the execution of this Agreement will not result in any Default, Event of Default or in any breach of any of the terms, conditions or provisions of or constitute a default under any indenture, mortgage, deed of trust or other agreement or instrument to which Synbiotics is a party or by which it or its property is bound or any order of any court or administrative agency entered in any proceeding to which Synbiotics is a party or by which it or its property may be bound or to which it or its property may be subject. 5. Miscellaneous. ------------- 5.1. Notices, etc. Any and all notices, requests, certificates and ------------ other instruments executed and delivered after the execution and delivery of this Agreement may refer to the Credit Agreement without making specific reference to this Agreement but nevertheless all such references shall include this Agreement unless the context otherwise requires. 5.2. Headings. The descriptive headings of the various Sections or -------- parts of this Agreement are for convenience only and shall not affect the meaning or construction of any of the provisions hereof. 5.3. Governing Law. This Agreement shall be governed by and construed ------------- in accordance with the laws of California. 5.4. Counterparts. The execution hereof by the parties hereto shall ------------ constitute a contract between the parties hereto for the uses and purposes hereinabove set forth, and this Agreement may be executed in any number of counterparts, each executed counterpart constituting an original, but all together only one agreement. 6 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and the year first written. SYNBIOTICS CORPORATION By: /s/ Michael Green ---------------------------------- Name: Michael Green Title: VP Finance (signatures continued on next page) 7 BANQUE PARIBAS, as Agent and as a Bank By: /s/ Lynne A. Lueders ----------------------------- Name: Lynne A. Lueders Title: Director By: /s/ Matthew C. Bishop ----------------------------- Name: Matthew C. Bishop Title: Assistant Vice President (signatures continued on next page) 8 IMPERIAL BANK, as a Bank By: /s/ Leila Ghoroghchi ----------------------------- Name: Leila Ghoroghchi Title: Vice President 9 Schedule 2.1 Assumption of Indebtedness Demand Notes payable in the amount of approximately $140,900. Deferred Compensation in the amount of approximately $102,500. 10 Schedule 2.2 Assumption of Liens Prisma Acquisition Corp. acquired all the of Prisma Systems Corporation free and clear of all liens and encumbrances. Reference the attached May 2, 1997 Court Order. No leases were assumed, however the company is utilizing test equipment that Prisma Systems had leased from Hewlett-Packard. Hewlett Packard engaged a collection agency who would like us to enter into a payment plan for approximately $450/month for 30 months to pay the old lease balance of $13,603.55. Our preference is to offer $8,000 for an outright purchase of the equipment. Market value is $10,000 - 12,000. No formal offers have been made as yet a no contracts have been entered into by the company with regards to a new lease for the equipment. Prisma Acquisition Corp. hereby agrees that nay amounts actually paid to Hewlett-Packard in excess of $8,000 pursuant to a payment plan or purchase of the equipment shall be considered accounts payable as of the Closing Date. 11 Schedule 2.3 Assumption of Contingent Liabilities No leases were assumed, however the company is utilizing test equipment that Prisma Systems had leased from Hewlett-Packard. Hewlett Packard engaged a collection agency who would like us to enter into a payment plan for approximately $450/month for 30 months to pay the old lease balance of $13,603.55. Our preference is to offer $8,000 for an outright purchase of the equipment. Market value is $10,000 - 12,000. No formal offers have been made as yet a no contracts have been entered into by the company with regards to a new lease for the equipment. Prisma Acquisition Corp. hereby agrees that nay amounts actually paid to Hewlett-Packard in excess of $8,000 pursuant to a payment plan or purchase of the equipment shall be considered accounts payable as of the Closing Date. 12 EX-10.70 4 SETTLEMENT AGREEMENT Exhibit 10.70 ------------- SETTLEMENT AGREEMENT, STIPULATION TO SETTLEMENT ORDER UNDER SEAL, RELEASE AND LICENSE BETWEEN BARNES-JEWISH HOSPITAL AND SYNBIOTICS CORPORATION ------------------------------------------------- This Settlement Agreement, Stipulation to Settlement Order Under Seal, Release and License (the "Agreement") effective this 28th day of July, 1998 ("Effective Date") is made by and between Barnes-Jewish Hospital (hereinafter "the HOSPITAL") , a Missouri not-for-profit corporation with headquarters in St. Louis, Missouri, and Synbiotics Corporation (hereinafter "Synbiotics") , a California corporation with headquarters in San Diego, California. WHEREAS, the parties were in litigation and set to commence trial in early 1999; WHEREAS, the HOSPITAL and Synbiotics agreed to forego that trial in exchange for the terms of this Agreement; and WHEREAS, the parties desire to fully and finally settle all controversies between them by the terms of this Agreement. NOW, THEREFORE, the parties agree to the following terms and conditions: ARTICLE I - DEFINITIONS ----------------------- For purposes of this Agreement the words and phrases set forth in this Article shall have the following meanings: 1.1 As used in the Agreement, "HOSPITAL" and "Synbiotics" include and refer to each such party's respective parents, subsidiaries, affiliates and successors. 1.2 "LICENSED PATENTS" means [*]. 1.3 "LICENSED PRODUCTS" means any [*] diagnostic products within the allowed claims of the applicable LICENSED PATENTS, regardless of the end use of such product. The Parties agree that [*] are covered within the allowed claims of the applicable LICENSED PATENTS. - --------------- [*] 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 Securities Exchange Act of 1934, as amended. 1.4 "NET SELLING PRICE" means the price charged by Synbiotics to customers for the sale of LICENSED PRODUCTS, [*]. If any LICENSED PRODUCTS are transferred to a third party which is not a subsidiary or affiliate of Synbiotics in a barter transaction or for other than bona fide cash consideration, NET SELLING PRICE for such LICENSED PRODUCTS shall be the [*] of such product. 1.5 "SALE(S)" and forms of that term (e.g., "sold") used for purposes of this agreement means "the passing of title from the seller to the buyer for a price (U.C.C.(S) 2.401)" as set forth at U.C.C.(S) 2.106, from a person within the definition of Synbiotics to a person not within the definition of Synbiotics. 1.6 "NET SALES" means the total sales as calculated from the sales of [*] of each such sale, together with [*] as set forth in paragraph 1.4. 1.7 "CALENDAR YEAR" means January 1 to December 31. ARTICLE II - SUPERSEDURE ------------------------ 2.1 Upon the Effective Date, the terms and conditions of the Agreement shall supersede the terms and conditions of any other agreement between the parties, whether written or oral, relating to the subject matter of this Agreement, Omission of any terms of the July 9, 1998 Memorandum only indicates that such term is,not included as a part of this Agreement. Notwithstanding the above, while the parties intend and believe that the terms of this Agreement are consistent with the terms of the July 9, 1998 Memorandum, in the event of any perceived or determined inconsistency of any express terms therebetween, the terms and conditions of the Agreement shall govern. The terms of this Agreement are both Court Orders and contractual and not a mere recital. ARTICLE III - LICENSE GRANT --------------------------- 3.1 Grant of Rights. The HOSPITAL hereby grants to Synbiotics a [*] to make, use, import, market and sell LICENSED PRODUCTS under the LICENSED PATENTS, and (without either party expressing a position as to whether and to what extent such other products are actually covered within the allowed claims of the applicable LICENSED PATENTS) a [*], non-royalty bearing license [*] under the LICENSED PATENTS to make, use, import, market and sell any and all [*], other than LICENSED PRODUCTS. 2 The Hospital hereby grants to Synbiotics a most [*] which applies [*] hereunder. If the [*] by the Hospital now or at any time in the future [*] to any other commercial licensee of the LICENSED PATENTS, or any of them, is [*] then, on or after reaching the [*] of [*] Synbiotics may elect, at its option, to adopt prospectively the [*] (as calculated above) [*] to such [*]. The Hospital covenants to inform Synbiotics of all [*] to the extent they contain [*] would make it [*]. This [*] is not [*]. This [*] shall not apply to any [*] but shall apply to any [*]. 