-----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, A2D3vN2GQlJGjgux8TaseElV26PMa8JfY0OqNy5rypO2PmS9CSmHnUSScyFZ+BFi aX59058MO5wFxq5Hpv7/Fw== 0001072993-00-000287.txt : 20000414 0001072993-00-000287.hdr.sgml : 20000414 ACCESSION NUMBER: 0001072993-00-000287 CONFORMED SUBMISSION TYPE: 10QSB/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 20000413 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/A SEC ACT: SEC FILE NUMBER: 000-11303 FILM NUMBER: 600748 BUSINESS ADDRESS: STREET 1: 11011 VIA FRONTERA CITY: SAN DIEGO STATE: CA ZIP: 92127 BUSINESS PHONE: 6194513771 10QSB/A 1 AMENDMENT NO. 1 TO FORM 10-QSB ================================================================================ U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 _________________ FORM 10-QSB/A [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1999 OR [_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-11303 SYNBIOTICS CORPORATION (Exact name of small business issuer as specified in its charter) California 95-3737816 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 11011 Via Frontera San Diego, California 92127 (Address of principal executive offices) (Zip Code) Issuer's telephone number, including area code: (858) 451-3771 Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] As of August 11, 1999, 9,188,595 shares of Common Stock were outstanding. Transitional Small Business Disclosure Format: Yes [_] No [X] ================================================================================ In March 1999, we recognized $1,453,000 of non-refundable license fee revenue related to the amendment of a supply agreement with Merial Limited ("Merial") in exchange for giving Merial broadened U.S. distribution rights. After initial consultations with our independent accounting firm, and based on our belief that our future commitments would be insignificant, we recorded the $1,453,000 cash received as revenue in the first quarter of 1999. Upon further review of the facts and circumstances, we remain contractually obligated to continue to supply Merial with product under this agreement. Based on this, and recent trends in the accounting profession, we decided it would be more appropriate to recognize the revenue over the remaining six year life of the supply agreement even though the cash was received. As a result, we are amending our Quarterly Report on Form 10-QSB for the quarterly period ended June 30, 1999 to reflect the adjustment to the license fee revenue. SYNBIOTICS CORPORATION INDEX
Page ----- Part I Condensed Consolidated Statement of Operations and Comprehensive Income - Three and six months ended June 30, 1999 and 1998 3 Condensed Consolidated Balance Sheet - June 30, 1999 and December 31, 1998 4 Condensed Consolidated Statement of Cash Flows - Six months ended June 30, 1999 and 1998 5 Notes to Condensed Consolidated Financial Statements 6 Management's Discussion and Analysis or Plan of Operation 9 Part II Other Information 16
-2- PART I - FINANCIAL INFORMATION Item 1. Financial Statements (continued) Synbiotics Corporation Condensed Consolidated Statement of Operations and Comprehensive Income (Loss) - ------------------------------------------------------------------------------ (unaudited) - -----------
Three Months Ended June 30, Six Months Ended June 30, ----------------------------- ----------------------------- 1999 1998 1999 1998 ------------ ------------ ------------ ------------ Revenues: Net sales $ 8,336,000 $ 8,936,000 $ 17,726,000 $ 17,737,000 License fees 66,000 126,000 Royalties 2,000 65,000 5,000 139,000 ------------ ------------ ------------ ------------ 8,404,000 9,001,000 17,857,000 17,876,000 Operating expenses: Cost of sales 3,409,000 3,859,000 7,486,000 7,905,000 Research and development 576,000 592,000 1,136,000 1,113,000 Selling and marketing 1,782,000 1,572,000 3,800,000 3,163,000 General and administrative 1,401,000 880,000 2,816,000 2,119,000 Patent litigation settlement 4,601,000 4,601,000 ------------ ------------ ------------ ------------ 7,168,000 11,504,000 15,238,000 18,901,000 ------------ ------------ ------------ ------------ Income (loss) from operations 1,236,000 (2,503,000) 2,619,000 (1,025,000) Other income (expense): Interest, net (286,000) (258,000) (613,000) (515,000) ------------ ------------ ------------ ------------ Income (loss) before income taxes 950,000 (2,761,000) 2,006,000 (1,540,000) Provision for (benefit from) income taxes 477,000 (1,148,000) 942,000 (618,000) ------------ ------------ ------------ ------------ Income before extraordinary item 473,000 (1,613,000) 1,064,000 (922,000) Early extinguishment of debt, net of tax 116,000 ------------ ------------ ------------ ------------ Net income (loss) 473,000 (1,613,000) 1,180,000 (922,000) Cumulative translation adjustment (350,000) 188,000 (1,254,000) (60,000) ------------ ------------ ------------ ------------ Comprehensive income (loss) $ 123,000 $ (1,425,000) $ (74,000) $ (982,000) ============ ============ ============ ============ Basic income (loss) per share: Income (loss) from continuing operations $ 0.05 $ (0.19) $ 0.11 $ (0.12) Early extinguishment of debt, net of tax 0.01 ------------ ------------ ------------ ------------ Net income (loss) $ 0.05 $ (0.19) $ 0.12 $ (0.12) ============ ============ ============ ============ Diluted income (loss) per share: Income (loss) from continuing operations $ 0.05 $ (0.19) $ 0.11 $ (0.12) Early extinguishment of debt, net of tax 0.01 ------------ ------------ ------------ ------------ Net income (loss) $ 0.05 $ (0.19) $ 0.12 $ (0.12) ============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements. -3- Item 1. Financial Statements (continued) Synbiotics Corporation Condensed Consolidated Balance Sheet - ------------------------------------
June 30, December 31, 1999 1998 ------------ ------------ (unaudited) (audited) Assets Current assets: Cash and equivalents $ 5,610,000 $ 4,357,000 Securities available for sale 1,384,000 1,613,000 Accounts receivable 5,075,000 4,135,000 Inventories 5,620,000 5,179,000 Deferred tax assets 279,000 341,000 Other current assets 621,000 820,000 ------------ ------------ Total current assets 18,589,000 16,445,000 Property and equipment, net 2,026,000 1,774,000 Goodwill 12,603,000 13,372,000 Deferred tax assets 7,181,000 7,873,000 Deferred debt issuance costs 551,000 653,000 Other assets 4,674,000 5,329,000 ------------ ------------ $ 45,624,000 $ 45,446,000 ============ ============ Liabilities and Shareholders' Equity: Current liabilities: Accounts payable and accrued expenses $ 4,255,000 $ 5,217,000 Current portion of long-term debt 1,000,000 2,000,000 Income taxes payable 186,000 Deferred revenue 242,000 ------------ ------------ Total current liabilities 5,683,000 7,217,000 ------------ ------------ Long-term debt 6,314,000 6,716,000 Deferred revenue 1,090,000 Other liabilities 1,429,000 1,369,000 ------------ ------------ 8,833,000 8,085,000 ------------ ------------ Mandatorily redeemable common stock 2,349,000 2,287,000 ------------ ------------ Non-mandatorily redeemable common stock and other shareholders' equity: Common stock, no par value, 24,800,000 share authorized, 8,548,000 and 8,246,000 shares issued and outstanding at June 30, 1999 and December 31, 1998 39,172,000 38,134,000 Common stock warrants 1,003,000 1,003,000 Accumulated other comprehensive income (758,000) 496,000 Accumulated deficit (10,658,000) (11,776,000) ------------ ------------ Total non-mandatorily redeemable common stock and other shareholders' equity 28,579,000 27,857,000 ------------ ------------ $ 45,624,000 $ 45,446,000 ============ ============
See accompanying notes to condensed consolidated financial statements. -4- Item 1. Financial Statements (continued) Synbiotics Corporation Condensed Consolidated Statement of Cash Flows (unaudited) - ----------------------------------------------------------
Six Months Ended June 30, -------------------------------- 1999 1998 ------------ ------------ Cash flows from operating activities: Net income (loss) $ 1,180,000 $ (922,000) Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Depreciation and amortization 1,231,000 929,000 Early extinguishment of debt (200,000) Changes in assets and liabilities: Account receivable (940,000) (1,680,000) Inventories (441,000) (15,000) Deferred taxes 754,000 (664,000) Other assets 707,000 (177,000) Accounts payable and accrued expenses (246,000) 833,000 Income taxes payable 186,000 (91,000) Deferred revenue 1,332,000 Other liabilities 59,000 3,922,000 ------------ ------------ Net cash provided by operating activities 3,685,000 2,135,000 ------------ ------------ Cash flows from investing activities: Acquisition of property and equipment (432,000) (252,000) Investment in securities available for sale (133,000) Proceeds from sale of securities available for sale 229,000 ------------ ------------ Net cash (used for) investing activities (203,000) (385,000) ------------ ------------ Cash flows from financing activities: Payments of long-term debt (1,300,000) (633,000) Mandatorily redeemable stock issuance costs (16,000) Proceeds from issuance of common stock, net 325,000 (63,000) ------------ ------------ Net cash (used for) financing activities (975,000) (712,000) ------------ ------------ Net increase in cash and equivalents 2,507,000 1,038,000 Effect of exchange rates on cash (1,254,000) (60,000) Cash and equivalents - beginning of period 4,357,000 2,190,000 ------------ ------------ Cash and equivalents - end of period $ 5,610,000 $ 3,168,000 ============ ============
See accompanying notes to condensed consolidated financial statements. -5- Item 1. Financial Statements (continued) SYNBIOTICS CORPORATION Notes to Condensed Consolidated Financial Statements (unaudited) - -------------------------------------------------------------------------------- Note 1 - Interim Financial Statements: The accompanying condensed consolidated balance sheet as of June 30, 1999 and the condensed consolidated statements of operations and comprehensive income and of cash flows for the three and six month periods ended June 30, 1999 and 1998 have been prepared by Synbiotics Corporation (the "Company") and have not been audited. The condensed consolidated financial statements of the Company include the accounts of its wholly-owned subsidiary Synbiotics Europe SAS. All significant intercompany transactions and accounts have been eliminated in consolidation. These financial statements, in the opinion of management, include all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the financial position, results of operations and cash flows for all periods presented. The financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-KSB filed for the year ended December 31, 1998. Interim operating results are not necessarily indicative of operating results for the full year. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Note 2 - Extraordinary Item: In February 1999, the Company repaid the $1,000,000 note issued in conjunction with the March 1998 acquisition of Prisma Acquisition Corp., which was due in March 1999, for $800,000. As a result, in the first quarter of 1999 the Company recognized a $116,000 extraordinary gain upon early extinguishment of the debt, net of income taxes totaling $84,000. Note 3 - Inventories: Inventories consist of the following:
June 30, December 31, 1999 1998 ----------- ------------- (unaudited) (audited) Raw materials $2,331,000 $2,219,000 Work in progress 786,000 904,000 Finished goods 2,503,000 2,056,000 ---------- ---------- $5,620,000 $5,179,000 ========== ==========
-6- Item 1. Financial Statements (continued) SYNBIOTICS CORPORATION Notes to Condensed Consolidated Financial Statements (unaudited) - -------------------------------------------------------------------------------- Note 4 - Earnings (Loss) per Share: The following is a reconciliation of net income (loss) and share amounts used in the computations of income (loss) per share:
Three Months Ended June 30, Six months Ended June 30, ----------------------------- --------------------------- 1999 1998 1999 1998 ------------- -------------- ------------- ------------ (unaudited) (unaudited) (unaudited) (unaudited) Basic net income (loss) used: Income (loss) from continuing operations $ 473,000 $(1,613,000) $1,064,000 $ (922,000) Less accretion of mandatorily redeemable common stock (31,000) (37,000) (62,000) (72,000) ---------- ----------- ---------- ---------- Income (loss) from continuing operations used in computing basic income (loss) from continuing operations per share 442,000 (1,650,000) 1,002,000 (994,000) Early extinguishment of debt, net of tax 116,000 ---------- ----------- ---------- ---------- Net income (loss) used in computing basic net income (loss) per share $ 442,000 $(1,650,000) $1,118,000 $ (994,000) ========== =========== ========== ========== Diluted net income (loss) used: Income (loss) from continuing operations $ 473,000 $(1,613,000) $1,064,000 $ (922,000) Less accretion of mandatorily redeemable common stock (31,000) (37,000) 62,000 (72,000) ---------- ----------- ---------- ---------- Income (loss) from continuing operations used in computing diluted income (loss) from continuing operations per share 442,000 (1,650,000) 1,002,000 (994,000) Early extinguishment of debt, net of tax 116,000 ---------- ----------- ---------- ---------- Net income (loss) used in computing diluted net income (loss) per share $ 442,000 $(1,650,000) $1,118,000 $ (994,000) ========== =========== ========== ========== Shares used: Weighted average common shares outstanding used in computing basic income (loss) per share 9,071,000 8,669,000 9,003,000 8,508,000 Weighted average options and warrants to purchase common stock as determined by application of the treasury method 381,000 365,000 ---------- ----------- ---------- ---------- Shares used in computing diluted income (loss) per share 9,452,000 8,669,000 9,368,000 8,508,000 ========== =========== ========== ==========
-7- Item 1. Financial Statements (continued) SYNBIOTICS CORPORATION Notes to Condensed Consolidated Financial Statements (unaudited) - -------------------------------------------------------------------------------- Weighted average options and warrants to purchase common stock as determined by the application of the treasury method and weighted average shares of common stock issuable upon assumed conversion of debt totaling 680,000 shares and 674,000 shares have been excluded from the shares used in computing diluted net loss for the three and six months ended June 30, 1998, as their effect is anti- dilutive. In addition, warrants to purchase 284,000 shares of common stock at $4.54 per share have been excluded from the shares used in computing diluted net loss per share for the three and six months ended June 30, 1999 and 1998 as their exercise price is higher than the weighted average market price for those periods, as well as their effect is anti-dilutive for the three and six months ended June 30, 1998. Note 5 - Segment Information and Significant Customers: The Company has determined that it has only one reportable segment based on the fact that all of its products are animal health products. Although the Company sells diagnostic, vaccine and instrument products, it does not base its business decision making on a product category basis. The following are revenues for the Company's diagnostic, vaccine and instrument products:
Three Months Ended June 30, Six months Ended June 30, --------------------------- ------------------------- 1999 1998 1999 1998 ---- ---- ---- ---- (unaudited) (unaudited) (unaudited) (unaudited) Diagnostics $ 6,748,000 $ 6,472,000 $ 14,138,000 $ 13,664,000 Vaccines 1,347,000 2,381,000 3,106,000 3,990,000 Instruments 241,000 83,000 482,000 83,000 Other revenues 68,000 65,000 131,000 139,000 ------------ ------------ ------------- ------------- $ 8,404,000 $ 9,001,000 $ 17,857,000 $ 17,876,000 ============ ============ ============= =============
The following are revenues and long-lived asset information by geographic area:
Three Months Ended June 30, Six months Ended June 30, --------------------------- ------------------------- 1999 1998 1999 1998 ---- ---- ---- ---- (unaudited) (unaudited) (unaudited) (unaudited) Revenues: United States $ 6,189,000 $ 6,573,000 $ 12,585,000 $ 13,515,000 France 814,000 1,168,000 2,202,000 2,798,000 Other foreign countries 1,401,000 1,260,000 3,070,000 1,563,000 ------------ ------------ ------------- ------------- $ 8,404,000 $ 9,001,000 $ 17,857,000 $ 17,876,000 ============ ============ ============= ============= June 30, December 31, 1999 1998 ---- ---- (unaudited) (audited) Long-lived assets: United States $ 12,793,000 $ 13,038,000 France 7,061,000 8,090,000 ------------- ------------- $ 19,854,000 $ 21,128,000 ============= =============
-8- The Company had sales to one customer totaling $1,690,000 during the three months ended June 30, 1999. Sales to one customer totaled $2,292,000 during the six months ended June 30, 1999. During the six months ended June 30, 1998, sales to two customers totaled $5,835,000. Item 2. Management's Discussion and Analysis or Plan of Operation The information contained in this Management's Discussion and Analysis or Plan of Operation and elsewhere in this Quarterly Report on Form 10-QSB/A contains both historical financial information and forward-looking statements. We do not provide forecasts of future financial performance. While we are optimistic about our long-term prospects, the historical financial information may not be indicative of future financial performance. In fact, future financial performance may be materially different than the historical financial information presented herein. Moreover, the forward-looking statements about future business or future results of operations are subject to significant uncertainties and risks, which could cause actual future results to differ materially from what is suggested by the forward-looking information. The following risk factors should be considered in evaluating our forward-looking statements and assessing our future financial condition, results of operations and cash flows: The market in which we operate is intensely competitive, particularly with regard to our key canine heartworm diagnostic products, and many of our competitors are larger and more established The market for animal health care products is extremely competitive. Companies in the animal health care market compete to develop new products, to market and manufacture products efficiently, to implement effective research strategies, and to obtain regulatory approval. Our current competitors include significantly larger companies such as Pfizer Animal Health, Merial S.A.S. (the successor to Rhone-Merieux), Schering-Plough and IDEXX Laboratories. These companies are substantially larger and have greater financial, manufacturing, marketing, and research resources than we do. Our current competitors also have extensive expertise in conducting pre-clinical and clinical testing of new products and in obtaining the necessary regulatory approvals to market products. In addition, IDEXX Laboratories prohibits its distributors from selling competitors' products, including ours. Further, additional competition could come from new entrants to the animal health care market. We cannot assure you that we will be able to compete successfully in the future or that competition will not harm our business. Our canine heartworm products constitute a large portion of our sales. In addition to our historic competition with IDEXX Laboratories, the sales leader in this product category, our sales were substantially affected in 1999 by a new heartworm product from Heska Corporation. We have filed a lawsuit against Heska, claiming that its heartworm product infringes our patent We have a history of losses and an accumulated deficit Although we generated profits for the years ended December 31, 1997 and 1996, we did not achieve profitability for the year ended December 31, 1998 and we have had a history of losses. We have incurred a consolidated accumulated deficit of $10,658,000 at June 30, 1999. We may not achieve profitability again and if we are profitable in the future there can be no assurance that profitability can be sustained. We depend on third party manufacturers We contract for the manufacture of some of our products, including all of our vaccines, our Witness(R), VetRED(R) and ICT Gold(TM) diagnostic kits, and our SCA 2000(TM) instrument. We also expect that some of our anticipated new products will be manufactured by third parties. In addition, some of the products manufactured for us by third parties, including Witness(R), VetRED(R) and ICT Gold(TM) are licensed to us by their manufacturers. There are a number of risks associated with our dependence on third-party manufacturers including: . reduced control over delivery schedules; . quality assurance; . manufacturing yields and costs; . the potential lack of adequate capacity during periods of excess demand; . limited warranties on products supplied to us; and -9- . increases in prices and the potential misappropriation of our intellectual property. If our third party manufacturers fail to supply us with an adequate number of finished products, our business would be significantly harmed. We have no long- term contracts or arrangements with any of our vendors that guarantee product availability, the continuation of particular payment terms or the extension of credit limits. In addition, sales of our feline leukemia virus ("FeLV") vaccine to Merial S.A.S. and other distributors for resale in Europe will be at risk unless our manufacturer, Bio-Trends International, Inc. ("Bio-Trends"), obtains European Union regulatory approvals for its manufacturing facilities. Loss of these sales would have a material adverse effect on our profitability and our cash flows. If we encounter delays or difficulties in our relationships with our manufacturers, the resulting problems could have a material adverse effect on us. In fact, all of our vaccine products (exclusive of our FeLV and canine corona virus products) were manufactured using bulk antigen fluids that were supplied by a third party. The supply agreement expired and we were unable to locate a replacement supplier for these bulk antigen fluids. We decided to discontinue the sales of the affected products once our remaining supplies were exhausted, which occurred during the third quarter of 1999. Sales of the affected products totaled $2,073,000, $1,596,000 and $1,225,000 during 1998, 1997 and 1996, respectively. We rely on third party distributors for a substantial portion of our sales, but we are experiencing difficulties with the distribution channel During the year ended December 31, 1998, sales to two distributors totaled 33% of our net sales. Because we have historically depended upon distributors for such a large portion of our sales, our ability to establish and maintain an adequate sales and marketing capability in any or all of our targeted markets may be impaired. Our failure to independently sell and market our products could materially harm our business. Further, distributor agreements render our sales exposed to the efforts of third parties who are not employees of Synbiotics and over whom we have no control. Their failure to generate significant sales of our products could materially harm our business. Reduction by these distributors of the quantity of our products which they distribute would materially harm our business. In addition, IDEXX