3.2 Patent Marking. A. Products Synbiotics shall, within a reasonable amount of time from the Effective Date of this Agreement, and until given written notice to the contrary by the HOSPITAL, mark all LICENSED PRODUCTS sold by Synbiotics under this Agreement in accordance with applicable laws and regulatory requirements, with (at a minimum) the following patent notice: [*] Synbiotics' markings need not, however, refer to any country in which the marked unit of product is not made or sold. It is agreed that patent markings on product inserts shall be sufficient. B. [*] for [*]. In the event that Synbiotics [*] LICENSED PRODUCTS as required by [*] of this section, Synbiotics shall [*]. ARTICLE IV - ROYALTIES ---------------------- 4.1 Settlement/License Issue Fee. A. [*] 1. At the Time of Closing and Future Payments Synbiotics shall pay to HOSPITAL a [*] settlement/license issue fee in the sum of [*] payable [*] as follows: (a) [*] at the [*] of this Agreement, (b) Synbiotics shall deliver to the HOSPITAL at Closing a [*] in a form to be agreed upon by the parties with a [*] in [*] on the [*] of the Agreement in the [*], and (c) Synbiotics shall deliver to the HOSPITAL at Closing a [*] in a form to be agreed upon by the parties with a [*] in [*] on the [*] of the Agreement in the [*]. 2. [*] for [*] Synbiotics agrees that, when its [*] with [*] is [*], Synbiotics shall [*] the Hospital a [*] in Synbiotics' [*], in [*] of the [*] under Paragraphs 4.1.A.1.b and 4.1.A.l.c, provided, that such [*] shall be [*], and the HOSPITAL shall 3 execute and deliver any [*]. Synbiotics shall give notice to the Hospital of the [*] of its [*] with [*] on or before the date of [*] thereof. The parties agree that the [*] shall be in the form attached. B. Stock 1. Issuance of Stock Synbiotics shall issue 333,333 [*] shares of [*] Synbiotics common stock (the "Shares") to the HOSPITAL on the fifth business day after the Effective Date, wherein: a. Synbiotics shall [*], covering the [*] the Hospital, or [*], to be [*] by the [*] within [*] of issuance of the Shares and [*] or (ii) the time when the [*]. Synbiotics shall take any action necessary to [*] such Shares [*] as requested by the Holders. Synbiotics shall be responsible for the [*]. Synbiotics shall [*] the holders against [*]. Synbiotics shall provide, [*], copies of the [*] as reasonably requested by the Holders in connection with [*] thereunder. Upon request of Holders, Synbiotics shall, in connection with [*] by the Holders, reasonably cooperate and [*] as necessary for the Holders to [*]. b. If Synbiotics common stock [*] a [*] per share on [*] the Effective Date, [*] the following number of [*] of Synbiotics common stock to the HOSPITAL: [*] where [*] [*] Synbiotics shall [*], [*], to be [*] by the [*] within [*] of issuance of the [*] and shall cause it to [*] (i) [*], or (ii) the time when the [*] may be [*]. Synbiotics shall take any action necessary to [*] such [*] as requested by the Holders. Synbiotics shall be responsible for the [*]. Synbiotics shall [*] against [*]. Synbiotics shall provide, [*], copies of the [*] as reasonably requested by the Holders in connection with [*] thereunder. Upon, request of Holders, Synbiotics shall, in connection with [*] by 4 the Holders, reasonably cooperate and [*] Holders to [*]. c. If the Hospital has disposed of any percentage of its original Shares before the [*] mark, the number of [*] issuable [*] shall be [*]. For purposes of this Paragraph 4.1.B.1 and Paragraph 4.1.B.2. transfers by the [*]; d. The parties agree that if for the [*] period as contemplated in Paragraph 4.1.B.l.b, wherein Synbiotics' common stock does [*] of [*] on [*], there is no day on which the [*] and the [*] by Nasdaq for such [*] is less than [*], then the [*] in Paragraph 4.1.B.l.b shall be [*] to a [*], subject only to the original Paragraph 4.1.B.l.b requirements, and of which the [*] then ended can count as the [*]; e. In the event that Synbiotics fails to cause the [*] Paragraph 4.1.B.l.a [*], then Synbiotics shall at the option of the Holders, pay to the Holders at the [*] the [*], in exchange for all of the Shares; and f. In the event that Synbiotics fail to cause the [*] within the Paragraph 4.1.B.i.b [*], then Synbiotics shall at the [*], in exchange for all of the [*], at the option of the Holders, pay to the Holders the amount [*]. 2. Buy-out or Merger of Synbiotics In the event that prior to the date occurring [*] following the date hereof Synbiotics common stock ceases to be included for quotation on the Nasdaq National Market (and is not then being listed on the New York Stock Exchange), then Synbiotics, at the time Synbiotics common stock ceases to be so included, shall at the option of the Holders [*], and no [*] shall be [*]. In the event that prior to the date occurring [*] following the date hereof, Synbiotics engages in a transaction pursuant to which the Synbiotics common stock is to be transformed into the right to receive anything but common stock which is included for quotation on the Nasdaq National Market or listed on the New York Stock Exchange, then immediately prior to such transaction Synbiotics or any other party to any such transaction shall at the option of the Holders [*], and no [*] shall be [*]. In the event that prior to the date occurring [*] following the date hereof, Synbiotics engages in a transaction pursuant to which the Synbiotics common stock is to be transformed into the right to receive common stock of another entity which is included for quotation on the Nasdaq 5 National Market or listed on the New York Stock Exchange, then immediately prior to such transaction Synbiotics shall at the option of a majority of interest of the Holders, either cause such other entity to execute an agreement to be bound by the provisions of this Paragraph 4.1.B. as to [*] before the [*] or [*]. If the Hospital has disposed of any percentage of its original shares before the [*], all references to [*] in this Paragraph 4.1.B.2. shall be [*]. 4.2. Royalties on Patent Rights. A. [*] Royalties on [*] [*] royalty shall be due on the [*] of Synbiotics' Net Sales of Licensed Products cumulatively from and after [*]. For avoidance of doubt: [*] shall be deemed only to include, for any purpose, Net Sales of LICENSED PRODUCTS made, used, imported, or sold [*], as the case may be, after the issuance of and prior to the expiration of the respective Licensed Patent applicable to such country. B. [*] Royalty on the [*] Synbiotics will pay an [*] royalty on the [*] of Synbiotics' [*]. C. [*] Royalty [*] Synbiotics will pay a [*] royalty on the [*] of Synbiotics' [*]. D. Royalties Payable [*] Royalties payable under Paragraphs 4.2.B and 4.2.C shall be reportable and payable [*] in the Calendar Year, provided that until royalties begin to accrue pursuant to Paragraph, 4.2.B., reports need only be made annually as provided below. [*]. (For example, if cumulative [*] are [*], royalties of [*] will be due). ARTICLE V - RECORDS, AUDITS, REPORTS AND PAYMENTS ------------------------------------------------- 5.1 Records. Synbiotics shall keep full, complete, and accurate books and records containing all particulars which may be reasonably necessary for determining the amounts payable to the HOSPITAL. Said books of account shall be kept at Synbiotics, principal place of business. For purposes of this Agreement, the date of SALE shall be the date Synbiotics takes revenue credit in its sales accounting records or upon actual receipt of the proceeds of said SALE, lease or barter, whichever, is earlier. 6 5.2 [*] Audit. Said books and records of Section 5.1 shall be made available for inspection, upon reasonable notice, [*] as of right during each CALENDAR YEAR said license is active and for [*] after its termination. Said books and records shall be maintained for at least [*] following the end of the CALENDAR YEAR to which they pertain, for inspection by an authorized accounting representative retained by the HOSPITAL at the HOSPITAL's expense, for the purpose of verifying Synbiotics, statements. In the event that Synbiotics, royalties calculated for any [*] reporting period are in [*], the cost of the audit and review will be borne by Synbiotics. Notwithstanding the foregoing provisions of this Paragraph 5.2. for any CALENDAR YEAR which contains a calendar quarter for which net sales of LICENSED PRODUCTS are [*] of the net sales of LICENSED PRODUCTS for the same quarter of the prior CALENDAR YEAR, the HOSPITAL may secure [*] additional audit initially at its own expense and according to all of the terms of this Paragraph 5.2. Such [*] does not replace or preclude the [*] set forth above. 5.3 Compliance Audit. Synbiotics shall provide to the HOSPITAL upon the HOSPITAL's request the following for the purpose of assuring compliance with the Agreement: A. One sample of each and every product made, used, offered for sale, sold or imported by Synbiotics related to detection of [*]; B. Reports on any tests or evaluations of the products described in 5.3.A when such tests or evaluations are relevant to the determination of whether such product is a LICENSED PRODUCT. 5.4 Reports. Concurrently with the royalties required by Article IV, except as set forth in 4.2.D, Synbiotics shall deliver true and accurate royalty and revenue reports to the HOSPITAL within [*] after the end of each calendar quarter, (provided however, that for Net Sales in 4.2.A, Synbiotics shall provide an [*] for each Calendar Year within 60 days of the end of the calendar year with all information set forth in 5.4.A through 5.4.D), giving such particulars of the business conducted by Synbiotics during the preceding quarter as follows: [*] E. For each CALENDAR YEAR, a certification from the Chief Financial Officer of Synbiotics that the above 5.4.A through 5.4.D fairly represent an accurate accounting. 