Laboratories' prohibition against its distributors carrying competitors' products, including ours, has and could continue to make some distributors unavailable to us. We adopted a similar policy in the second quarter of 1999, which caused some of our distributors to abandon our product line. Although we have rescinded this policy, we do not expect to get the distributors back to any meaningful extent. We are also exposed to the risk that any sales by us directly to veterinarians could alienate our current distributors. Our direct selling efforts may not succeed We are increasing our efforts to sell our products directly to veterinarians, including by telesales and over the Internet. We are inexperienced in large- scale direct selling efforts and may not be able to successfully execute this strategy. Also, veterinarians have traditionally relied on distributors, and the number of veterinarians willing to purchase directly from manufacturers may be smaller than we believe. Our profitable vaccine sales in Europe may decline soon Merial distributes in Europe our FeLV vaccine, which we obtain from Bio-Trends. Our gross profit in 1998 on these sales of FeLV to Merial in Europe was $520,000. Merial has exercised a contractual right which will enable it, in 2002, to introduce its own FeLV vaccine product in Europe. If Merial does so, our sales to Merial in Europe would probably decline sharply. There is no assurance that acquired businesses can be successfully combined There can be no assurance that the anticipated benefits of the 1998 acquisition of Prisma Acquisition Corp. ("Prisma"), the 1997 acquisition of the veterinary diagnostics business of Synbiotics Europe SAS ("SBIO-E"), or any other future acquisitions (collectively, the "Acquired Business") will be realized. Acquisitions of businesses involve numerous risks, including difficulties in the assimilation of the operations, technologies and products of the Acquired Business, introduction of different distribution channels, potentially dilutive issuances of equity and/or increases in leverage and risk resulting from issuances of debt securities, the need to establish internally operating functions which had been previously provided pre-acquisition by a corporate parent, accounting charges, operating companies in different geographic locations with different cultures, the potential loss of key employees of the Acquired Business, the diversion of management's attention from other business concerns and the risks of -10- entering markets in which we have no or limited direct prior experience. In addition, there can be no assurance that the acquisitions will not have a material adverse effect upon our business, results of operations, financial condition or cash flows, particularly in the quarters immediately following the consummation of the acquisition, due to operational disruptions, unexpected expenses and accounting charges which may be associated with the integration of the Acquired Business and us, as well as operating and development expenses inherent in the Acquired Business itself as opposed to integration of the Acquired Business. We depend on key executives and personnel Our future success will depend, to a significant extent, on the ability of our management to operate effectively, both individually and as a group. Competition for qualified personnel in the animal health care products industry is intense, and we may not be successful in attracting and retaining such personnel. There are only a limited number of persons with the requisite skills to serve in those positions and it may become increasingly difficult to hire such persons. The loss of the services of any of our key personnel or the inability to attract or retain qualified personnel could harm our business. We rely on new and recent products We rely to a significant extent on new and recently developed products, and expect that we will need to continue to introduce new products to be successful in the future. There can be no assurance that we will obtain and maintain market acceptance of our products. There can be no assurance that future products will meet applicable regulatory standards, be capable of being produced in commercial quantities at acceptable cost or be successfully commercialized. There can be no assurance that new products can be manufactured at a cost or in quantities necessary to make them commercially viable. If we are unable to produce internally, or to contract for, a sufficient supply of our new products on acceptable terms, or if we should encounter delays or difficulties in our relationships with manufacturers, the introduction of new products would be delayed, which could have a material adverse effect on our business. We may need additional capital in the future We currently anticipate that our existing cash balances and short term investments and cash flow expected to be generated from future operations will be sufficient to meet our liquidity needs for at least the next twelve months. However, we may need to raise additional funds if our estimates of revenues, working capital and/or capital expenditure requirements change or prove inaccurate or in order for us to respond to unforeseen technological or marketing hurdles or to take advantage of unanticipated opportunities. Further, our future capital requirements will depend on many factors beyond our control or ability to accurately estimate, including continued scientific progress in our product and development programs, the cost of manufacturing scale-up, the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims, the cost involved in patent infringement litigation, competing technological and market developments, and the cost of establishing effective sales and marketing arrangements. In addition, we expect to review potential acquisitions that would compliment our existing product offerings or enhance our technical capabilities. While we have no current agreements or negotiations underway with respect to any such acquisition, any future transaction of this nature could require potentially significant amounts of capital. Such funds may not be available at the time or times needed, or available on terms acceptable to us. If adequate funds are not available, or are not available on acceptable terms, we may not be able to take advantage of market opportunities, to develop new products, or to otherwise respond to competitive pressures. This inability could materially harm our business. In July 1997, we obtained $15,000,000 of debt financing from Banque Paribas, of which $11,493,000 was used in connection with our acquisition of portions of Rhone Merieux S.A.S. The $15,000,000 included a $5,000,000 revolving line of credit. Draws by us under this line of credit are subject to certain requirements and can be used only for certain purposes. Additionally, Banque Paribas requires us to maintain certain financial ratios and levels of tangible net worth and also restricts our ability to pay dividends and make loans, capital expenditures, or investments without its consent. -11- If adequate funds are not available to us, or if they are not available on terms reasonably favorable to us, we may need to delay, reduce, or eliminate one or more of our research and development programs. Any of these events would impair our competitive position and harm our business. Our canine heartworm business is seasonal Our operations are seasonal due to the success of our canine heartworm diagnostic products. Our sales and profits tend to be concentrated in the first half of the year as our distributors prepare for the heartworm season by purchasing diagnostic products for resale to veterinarians. The operations of SBIO-E have reduced our seasonality as sales of their large-animal diagnostic products tend to occur evenly throughout the year. We believe that increased sales of our instrument products will also reduce our seasonality. Our failure to adequately establish or protect our proprietary rights may adversely effect us We rely on a combination of patent, copyright, and trademark laws, and on trade secrets and confidentiality provisions and other contractual provisions to protect our proprietary rights. These measures afford only limited protection. We currently have 11 issued U.S. patents and several pending patent applications. Our means of protecting our proprietary rights in the U.S. or abroad may not be adequate and competitors may independently develop similar technologies. Our future success will depend in part on our ability to protect our proprietary rights and the technologies used in our principal products. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use trade secrets or other information that we regard as proprietary. In addition, the laws of some foreign countries do not protect our proprietary rights as fully as do the laws of the U.S. Issued patents may not preserve our proprietary position. Even if they do, competitors or others may develop technologies similar to or superior to our own. If we do not enforce and protect our intellectual property, our business will be harmed. From time to time, third parties, including our competitors, have asserted patent, copyright, and other intellectual property rights to technologies that are important to us. We expect that we will increasingly be subject to infringement claims as the number of products and competitors in the animal health care market increases. The results of any litigated matter are inherently uncertain. In the event of an adverse result in any litigation with third parties that could arise in the future, we could be required to: . pay substantial damages, including treble damages if we are held to have willfully infringed; . cease the manufacture, use and sale of infringing products; . expend significant resources to develop non-infringing technology; or . obtain licenses to the infringing technology. Licenses may not be available from any third party that asserts intellectual property claims against us on commercially reasonable terms, or at all. Also, litigation is costly regardless of its outcome and can requires significant management attention. For example, in 1997, Barnes-Jewish Hospital filed an action against claiming that our canine heartworm diagnostic products infringe their patent. We settled this lawsuit, but there can be no assurance that we would be able to resolve similar incidents in the future. Also, because our patents and patent applications cover novel diagnostic approaches, . the patent coverage which we receive could be significantly narrower than the patent coverage we seek in our patent applications; and . our patent positions involve complex legal and factual issues which can be hard for patent examiners or lawyers asserting patent coverage to successfully resolve. Because of this, our patent position could be vulnerable and our business could be materially harmed. -12- The U.S. patent application system also exposes us to risks. In the United States, the first party to make a discovery is granted the right to patent it and patent applications are maintained in secrecy until the underlying patents issue. For these reasons, we can never know if we are the first to discover particular technologies. Therefore, we can never be certain that our technologies will be patented and we could become involved in lengthy, expensive, and distracting disputes concerning whether we were the first to make the disputed discovery. Any of these events would materially harm our business. Our business is regulated by the United States and various foreign governments Our business is subject to substantial regulation by the United States government, most notably the United States Department of Agriculture, and the French government. In addition, our operations may be subject to future legislation and/or rules issued by domestic or foreign governmental agencies with regulatory authority relating to our business. There can be no assurance that we will continue to be in compliance with any of these regulations. For marketing outside the United States, we, and our suppliers, are subject to foreign regulatory requirements, which vary widely from country to country. There can be no assurance that we, and our suppliers, will meet and sustain compliance with any such requirements. In particular, our sales of feline leukemia virus vaccine to Merial S.A.S. or other distributors for resale in Europe will be at risk unless Bio-Trends, our supplier, obtains European Union regulatory approvals for its manufacturing facilities. Our liability insurance may prove inadequate Our products carry an inherent risk of product liability claims and associated adverse publicity. While we have maintained product liability insurance for such claims to date, we cannot be certain that this type of insurance will continue to be available to us or that, if it is available, that it can be obtained on acceptable terms. Also, our current coverage limits may not be adequate. Any claim against us which results in our having to pay damages in excess of our coverage limits will materially harm our business. Even if such a claim is covered by our existing insurance, the resulting increase in insurance premiums or other charges would increase our expenses and harm our business. We use hazardous materials Our business requires that we store and use hazardous materials and chemicals, including radioactive compounds. Although we believe that our procedures for storing, handling, and disposing of these materials comply with the standards prescribed by local, state, and federal regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. If any of these materials were mishandled, or if an accident with them occurred, the consequences could be extremely damaging and we could be held liable for them. Our liability for such an event would materially harm our business and could exceed all of our available resources for satisfying it. Results of Operations Our net sales for the second quarter of 1999 decreased by $600,000 or 7% from the second quarter of 1998. The decrease in our net sales reflects a net increase in our sales of diagnostic products of approximately $242,000, a decrease in our vaccine product sales of approximately $1,000,000 and an increase in our instrument sales of $158,000. The increase in the sales of our diagnostic products is primarily due to an increase in our canine heartworm diagnostics sales of 4%. The increased canine heartworm diagnostics sales were due to increases in the sales of our rapid canine heartworm diagnostic tests, resulting from the success of our WITNESS(R) product (which we introduced in the U.S. in the third quarter of 1998), and further increases in our DiroCHEK(R) sales; however, our sales of our canine heartworm diagnostic products have been impacted by increased competition. The decreased vaccine sales reflected a decrease of 45% in sales of bulk FeLV vaccine (related to the timing of shipments as requested by our OEM customer), and a 42% decrease in sales of vaccines to private label partners resulting from the phase-out of sales of most of our Synbiotics-labeled vaccines. Our instrument business, which we acquired in March 1998, contributed 3% of our sales for the second quarter of 1999, as compared with less than 1% for the prior year. Our net sales for the six months ended June 30, 1999 decreased by $11,000 from the six month period ended June 30, 1998. The decrease in our net sales reflects a net increase in our sales of diagnostic products of approximately 3%, a decrease in our vaccine product sales of 22% and an increase in our instrument sales of 483%. The increase in the sales of our diagnostic products is due primarily to an increase in our canine heartworm diagnostic sales of 8%. The increased canine heartworm diagnostics sales were due to increases in the sales of our rapid canine heartworm diagnostic tests, resulting from the success of our WITNESS(R) product -13- (which we introduced in the U.S. in the third quarter of 1998), and further increases in our DiroCHEK(R) sales; however, our sales of our canine heartworm diagnostic products have been impacted by increased competition. The decreased vaccine sales reflected a decrease of 16% in sales of bulk FeLV vaccine (related to the timing of shipments as requested by our OEM customer) and a 27% decrease in sales of vaccines to private label partners resulting from the phase-out of sales of most of our Synbiotics-labeled vaccines. Our instrument business, which we acquired in March, 1998, contributed 3% of sales for the first six months of 1999, compared with less than 1% for the prior year. All of our vaccine products (exclusive of our FeLV vaccine products) were manufactured using bulk antigen fluids that were supplied by a third party. The supply agreement expired and we were unable to locate a replacement supplier for these bulk antigen fluids. We decided to discontinue the sales of the affected products once our remaining supplies were exhausted, which occurred during the third quarter of 1999. Sales of the affected products totaled $2,073,000 and $1,596,000 during 1998 and 1997, respectively. Although veterinary products manufacturers, including us, have traditionally relied on distributors, we have been increasing our direct sales of products to veterinarians via telesales and the Internet as part of a focused strategy. In addition, we stopped selling to several distributors and to Vedco, Inc., a distributor co-op, in the second quarter of 1999. Our cost of sales as a percentage of our net sales was 41% during the second quarter of 1999 compared to 43% during the second quarter of 1998 (i.e., our gross margin increased to 59% from 57%). The higher gross margin is a direct result of three factors: i) a high percentage of our sales relate to products manufactured by us rather than by third party manufacturers; ii) a decrease in our sales of lower margin vaccines, and iii) the fact that a significant portion of our manufacturing costs are fixed costs. Among our major products, our DiroCHEK(R) canine heartworm diagnostic products are manufactured at our facilities, whereas our WITNESS(R), ICT GOLD(TM) HW, VetRED(R) and all our vaccines are manufactured by third parties. In addition to affecting our gross margins, outsourcing of manufacturing renders us relatively more dependent on the third-party manufacturers. Our cost of sales as a percentage of our net sales was 42% during the six months ended June 30, 1999 compared to 45% during the six months ended June 30, 1998 (i.e. our gross margins increased to 58% from 55%). The higher gross margins are a result of the three factors mentioned above. In March 1999, we amended (effective July 1, 1998) our FeLV vaccine supply agreement with Merial Limited ("Merial"). Since 1992, we have supplied Bio- Trends-manufactured FeLV vaccine to Merial in the United States. This has included shipments to Merial at our cost, while Merial has paid a royalty to us on their sales of Merial-labeled FeLV vaccine. In exchange for $1,500,000 in cash ($1,453,000 of which we are recognizing ratably over the remaining term of the supply agreement, and the remainder was applied to royalties receivable from Merial), the revised supply agreement broadens Merial's U.S. distribution rights (which had been an area of ongoing discussions) and eliminates the royalty. In addition, we will work with Merial to try to have Bio-Trends supply FeLV vaccine directly to Merial for U.S. distribution. Our FeLV vaccine sales to Merial for U.S. resale totaled $2,029,000 and $1,309,000 during 1998 and 1997, respectively. If Merial buys its FeLV vaccine for U.S. resale from Bio-Trends instead of from us, we will lose net sales but have a higher overall gross margin. In the meantime, we will continue to resell Bio-Trends-supplied FeLV vaccine to Merial at no profit for U.S. resale. Our sales of our own VacSyn and other FeLV-labeled vaccine products, our sales of Bio-Trends supplied FeLV vaccine to Merial S.A.S. in France, which are at a profit rather than at cost, and the collaborative research relationship between Merial and us were not affected by this amendment. Our research and development expenses during the second quarter of 1999 decreased $16,000 or 3% from the second quarter of 1998 and increased during the six months ended June 30, 1999 by $23,000 or 2% over the six months ended June 30, 1998. The decrease for the quarter relates to the timing of external research projects and the increase for the six months is primarily due to an increase in personnel costs resulting from the March 1998 acquisition of Prisma. Our research and development expenses as a percentage of our net sales were 7% during the second quarters of 1999 and 1998, and were 6% during the six months ended June 30, 1999 and 1998. We expect our research and development expenses to increase during the remainder of 1999 due to further development of our instrument product line. Our selling and marketing expenses during the second quarter of 1999 increased by $210,000 or 13% over the second quarter of 1998, and increased $637,000 or 20% over the six months ended June 30, 1998. The increase is due primarily to the addition of an outbound telemarketing group during the third quarter of 1998, increased royalties due to the 1998 introduction of our WITNESS(R) products, an increase in our field sales force during the fourth quarter of 1998 and an increase in promotional programs. Our selling and marketing expenses as a percentage of our net sales were 21% and 18% during the second quarter of 1999 and 1998, respectively, and were 21% and 18% during the six months ended June 30, 1999 and 1998, respectively. We have experienced increased competition in certain of our U.S. distribution channels, arising primarily from Heska's attempt to -14- launch a canine heartworm diagnostic product. In response, in addition to the patent infringement lawsuit, we have significantly revised some of our distribution strategies and policies, and we continue to increase our own marketing capabilities. We will continue to increase our investment in sales and marketing to expand our field sales force and our telemarketing and Internet sales efforts. In the second quarter of 1999, we decided to require our full- line distributors to carry our heartworm diagnostics exclusively. As a result of this policy, we terminated our relationship with several of our U.S. distributors in the second quarter of 1999. We believe that our remaining exclusive distributors, coupled with our own marketing efforts, may be able to substantially mitigate the sales lost from the terminated distribution arrangements. Our general and administrative expenses during the second quarter of 1999 increased by $521,000 or 59% over the second quarter of 1998 and increased $697,000 or 33% over the six months ended June 30, 1998. The increase is due primarily to an increase in personnel costs resulting from the March 1998 acquisition of Prisma, legal expenses related to the Heska patent litigation, and the fact that we reclassified $463,000 of legal expenses relating to settlement of patent litigation from general and administrative expenses during the second quarter of 1998. Our general and administrative expenses as a percentage of our net sales were 17% and 10% during the second quarters of 1999 and 1998, respectively, and were 16% and 12% during the six months ended June 30, 1999 and 1998, respectively. Our royalty income during the second quarter of 1999 and for the six months ended June 30, 1999 decreased from the prior periods