7 F. Synbiotics represents and warrants that the attached Exhibit A is a fair and accurate accounting for all [*]. The supporting detail required for this Paragraph 5.4 (and, correspondingly, Paragraph 5.1) will not be required for the [*], provided, however, this will not reduce the audit rights of HOSPITAL. For Net Sales commencing on [*] and thereafter the details in Paragraph 5.4 shall be required. 5.5 [*] Payments. Royalties will be accumulated and reported on a [*] calendar basis. Payment shall be made within [*] following the close of each [*] calendar period. 5.6 Currency. All royalties and other payments payable by Synbiotics hereunder shall be paid in United States Dollars. if transfer restrictions exist or; are imposed which prevent such payments in United States Dollars, the parties agree to cooperate to procure whatever licenses or permits are required to obtain the waiver of such restrictions or otherwise to facilitate the transfer of such dollars. 5.7 Late Payments A late charge at the [*] shall accrue on the outstanding balance of any payment under this Agreement for the period that payment is due until the time payment is actually received. ARTICLE VI - PATENT INFRINGEMENT -------------------------------- 6.1 Synbiotics agrees to notify the HOSPITAL promptly of each infringement of one or more LICENSED PATENTS of which Synbiotics is or becomes aware. In such event, Synbiotics shall cooperate in all respects if the HOSPITAL decides to pursue litigation or otherwise take action, but the HOSPITAL shall reimburse Synbiotics for all personnel and other costs reasonably incurred in, and as requested by the Hospital, in providing such cooperation. The HOSPITAL retains sole discretion whether to take action or institute any litigation. ARTICLE VII - REPRESENTATIONS AND WARRANTIES -------------------------------------------- 7.1 Authority. Each party represents and warrants that it has the right and authority to enter into this Agreement, including but not limited to the fact that it has sufficient Board Authorization to do so. The persons undersigned represent that they are authorized to bind the party on whose behalf they are executing this agreement. 8 7.2 Conflicts. Each party represents and warrants that the making of this Agreement does not violate any separate agreement it has with any other person or entity. 7.3 Exception. NOTWITHSTANDING ANY PROVISIONS OF THIS AGREEMENT, THE PARTIES DO NOT WARRANT OR REPRESENT THAT ANYTHING MADE, USED, SOLD OR OTHERWISE DISPOSED OF UNDER ANY LICENSE GRANTED IN THIS AGREEMENT OR ANY METHOD(S) PRACTICED UNDER ANY LICENSE GRANTED IN THIS AGREEMENT ARE OR WILL BE FREE FROM INFRINGEMENT OF ANY PATENTS OR OTHER PROPRIETARY RIGHTS OF THIRD PARTIES, NOR WARRANTS THE VALIDITY OR THE SCOPE OF PATENTS. 7.4 Disclaimer. THE HOSPITAL MAKES NO REPRESENTATIONS AND EXTENDS NO WARRANTIES OF ANY KIND, EITHER EXPRESS OR IMPLIED. THERE ARE NO EXPRESS OR IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS OF LICENSED PRODUCTS FOR A PARTICULAR PURPOSE, AND SUCH REPRESENTATIONS AND WARRANTIES ARE EXPRESSLY DISCLAIMED. ARTICLE VIII - [*] ------------------ 8.1 [*] [*] shall [*], defend, and hold harmless the [*] and its directors, officers, and employees (collectively [*]), against any liability, damage or cost, fines, penalties, loss or expense (including, without limitation attorney?s fees and court costs), incurred by or imposed upon [*] in connection with any claims, suits, actions, demands, or judgments brought against an [*] arising out of [*] ARTICLE IX - CONFIDENTIALITY ---------------------------- 9.1 General. Each party agrees to keep secret [*] the confidential information provided by the other. It is the obligation of the party seeking a confidential status of information to designate such information as confidential by stamping or marking each piece of paper "confidential" or otherwise informing the receiving party, in writing, that the particular information is "confidential". The parties will make all efforts possible to have this Agreement filed under SEAL by the Order of the Court. In any event, this Agreement, the terms of this Agreement and the July 9, 1998 Memorandum constitute Confidential Information of each of the parties. Any information related to the LICENSED PATENTS provided to Synbiotics by the HOSPITAL under this Agreement shall be deemed "Confidential Information. 11 Each party shall not use 9 any Confidential Information of the other party for any purpose other than for the purposes of this Agreement. 