as a result of our amended supply agreement with Merial (see above); we will no longer receive royalties beginning in 1999. Our royalty income totalled $317,000 and $332,000 during 1998 and 1997, respectively. Our combined effective tax rate was 47% during the first six months of 1999 as compared to 40% during the first six months of 1998. The increase in our effective rate is due primarily to an increase in our state income tax expense resulting from certain states' taxes being calculated on our net worth rather than our net income. Our operations have become seasonal due to the success of our canine heartworm diagnostic products. Our sales and profits tend to be concentrated in the first half of the year, as our distributors prepare for the heartworm season by purchasing diagnostic products for resale to veterinarians. The operations SBIO- E have reduced our seasonality as sales of their large-animal diagnostic products tend to occur evenly throughout the. We believe that increased sales of our instruments and supplies would also reduce seasonality. Financial Condition We believe that our present capital resources, which included working capital of $12,906,000 at June 30, 1999, are sufficient to meet our current working capital needs and service our debt for at least the next twelve months. However, pursuant to a debt agreement with Banque Paribas, we are required to maintain certain financial ratios and levels of tangible net worth and we are also restricted in our ability to pay dividends and make loans, capital expenditures or investments without Banque Paribas' consent. As of June 30, 1999, we had outstanding principal balances on our Banque Paribas debt of $8,000,000, and may borrow up to $5,000,000 (subject to a borrowing base calculation) on our revolving line of credit. In February 1999, we repaid the $1,000,000 note issued in conjunction with the acquisition of Prisma for $800,000, and recognized a $116,000 extraordinary gain, net of income taxes totaling $84,000, during the first quarter of 1999. Impact of the Year 2000 Issue The year 2000 issue is the result of computer programs being written using two digits rather than four digits to define the applicable year. Embedded microprocessors or computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculation causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices or engage in similar normal business activities. We have determined that the financial systems used in our U.S. operations are not year 2000 compliant. Although the software manufacturer has provided the necessary software to make the systems year 2000 compliant, we have also determined that our current information system is inadequate to meet our growth goals and objectives. We have selected an enterprise resource planning system, and began implementation of the new system in March 1999. The total cost of the new system (including software, hardware and implementation) is expected to be approximately $1,000,000, for which we have obtained lease financing. The new system is year 2000 compliant. -15- The computer systems of SBIO-E are not affected by the year 2000 issue as new systems were implemented during 1998, and those systems are year 2000 compliant. We have also determined that our telephone systems and equipment used in our manufacturing and research and development processes are year 2000 compliant. We have been notified by our major suppliers and customers that they are testing their systems for year 2000 compliance, and to the best of their knowledge those systems are year 2000 compliant. In the event that these suppliers' and customers' systems in fact fail to become year 2000 compliant and the suppliers and customers suffer disruptions in their own operations, there could be a material adverse impact on our results of operations and financial condition beginning in 2000. The greatest disruption would occur if third-party manufacturers of our diagnostic products and vaccines were interrupted due to their own, or their own suppliers', year 2000 problems. PART II - OTHER INFORMATION Item 1. Legal Proceedings Arbitration of Contractual Dispute Between Synbiotics Corporation and Bio-Trends - -------------------------------------------------------------------------------- International, Inc. - ------------------ In November 1998, Bio-Trends International, Inc. ("Bio-Trends"), our supplier of feline leukemia virus ("FeLV") vaccine, declared our previously exclusive domestic rights to the vaccine to be non-exclusive, based on an alleged insufficiency of marketing expenditures by us. We filed an arbitration action against Bio-Trends, seeking a declaration that our rights remain exclusive. On June 9, 1999, the arbitrator ruled that our rights were no longer exclusive. Item 2. Changes in Securities None. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders The Annual Meeting of Shareholders was held on June 30, 1999. The following matters were submitted to a vote, with the results indicated below: (a) Election of directors:
Broker Nominee For Against Abstain Withheld Non-votes ------- --- ------- ------- -------- --------- Patrick Owen Burns 7,795,275 n/a n/a 488,772 0 Kenneth M. Cohen 7,801,675 n/a n/a 482,372 0 James C. DeCesare 7,756,425 n/a n/a 487,622 0 Brenda D. Gavin, DVM 7,793,775 n/a n/a 490,272 0 M. Blake Ingle, Ph.D. 7,798,075 n/a n/a 485,972 0 Donald E. Phillips 7,796,575 n/a n/a 487,472 0 Joseph Klein III 7,799,125 n/a n/a 484,922 0
-16- (b) Approval of the amendment of the Company's 1995 Stock Option/Stock Issuance Plan: For: 4,485,539 Against: 996,920 Abstain: 76,987 Broker Non-votes: 2,724,601 Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits -------- 10.49 Amendment Number Three To Agreement Regarding Licensing, Development, Marketing and Manufacturing between the Registrant and Binax, Inc. dated April 20, 1999. 10.50 1995 Stock Option/Stock Issuance Plan, as amended. 27 Financial Data Schedule (for electronic filing purposes only). (b) Reports on Form 8-K ------------------- On April 2, 1999, we filed an amended Form 8-K with regard to an event dated July 9, 1997, providing revised financial statements and revised pro forma financial information pertaining to our 1997 acquisition of SBIO-E. SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SYNBIOTICS CORPORATION Date: April 10, 2000 /s/ Michael K. Green ------------------------------------------ Michael K. Green Senior Vice President and Chief Financial Officer (signing both as a duly authorized officer and as principal financial officer) -17- EXHIBIT INDEX Exhibit No. Exhibit - ---------- ------- 10.49 Amendment Number Three To Agreement Regarding Licensing, Development, Marketing and Manufacturing between the Registrant and Binax, Inc. dated April 20, 1999. 10.50 1995 Stock Option/Stock Issuance Plan, as amended. 27 Financial Data Schedule (for electronic filing purposes only). -18- EX-10.49 2 AMENDMENT NO. 3 TO AGREEMENT Exhibit 10.49 ------------- AMENDMENT NUMBER THREE TO AGREEMENT REGARDING LICENSING, DEVELOPMENT, MARKETING AND MANUFACTURING This Amendment Number Three to Agreement Regarding Licensing, Development, Marketing and Manufacturing ("Amendment") is made and entered into as of April 20, 1999 by and between Synbiotics Corporation, a California corporation ("Synbiotics"), and Binax, Inc., a Delaware corporation ("Binax"). RECITALS WHEREAS, Synbiotics and Binax entered into that certain Agreement Regarding Licensing, Development, Marketing and Manufacturing dated June 30, 1993, as previously amended by Amendment Number One thereto dated December 9, 1993 and Amendment Number Two thereto dated July 27, 1994 (together, the "Agreement"). WHEREAS, the parties desire to amend and modify certain of the provisions of the Agreement pursuant to Section 16.2 of the Agreement to memorialize the results of their good faith negotiations pursuant to Section 3.7 of the Agreement. AGREEMENT NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. The FeLV Synbiotics Sublicensed Product (the "FeLV product") is hereby licensed back to Binax for development, manufacture, sale and distribution anywhere in the world as contemplated by the second, the next-to-last, and the last sentence of Section 3.7, provided that Binax's obligation to make royalty payments to Synbiotics under the second sentence of Section 3.7 shall terminate when Binax has paid Synbiotics a total of $150,000 in royalties on its FeLV product. Synbiotics agrees to amend its Distribution Agreement with Daiichi Pharmaceutical Co., Ltd. ("Daiichi") to delete the FeLV product therefrom (but nonetheless also to amend Section 3(b)(ii) thereof to provide for payment to Synbiotics by Daiichi of $75,000 within 30 days of registration of the FeLV product in Japan by Daiichi in furtherance of any Binax/Daiichi Distribution Agreement). Binax agrees to negotiate in good fait the terms of a Distribution Agreement with Daiichi for the registration and sale of the FeLV product in Japan. Synbiotics acknowledges that Daiichi and Binax may not come to an agreement regarding registration and sale of the FeLV product in Japan and therefore that the $75,000 payment by Daiichi to Synbiotics may never be made. Synbiotics shall allow Daiichi/Binax to use the ICT GOLD trademark for such FeLV product in Japan, an if requested to do so shall supply reagents for it on commercially reasonable terms. Binax may distribute the FeLV product independently or through a third party. 2. The rights and duties of the parties with regard to the existing ICT Gold HW canine heartworm test shall remain unchanged for as long as Synbiotics wishes to market such a test. (E.g., Synbiotics cannot lose such rights under section 3.7 or 5.3.2(a)(iii) of the Agreement.) Notwithstanding the foregoing, and notwithstanding the exclusivity of the rights granted to Synbiotics under the Section 3.1(a) of the Agreement, Binax may develop and manufacture (but not sell) and may, any time after April 1, 2000, manufacture, market and sell a proprietary rapid canine heartworm test in the ICT Format, or another format controlled by Binax, (the "Binax Test") anywhere in the world. Synbiotics need not provide reagents or other products to Binax for the Binax Test, or provide the use of any Synbiotics Confidential Information, Synbiotics Developments, intellectual property or technology, or provide any other development, manufacturing or marketing assistance to Binax for the Binax Test. Synbiotics grants no license to use any Synbiotics trademarks, tradenames, logos or other marks or other intellectual property in connection with the Binax Test, except as provided in Section 3 below. Because the parties agree to deem the Binax Test not to constitute a reverted Synbiotics sublicensed Product, Binax nee not pay the 7.5% royalty or recoupment of development costs which was contemplated by Section 3.7 of the Agreement. Because the Binax Test, if developed and marketed, will compete with Synbiotics' ICT Gold HW and other heartworm products, it is agreed that the relation of the parties with regard to marketing their respective products shall be that of arms-length competitors. 3. Synbiotics hereby grants Binax a limited, nonsublicensable, nonassignable, nonexclusive license under U.S. Patent No. 4,789,631 to develop, make, sell, market, distribute and use the Binax Test. Such license requires both an upfront consideration and a running royalty. The upfront consideration is Binax's agreement not to market or sell the Binax Test before April 1, 2000. The running royalty is 8% of the net selling price received by Binax and its Affiliates upon sales of units of the Binax Test which are made, sold, marketed, distributed or used in the United States (net of returns and customary trade discounts actually allowed and taken), and shall be paid at Synbiotics; headquarters in U.S. dollars within 30 days after the end of each calendar quarter, accompanied by a detailed net-sales report for such quarter signed by Binax's President. No royalty or other payments shall be due on units of the Binax Test which are neither made, sold, marketed, distributed or used in the United States. Binax's obligation to make royalty payments on sales of Binax Tests units made, sold, marketed, distributed or used within the United States shall expire on December 5, 2005. Binax shall maintain at its headquarters full, complete and accurate books and records showing the calculation of such net sales of the Binax Test, and Synbiotics may audit those books and records upon reasonable notice. Such audit shall be at Synbiotics' expense unless it shows a Binax underpayment of more than 5% for any audited period, in which case Binax shall reimburse Synbiotics for the reasonable costs of such audit. 4. It is understood Binax may also have to pay royalties to Becton- Dickinson, Barnes-Jewish Hospital, Carter-Wallace and/or SmithKline Diagnostics on the Binax Test. Synbiotics agrees that, if all the other licensors reduce their royalty rates to Binax, Synbiotics will reduce its running royalty rate to Binax by the same percentage. 2 5. The license specified in Section 3 of this Amendment shall terminate (a) 30 days after written notice by Synbiotics to Binax of material breach of the Agreement or this Amendment by Binax, which breach is not cured within such 30 days, (b) upon sale of Binax or its stock (by merger or otherwise) before December 5, 2005 to any company with a substantial animal health business that does not already have a license of the above-referenced patent from Synbiotics, or (c) upon any sale of the Binax Test udne a trademark or trade name not owned by Binax of its Affiliates. A "substantial animal health business" means at least $10 million in total assets or annual net sales pertaining to animal health diagnostics, or at least $500 million in total assets or annual net sales in animal health. A breach described in this Section 5(a) can also, but would not necessarily, also result in termination of the entire Agreement as provided in Article 8 of the Agreement. 6. Synbiotics does not represent or warrant that the Binax Test will be free from infringement of any patents or other proprietary rights of any third parties, nor does Synbiotics represent or warrant the validity or scope of U.S. Patent No. 4,789,631 r make any other express or implied warranty, including any warranty of merchantability or of fitness for a particular purpose, with regard either to the licensed Synbiotics patented technology or the Binax Test. 7. Binax shall mark all Binax Test units sold in the United States (or their product inserts) with the following patent notice: "Licensed under U.S. Patent No. 4,789,631." 8. Binax agrees that the transfer price for ICT Gold HW will in no event be increased to above $1.40 before April 1, 2000. 9. Except as provided in Section 1 of this Amendment, Section 3.7 of the Agreement is deleted from the Agreement. 10. Section 5.11.1 of the Agreement is amended by adding at the end: "or (d) for any third party claims against Synbiotics as a result of Binax's manufacture, marketing, sale or use, after April 20, 1999, of the FeLV product or the Binax Test, unless such claim relates to Synbiotics' right to grant a license to use, or Binax's right to exercise its rights as licensee with respect to, U.S. Patent No. 4,789,631." 11. The second sentence of Section 5.12.1 of the Agreement is amended by inserting after the word "Products": "or Binax's manufacture, marketing, sale or use, after April 20, 1999, of the FeLV product or the Binax Test." 12. Except as expressly set forth in the Agreement or herein, Synbiotics grants no licenses whatsoever to Binax. 13. Except as amended as set forth in Sections 1 through 12 above, the Agreement shall remain unchanged and shall remain in full force and effect. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 3 IN WITNESS WHEREOF, the undersigned have executed this Amendment Number Three to the Agreement to be effective as of the date first above written. WITNESS: SYNBIOTICS CORPORATION /s/ Judith Francello By: /s/ Kenneth M. Cohen - -------------------- -------------------- Its: President and CEO WITNESS: BINAX, INC. /s/ By: /s/ Roger U. Piasio ------------------- Its: President and CEO (SIGNATURE PAGE TO AMENDMENT NUMBER THREE TO AGREEMENT REGARDING LICENSING, DEVELOPMENT, MARKETING AND MANUFACTURING) 4 EX-10.50 3 1995 STOCK OPTION PLAN Exhibit 10.50 ------------- SYNBIOTICS CORPORATION 1995 STOCK OPTION/STOCK ISSUANCE PLAN ------------------------------------- as amended through March 29, 1999 --------------------------------- ARTICLE ONE GENERAL PROVISIONS ------------------ I. PURPOSE OF THE PLAN This 1995 Stock Option/Stock Issuance Plan (the "Plan") is intended to promote the interests of Synbiotics Corporation, a California corporation, by providing eligible persons with the opportunity to acquire a proprietary interest, or otherwise increase their proprietary interest, in the Corporation as an incentive for them to remain in the service of the Corporation. Capitalized terms not otherwise defined shall have the meanings assigned to such terms in the attached Appendix. II. STRUCTURE OF THE PLAN A. The Plan shall be divided into three separate equity programs: (i) the Discretionary Option Grant Program under which eligible persons may, at the discretion of the Plan Administrator, be granted options to purchase shares of common stock of the Corporation, (ii) the Stock Issuance Program under which eligible persons may, at the discretion of the Plan Administrator, be issued shares of common stock of the Corporation directly, either through the immediate purchase of such shares or as a bonus for services rendered the Corporation (or any Parent or Subsidiary), and (iii) the Automatic Option Grant Program under which non-employee directors shall automatically receive option grants at periodic intervals to purchase shares of common stock of the Corporation. B. The provisions of Articles One and Five shall apply to all equity programs under the Plan and shall accordingly govern the interests of all persons under the Plan. III. ADMINISTRATION OF THE PLAN A. Plan Administrator. Either the Board or a committee of two (2) or ------------------ more non-employee Board members appointed by the Board to administer the Discretionary Option Grant and Stock Issuance Programs with respect to Section 16 insiders (the "Primary Committee") shall have sole and exclusive authority to administer the Plan with respect to Section 16 Insiders. B. Committees. Administration of the Discretionary Option Grant and ---------- Stock Issuance Programs with respect to all other persons eligible to participate in those programs may, at the Board's discretion, be -1- vested in the Board, the Primary Committee or a committee of two (2) or more Board members appointed by the Board to administer the Discretionary Option Grant Program and Stock Issuance Program with respect to eligible persons other than Section 16 insiders (the "Secondary Committee"), or the Board may retain the power to administer those programs with respect to all such persons. All Board members are eligible to be members of the Secondary Committee, including Board members who are Employees eligible to receive discretionary option grants or direct stock issuances under the Plan or any other stock option, stock appreciation, stock bonus or other stock plan of the Corporation (or any Parent or Subsidiary). C. Members of Committees. Members of the Primary Committee or any --------------------- Secondary Committee shall serve for such period of time as the Board may determine and may be removed by the Board at any time. The Board may also at any time terminate the functions of any Secondary Committee and assume all powers and authority previously delegated to such committee. D. Service as Committee Members. Service on the Primary Committee or the ---------------------------- Secondary Committee shall constitute service as a Board member, and members of each such committee shall accordingly be entitled to full indemnification and reimbursement as Board members for their service on such committee. No member of the Primary Committee or the Secondary Committee shall be liable for any act or omission made in good faith with respect to the Plan or any option grants or stock issuances under the Plan. E. Authority. Each Plan Administrator shall, within the scope of its --------- administrative functions under the Plan, have full power and authority (subject to the express provisions of the Plan) to (i) establish such rules and regulations as it may deem appropriate for the proper administration of the Discretionary Option Grant Program and Stock Issuance Program and to make such determinations under, and issue such interpretations of, such programs and any outstanding option grants or stock issuances as it may deem necessary or advisable, (ii) determine, with respect to the option grants under the Discretionary Option Grant Program, which eligible persons are to receive option grants, the time or times when such option grants are to be made, the number of shares to be covered by each such grant, the status of the granted option as either an Incentive Option or a Non-Statutory Option, the time or times at which each option is to become exercisable, the vesting schedule (if any) applicable to the option shares and the maximum term for which the option is to remain outstanding and (iii) determine, with respect to stock issuances under the Stock Issuance Program, which eligible persons are to receive stock issuances, the time or times when such issuances are to be made, the number of shares to be issued to each Participant, the vesting schedule (if any) applicable to the issued shares and the consideration to be paid by the Participant for such shares. The Plan Administrator(s) shall have the absolute discretion either to grant options in accordance with the Discretionary Option Grant Program or to effect stock issuances in accordance with the Stock Issuance Program. Decisions of each Plan Administrator shall be final and binding on all parties who have an interest in the Discretionary Option Grant Program and Stock Issuance Program or any outstanding option or stock issuance thereunder. F. Restriction on Discretion. The administration of the Automatic Option ------------------------- Grant Program under Article Three shall be self executing in accordance with the terms and conditions thereof and the Plan Administrator shall not exercise any discretionary functions in respect to matters governed by Article Three. -2- IV. OPTION GRANTS AND STOCK ISSUANCES A. Subject to Section V.B below, the persons eligible to receive stock issuances under the Stock Issuance Program ("Participant") and/or option grants pursuant to the Discretionary Option Grant Program ("Optionee") are as follows: (i) officers and other employees of the Corporation (or its parent or subsidiary corporations) who render services which contribute to the management, growth and financial success of the Corporation (or its parent or subsidiary corporations); (ii) non-employee members of the Board; and (iii) those consultants or other independent contractors who provide valuable services to the Corporation (or its parent or subsidiary corporations). B. The individuals eligible to receive option grants under the Automatic Option Grant Program shall be those individuals who serve as non- employee Board members during the term of the Plan. V. STOCK SUBJECT TO THE PLAN A. The stock issuable under the Plan shall be shares of authorized but unissued or