9.2 Exceptions. Notwithstanding the foregoing, the confidentiality obligations herein shall not apply to any Confidential Information received by a party ("Receiving Party") which falls into any of the following categories: A. Confidential Information of the HOSPITAL which Synbiotics needs to disclose to third parties as necessary for making, using, offering for sale, selling and importing LICENSED PRODUCTS, Any such disclosure shall be pursuant to confidentiality obligations obtained from the third party, such confidentiality obligations being acceptable to the HOSPITAL and obtained prior to any disclosure. B. The HOSPITAL may disclose this Agreement as necessary for it to comply with existing provisions and obligations, including but not limited to most favored nations provisions, in its existing license agreements for the LICENSED PATENTS. C. Synbiotics may disclose portions of this Agreement to the extent strictly necessary for it to comply with its reporting obligations as a public company. D. Either party may disclose portions of this Agreement as necessary for either party to comply with a valid Court Order (provided that the party requested to disclose shall give the nondisclosing party as much notice as practicable of the potential court order so as to allow it the opportunity to resist, in its own or the disclosing party's name, if necessary, the imposition of the order). E. Information which becomes generally available to the public through no breach of this Agreement or third party confidentiality obligations which may arise consistent with this Agreement; F. Information which is published or disclosed consistent with the terms of this Agreement by a party, its employees, or agents to the general public (including, but not limited to, publication in trade or academic journals, or similar events open to the general academic or trade community); G. Information which is disclosed to the Receiving Party by a third party having the lawful right to disclose same, without direct or indirect obligation of confidentiality to the Disclosing Party, or its consultants or agents; H. Information which is disclosed by the Receiving Party to a government agency to comply with statutory requirements for 10 market approval, clinical trials, certification, manufacture and/or distribution of the LICENSED PRODUCTS, for which the ReceiVing Party is unable to lawfully secure confidentiality; or I. Information which is approved for release by the Disclosing Party, and then only to the extent such written approval is granted. ARTICLE X - TERM AND TERMINATION -------------------------------- 10.1 Term. Unless this Agreement is terminated sooner as provided in this Article 10, this Agreement shall extend from the Effective Date until the expiration of the last Licensed Patent to expire. 10.2 Default. A. Timely Payment of Royalties Should Synbiotics default in its timely payment of royalties, "payments" or any other charges or [*] amounts, the HOSPITAL shall have the right to serve notice upon Synbiotics of its intention to terminate this Agreement within [*] after said notice of termination, unless Synbiotics shall cure such default within the [*] period. If within said [*] cure period, Synbiotics fails in paying any or all such royalties as calculated per Synbiotics, royalty reports or the Hospital's audits, payments, or other charges or indemnification amounts due and payable, the rights, privileges, and license granted hereunder shall terminate immediately upon receipt of written notice thereof from the HOSPITAL. Synbiotics shall at any time prior to receipt of notice of termination have the right to pay under protest and sue for refund. B. Timely Issuance [*] of Stock Should Synbiotics default in its timely issuance of stock and/or (despite tender by the HOSPITAL of the securities to be surrendered for cancellation) the [*], the HOSPITAL shall have the right to serve notice upon Synbiotics of its intention to terminate this Agreement within [*] after said notice of termination, unless Synbiotics shall cure such default within the [*] period. If within said [*] cure period, Synbiotics fails in fulfilling the obligations due to the Hospital,;the rights, privileges, and license granted hereunder shall terminate immediately upon receipt of written notice thereof from the HOSPITAL. 