reacquired common stock of the Corporation ("Common Stock"), including shares repurchased by the Corporation on the open market. The maximum number of shares of Common Stock which may be issued over the term of the Plan shall not exceed 2,752,565 shares. Such authorized share reserve is comprised of (i) the number of shares available for issuance under the Predecessor Plan as last approved by the Corporation prior to their incorporation into this Plan, including the shares subject to the outstanding options incorporated into the Plan and any other shares which would have been available for future option grants under the Predecessor Plan, plus (ii) an additional increase of 1,332,055 shares authorized by the Board under the Plan, subject to stockholder approval. B. No one person participating in the Plan may receive options and direct stock issuances for more than 800,000 shares of Common Stock in the aggregate over the term of the Plan. C. Shares of Common Stock subject to outstanding options shall be available for subsequent issuance under the Plan to the extent (i) the options (including any options incorporated from the Predecessor Plan) expire or terminate for any reason prior to exercise in full or (ii) the options are cancelled in accordance with the cancellation- regrant provisions of Article Two. All shares issued under the Plan (including shares issued upon exercise of options incorporated from the Predecessor Plan), whether or not those shares are subsequently repurchased by the Corporation pursuant to its repurchase rights under the Plan, shall reduce on a share-for-share basis the number of shares of Common Stock available for subsequent issuance under the Plan. In addition, should the exercise price of an option under the Plan (including any option incorporated from the Predecessor Plan) be paid with shares of Common Stock or should shares of Common Stock otherwise issuable under the Plan be withheld by the Corporation in satisfaction of the withholding taxes incurred in connection with the exercise of an option or the vesting of a stock issuance under the Plan, then the number of shares of Common Stock available for issuance under the Plan shall be reduced by the gross number of shares for which the option is exercised or which vest under the stock issuance, and not by the net number of shares of Common Stock issued to the holder of such option or stock issuance. D. Should any change be made to the Common Stock by reason of any stock split, stock dividend, -3- recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation's receipt of consideration, appropriate adjustments shall be made to (i) the maximum number and/or class of securities issuable under the Plan, (ii) the maximum number and/or class of securities for which the share reserve is to increase automatically each year, (iii) the number and/or class of securities for which any one person may be granted options and direct stock issuances over the term of the Plan, (iv) the number and/or class of securities for which automatic option grants are to be subsequently made under the Automatic Option Grant Program and (v) the number and/or class of securities and the exercise price per share in effect under each outstanding option (including any option incorporated from the Predecessor Plan) in order to prevent the dilution or enlargement of benefits thereunder. The adjustments determined by the Plan Administrator shall be final, binding and conclusive. ARTICLE TWO DISCRETIONARY OPTION GRANT PROGRAM ---------------------------------- I. OPTION TERMS Each option shall be evidenced by one or more documents in the form approved by the Plan Administrator; provided, however, that each such document shall comply -------- with the terms specified below. Each document evidencing an Incentive Option shall, in addition, be subject to the provisions of the Plan applicable to such options. A. Exercise Price. -------------- 1. The exercise price per share shall be fixed by the Plan Administrator but shall not be less than eighty-five percent (85%) of the Fair Market Value per share of Common Stock on the option grant date, provided that the Plan Administrator may fix the exercise price at less than 85% if the optionee makes a payment to the Company (including payment made by means of a salary reduction agreement) of no less than the excess of 85% of the Fair Market Value of the Common Stock on the option grant date over such exercise price. 2. The exercise price shall become immediately due upon exercise of the option and shall, subject to the provisions of Section II of Article Five and the documents evidencing the option, be payable in one or more of the forms specified below: (i) cash or check made payable to the Corporation, (ii) shares of Common Stock held for the requisite period necessary to avoid a charge to the Corporation's earnings for financial reporting purposes and valued at Fair Market Value on the exercise date, or (iii) to the extent the option is exercised for vested shares, through a special sale and remittance procedure pursuant to which the Optionee shall concurrently provide irrevocable written instructions to (a) a Corporation- designated brokerage firm to effect the immediate sale of the purchased shares and remit to the Corporation, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate exercise price payable for the purchased shares plus all applicable Federal, state and local income and employment taxes required to be withheld by the Corporation by reason of such exercise and (b) the Corporation to deliver the certificates for the purchased shares directly to such brokerage firm in order to -4- complete the sale transaction. Except to the extent such sale and remittance procedure is utilized, payment of the exercise price for the purchased shares must be made on the exercise date. B. Exercise and Term of Options. Each option shall be exercisable at ---------------------------- such time or times, during such period and for such number of shares as shall be determined by the Plan Administrator and set forth in the documents evidencing the option. However, no option shall have a term in excess of ten (10) years measured from the option grant date. C. Effect of Termination of Service. -------------------------------- 1. The following provisions shall govern the exercise of any options held by the Optionee at the time of cessation of Service or death: (i) Any option outstanding at the time of the Optionee's cessation of Service for any reason shall remain exercisable for such period of time thereafter as shall be determined by the Plan Administrator and set forth in the documents evidencing the option, but no such option shall be exercisable after the expiration of the option term. (ii) Any option exercisable in whole or in part by the Optionee at the time of death may be subsequently exercised by the personal representative of the Optionee's estate or by the person or persons to whom the option is transferred pursuant to the Optionee's will or in accordance with the laws of descent and distribution. (iii) During the applicable post-Service exercise period, the option may not be exercised in the aggregate for more than the number of vested shares for which the option is exercisable on the date of the Optionee's cessation of Service. Upon the expiration of the applicable exercise period or (if earlier) upon the expiration of the option term, the option shall terminate and cease to be outstanding for any vested shares for which the option has not been exercised. However, the option shall, immediately upon the Optionee's cessation of Service, terminate and cease to be outstanding to the extent it is not exercisable for vested shares on the date of such cessation of Service. (iv) In the event of a Corporate Transaction,the provisions of Section III of this Article Two shall govern the period for which the outstanding options are to remain exercisable following the Optionee's cessation of Service and shall supersede any provisions to the contrary in this section. 2. The Plan Administrator shall have the discretion, exercisable either at the time an option is granted or at any time while the option remains outstanding, to: (i) extend the period of time for which the option is to remain exercisable following the Optionee's cessation of Service from the period otherwise in effect for that option to such greater period of time as the Plan Administrator shall deem appropriate, but in no event beyond the expiration of the option term, and/or (ii) permit the option to be exercised, during the applicable post-Service exercise period, not only with respect to the number of vested shares of Common Stock for -5- which such option is exercisable at the time of the Optionee's cessation of Service but also with respect to one or more additional installments in which the Optionee would have vested under the option had the Optionee continued in Service. D. Stockholder Rights. The holder of an option shall have no stockholder ------------------ rights with respect to the shares subject to the option until such person shall have exercised the option, paid the exercise price and become a holder of record of the purchased shares. E. Repurchase Rights. The Plan Administrator shall have the discretion ----------------- to grant options which are exercisable for unvested shares of Common Stock. Should the Optionee cease Service while holding such unvested shares, the Corporation shall have the right to repurchase, at the exercise price paid per share, any or all of those unvested shares. The terms upon which such repurchase right shall be exercisable (including the period and procedure for exercise and the appropriate vesting schedule for the purchased shares) shall be established by the Plan Administrator and set forth in the document evidencing such repurchase right. F. Limited Transferability of Options. Unless the Plan Administrator ---------------------------------- otherwise expressly approves in writing, the option shall be exercisable only by the Optionee during the lifetime of the Optionee, and shall not be assignable or transferable other than by will or by the laws of descent and distribution following the Optionee's death. However, a Non-Statutory Option may be assigned in accordance with the terms of a Qualified Domestic Relations Order within the meaning of Internal Revenue Code Section 414(p). The assigned option may only be exercised by the person or persons who acquire a proprietary interest in the option pursuant to such Qualified Domestic Relations Order. The terms applicable to the assigned option (or portion thereof) shall be the same as those in effect for the option immediately prior to such assignment and shall be set forth in such documents issued to the assignee as the Plan Administrator may deem appropriate II. INCENTIVE OPTIONS The terms specified below shall be applicable to all Incentive Options. Except as modified by the provisions of this Section II, all the provisions of Articles One, Two and Five shall be applicable to Incentive Options. Options which are specifically designated as Non-Statutory Options when issued under the Plan shall not be subject to the terms of this Section II. --- A. Eligibility. Incentive Options may only be granted to Employees. ----------- B. Exercise Price. The exercise price per share shall not be less than -------------- one hundred percent (100%) of the Fair Market Value per share of Common Stock on the option grant date. C. Dollar Limitation. The aggregate Fair Market Value of the shares of ----------------- Common Stock (determined as of the respective date or dates of grant) for which one or more options granted to any Employee under the Plan (or any other option plan of the Corporation or any Parent or Subsidiary) may