11 C. Material Breach. Upon any material breach by Synbiotics of its obligations under Paragraphs 5.1 through 5.4 of this Agreement, the HOSPITAL shall have the right to terminate this Agreement, and the rights and license granted hereunder, by giving [*] notice to Synbiotics. Such termination shall become effective at the end of such [*] period unless Synbiotics has cured such breach prior to the expiration of the [*] period. D. Specific Remedies. The parties confirm that damages at law would be an inadequate remedy for breach or threatened breach of any of the promises described in Paragraphs 3.2, 5.11, 5.21, 5.31, 5.4 and Article IX and the parties further agree that in the event of a breach or threatened breach of any provision thereof, the respective rights and obligations shall be enforceable by specific performance, injunction or other equitable remedy, but nothing herein contained is intended or shall it limit or affect any rights available to the parties at law, by statute or otherwise, it being the intention of this paragraph to make clear that the promises shall be enforceable in equity as law or otherwise. 10.3 Remedy Not Exclusive. Termination shall not be the exclusive remedy for the matters described in Paragraph 10.2, nor shall the seeking of any other remedy be deemed an election of remedies. 10.4 Obligation on Termination. Upon termination, a final report shall be submitted by Synbiotics as described in Section 5.4 and any royalty payments under Article IV due to the HOSPITAL shall become immediately payable. Upon termination, Synbiotics and the HOSPITAL will, if such have not already been destroyed in the ordinary course, return all originals and copies in all media of all Confidential Information, subject to the exceptions provided in the Protective Order entered by the United States District Court, Eastern District of Missouri (the "Court"), in Civil Action Docket No. 4:97CV1989 DJS (the "Action") as to retention of pleadings and other confidential documents related to said proceeding. In the absence of a default or material breach of this Agreement by Synbiotics, upon termination Synbiotics may complete the manufacture of LICENSED PRODUCTS then in process and sell its remaining inventory of LICENSED PRODUCTS, subject to the payment of royalties as set forth in Article V. However, nothing herein shall be construed to release either party from any obligation which matured prior to the effective date of such termination. 12 10.5 Survival. Section 3.2, Article V, Article VII, Article VIII, Article IX, Article X and Article XII and Section 13.1 shall survive any termination of this Agreement. 10.6 Survivability of This Agreement. [*] ARTICLE XI - [*] ---------------- 11.1 [*] This Agreement shall inure to the benefit of and be binding upon the HOSPITAL and Synbiotics, and their assigns and licensees. Notwithstanding the above, the license granted herein [*] by [*]. ARTICLE XII - MISCELLANEOUS PROVISIONS -------------------------------------- 12.1 Government Rights. This Agreement is subject to any rights pursuant to research funding from the Federal Government and will be modified as necessary to conform to government regulations. 12.2 Waiver. Neither party may waive or release any of its rights or interests in this Agreement except in writing. Failure to assert any right arising from this Agreement shall not be deemed or construed to be a waiver of such right nor to prohibit subsequent enforcement of such right. 12.3 Agent. Neither party shall be deemed to be an agent, partner or joint venturer of the other party as a result of any transaction under or related to this Agreement, and shall not in any way pledge the other party's credit or incur any obligation on behalf of the other party. 12.4 Notice. Except as required by the provisions of Paragraph 9.2.D, any notice or other communication pursuant to this Agreement shall be sufficiently made or given on the date of mailing if sent to such party by certified First Class mail, postage prepaid, addressed to it at its address as first set forth in this Agreement, or as it shall designate by subsequent written notice given to the other party. Notices shall be sent to: If to the HOSPITAL: Barnes-Jewish Hospital One Barnes-Jewish Hospital Plaza St. Louis, MO 63110 ATTENTION: Marlene Hartmann Vice-President 13 If to Synbiotics: Synbiotics Corporation 11011 Via Frontera San Diego, CA 92127 ATTENTION: President This notice information may be amended by either party upon written notice to the other. 12.5 Publicity. Synbiotics will not use the name of the HOSPITAL (except to identify it as a patent licensor and the plaintiff in the settled litigation), nor any physician, staff member, or employee of the HOSPITAL, in any form of publicity, advertising, or news release without the prior approval of the HOSPITAL. 12.6 Governing Law and Jurisdiction. All questions relating to the license of the Patents granted by the HOSPITAL to Synbiotics under this Agreement, not governed by Federal Law, shall be governed by the laws of the State of [*] and all questions relating to rights and/or releases granted by the HOSPITAL to Synbiotics under Article 13 of this Agreement shall be governed by the laws of the State of [*]. The United States District Court for the [*] shall have and retain jurisdiction for enforcement and interpretation of the Agreement. 12.7 Severability. The provisions of the Agreement are severable, and in the event that any provision of this Agreement is determined to be invalid or unenforceable under any controlling body of law, such invalidity or unenforceability shall not in any way affect the validity or enforceability of the remaining provisions hereof. 12.8 Integration. The parties acknowledge that this instrument sets forth the entire agreement and understanding of the parties hereto as to the subject matter hereof, and shall not be subject to any change or modification except by the execution of a written instrument subscribed to by the parties hereto. 12.9 Governmental Approval. Synbiotics will be solely responsible for obtaining appropriate licenses (including but not limited to exports) and other governmental approvals for making, using, offering for sale, selling or importing the LICENSED PRODUCTS. 14 12.10 Settlement Order And Dismissal. On or before August 1, 1998, the HOSPITAL and Synbiotics will jointly file with the Court, in and as to the Action, a stipulation for Dismissal with Prejudice and a motion for leave to file this Agreement under Seal as a Settlement Order Under Seal and to maintain such sealed status. The HOSPITAL and Synbiotics will cooperate in good faith to obtain entry of the order for dismissal with prejudice and granting such motion, and thereafter to file and maintain this Agreement under seal and affirmatively resist all efforts by anyone to unseal it. The aforesaid filings shall be approved in advance by Synbiotics and the Hospital. 12.11 Attorneys' Fees and Costs In the event of a dispute regarding this Agreement (including but not limited to interpretation and/or enforcement), the parties agree that the prevailing party on a particular issue shall recover its reasonable fees and costs expended related to that issue. ARTICLE 13 - MUTUAL RELEASE --------------------------- 13.1 Release. Synbiotics and the HOSPITAL hereby release, acquit and forever discharge each other, their subsidiaries, affiliates, agents, employees, insurers, directors, officers, and shareholders, and their successors and assigns from any and all liabilities, actions, causes of action, claims or demands for damages, costs, contribution or indemnification on account of, or in any way growing out of, any and all known or unknown, foreseen or unforeseen, anticipated or unanticipated damages of whatever kind or equitable or declaratory, relief resulting or to result from occurrences that happened at any time prior to the signing of this Agreement, including but not limited to those matters set forth in a Complaint and Counterclaim filed in the Action, except for those obligations set forth in this Agreement and in the Court's Settlement Order Under Seal entered or to be entered in said Action. For avoidance of doubt: the HOSPITAL's claims for patent infringement for all LICENSED PRODUCT activities between the date the Complaint was filed in the Action and the Effective Date are also released. [*] 13.2 No Representations. Synbiotics and the HOSPITAL admit that no representation of fact or opinion has been made by either of them to the other with respect to the extent or nature of the claims or damages in order to induce this compromise, except as set forth in Paragraph 5.4.F. above. 15 13.3 Advice Of Counsel. Each party has had the advice of counsel of their own choosing before executing this Agreement. Each party also acknowledges that they have reviewed this Agreement prior to execution and the execution hereof is their free act and deed. IN WITNESS WHEREOF, the parties have hereunder set their hands and seals and duly executed this Agreement in duplicate by their duly authorized officers the day and year first above written. BARNES-JEWISH HOSPITAL SYNBIOTICS CORPORATION /s/ Peter L. Savin /s/ Kenneth M. Cohen - ----------------------------- ------------------------------- SIGNATURE SIGNATURE Peter L. Slavin Kenneth M. Cohen NAME NAME President President and CEO TITLE TITLE 16 EXHIBIT "A" [*] 17 EX-27 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1998 AND THE RELATED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME AND OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 4,507 1,615 4,217 120 5,490 16,659 5,726 4,112 46,002 6,889 6,920 2,847 0 38,123 (10,118) 46,002 24,472 24,780 11,725 26,285 0 0 952 (2,457) (792) (1,665) 0 0 0 (1,665) (.21) (.21)
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