for the first time become exercisable as Incentive Options during any one (1) calendar year shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent the Employee holds two (2) or more such options which become exercisable for the first time in the same calendar year, the foregoing limitation on the exercisability of such options as Incentive Options shall be applied on the basis of the order in which such options are granted. D. 10% Stockholder. If any Employee to whom an Incentive Option is --------------- granted is a 10% stockholder (within the meaning of Internal Revenue Code Section 424(d)), then the exercise price per share shall -6- not be less than one hundred ten percent (110%) of the Fair Market Value per share of Common Stock on the option grant date, and the option term shall not exceed five (5) years measured from the option grant date. III. CORPORATE TRANSACTION A. In the event of any Corporate Transaction, each outstanding option shall automatically accelerate so that each such option shall, immediately prior to the effective date of the Corporate Transaction, become fully exercisable for all of the shares of Common Stock at the time subject to such option and may be exercised for any or all of those shares as fully-vested shares of Common Stock. However, an outstanding option shall not so accelerate if and to the extent: (i) such option is, in connection with the Corporate Transaction, either to be assumed by the successor corporation (or parent thereof) or to be replaced with a comparable option to purchase shares of the capital stock of the successor corporation (or parent thereof), (ii) such option is to be replaced with a cash incentive program of the successor corporation which preserves the spread existing on the unvested option shares at the time of the Corporate Transaction and provides for subsequent payout in accordance with the same vesting schedule applicable to such option or (iii) the acceleration of such option is subject to other limitations imposed by the Plan Administrator at the time of the option grant. The determination of option comparability under clause (i) above shall be made by the Plan Administrator, and its determination shall be final, binding and conclusive. B. All outstanding repurchase rights shall also terminate automatically, and the shares of Common Stock subject to those terminated rights shall immediately vest in full, in the event of any Corporate Transaction, except to the extent: (i) those repurchase rights are to be assigned to the successor corporation (or parent thereof) in connection with such Corporate Transaction or (ii) such accelerated vesting is precluded by other limitations imposed by the Plan Administrator at the time the repurchase right is issued. C. Immediately following the consummation of the Corporate Transaction, all outstanding options shall terminate and cease to be outstanding, except to the extent assumed by the successor corporation (or parent thereof). D. Each option which is assumed in connection with a Corporate Transaction shall be appropriately adjusted, immediately after such Corporate Transaction, to apply to the number and class of securities which would have been issuable to the Optionee in consummation of such Corporate Transaction had the option been exercised immediately prior to such Corporate Transaction. Appropriate adjustments shall also be made to (i) the number and class of securities available for issuance under the Plan on both an aggregate and per Optionee basis following the consummation of such Corporate Transaction and (ii) the exercise price payable per share under each outstanding option, provided the -------- aggregate exercise price payable for such securities shall remain the same. E. Any options which are assumed or replaced in the Corporate Transaction and do not otherwise accelerate at that time, shall automatically accelerate (and any of the Corporation's outstanding repurchase rights which do not otherwise terminate at the time of the Corporate Transaction shall automatically terminate and the shares of Common Stock subject to those terminated rights shall immediately vest in full) in the event the Optionee's Service should subsequently terminate by reason of an Involuntary Termination within eighteen (18) months following the effective date of such Corporate Transaction. Any options so accelerated shall remain exercisable for fully-vested shares until the earlier of (i) the expiration of the option term or ------- (ii) the expiration of the one (1)-year period measured from the effective date of the Involuntary Termination. -7- F. The portion of any Incentive Option accelerated in connection with a Corporate Transaction or Change in Control shall remain exercisable as an Incentive Option only to the extent the applicable One Hundred Thousand Dollar limitation is not exceeded. To the extent such dollar limitation is exceeded, the accelerated portion of such option shall be exercisable as a Non-Statutory Option under the Federal tax laws. G. The grant of options under the Discretionary Option Grant Program shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. IV. CANCELLATION AND REGRANT OF OPTIONS The Plan Administrator shall have the authority to effect, at any time and from time to time, with the consent of the affected option holders, the cancellation of any or all outstanding options under the Discretionary Option Grant Program (including outstanding options incorporated from the Predecessor Plan) and to grant in substitution new options covering the same or different number of shares of Common Stock but with an exercise price per share based on the Fair Market Value per share of Common Stock on the new option grant date. ARTICLE THREE STOCK ISSUANCE PROGRAM ---------------------- I. STOCK ISSUANCE TERMS Shares of Common Stock may be issued under the Stock Issuance Program through direct and immediate issuances without any intervening option grants. Each such stock issuance shall be evidenced by a Stock Issuance Agreement which complies with the terms specified below. A. Purchase Price -------------- 1. The purchase price per share shall be fixed by the Plan Administrator, but shall not be less than eighty-five percent (85%) of the Fair Market Value per share of Common Stock on the stock issuance date. 2. Subject to the provisions of Section II of Article Five, shares of Common Stock may be issued under the Stock Issuance Program for one or both of the following items of consideration which the Plan Administrator may deem appropriate in each individual instance: (i) cash or check made payable to the Corporation, or (ii) past services rendered to the Corporation (or any Parent or Subsidiary). B. Vesting Provisions ------------------ 1. Shares of Common Stock issued under the Stock Issuance Program may, in the discretion of the Plan Administrator, be fully and immediately vested upon issuance or may vest in one or more installments over the Participant's period of Service or upon attainment of specified -8- performance objectives. The elements of the vesting schedule applicable to any unvested shares of Common Stock issued under the Stock Issuance Program, namely: (i) the Service period to be completed by the Participant or the performance objectives to be attained, (ii) the number of installments in which the shares are to vest, (iii) the interval or intervals (if any) which are to lapse between installments, and (iv) the effect which death, Permanent Disability or other event designated by the Plan Administrator is to have upon the vesting schedule, shall be determined by the Plan Administrator and incorporated into the stock issuance agreement. 2. Any new, substituted or additional securities or other property (including money paid other than as a regular cash dividend) which the Participant may have the right to receive with respect to the Participant's unvested shares of Common Stock by reason of any stock dividend, stock split, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation's receipt of consideration shall be issued subject to (i) the same vesting requirements applicable to the Participant's unvested shares of Common Stock and (ii) such escrow arrangements as the Plan Administrator shall deem appropriate. 3. The Participant shall have full stockholder rights with respect to any shares of Common Stock issued to the Participant under the Stock Issuance Program, whether or not the Participant's interest in those shares is vested. Accordingly, the Participant shall have the right to vote such shares and to receive any regular cash dividends paid on such shares. 4. Should the Participant cease to remain in Service while holding one or more unvested shares of Common Stock issued under the Stock Issuance Program or should the performance objectives not be attained with respect to one or more such unvested shares of Common Stock, then those shares shall be immediately surrendered to the Corporation for cancellation, and the Participant shall have no further stockholder rights with respect to those shares. To the extent the surrendered shares were previously issued to the Participant for consideration paid in cash or cash equivalent (including the Participant's purchase-money indebtedness), the Corporation shall repay to the Participant the cash consideration paid for the surrendered shares and shall cancel the unpaid principal balance of any outstanding purchase-money note of the Participant attributable to such surrendered shares. 5. The Plan Administrator may in its discretion waive the surrender and cancellation of one or more unvested shares of Common Stock (or other assets attributable thereto) which would otherwise occur upon the non-completion of the vesting schedule applicable to such shares. Such waiver shall result in the immediate vesting of the Participant's interest in the shares of Common Stock as to which the waiver applies. Such waiver may be effected at any time, whether before or after the Participant's cessation of Service or the attainment or non-attainment of the applicable performance objectives. II. CORPORATE TRANSACTION -9- A. All of the outstanding repurchase rights under the Stock Issuance Program shall terminate automatically, and all the shares of Common Stock subject to those terminated rights shall immediately vest in full, in the event of any Corporate Transaction, except to the extent (i) those repurchase rights are assigned to the successor corporation (or parent thereof) in connection with such Corporate Transaction or (ii) such accelerated vesting is precluded by other limitations imposed in the stock issuance agreement. B. Any repurchase rights that are assigned in the Corporate Transaction shall automatically terminate, and all the shares of Common Stock subject to those terminated rights shall immediately vest in full, in the event the Optionee's Service should subsequently terminate by reason of an Involuntary Termination within eighteen (18) months following the effective date of such Corporate Transaction. III. SHARE ESCROW/LEGENDS Unvested shares may, in the Plan Administrator's discretion, be held in escrow by the Corporation until the Participant's interest in such shares vests or may be issued directly to the Participant with restrictive legends on the certificates evidencing those unvested shares. ARTICLE FOUR AUTOMATIC OPTION GRANT PROGRAM ------------------------------ I. OPTION TERMS A. Grant Dates. Option grants shall be made on the dates specified ----------- below: 1. Each non-employee director who is who is first elected or appointed as a non-employee Board member after the effective date of the Plan shall automatically be granted, on such initial election or appointment, a Non-Statutory Option to purchase 7,000 shares of Common Stock. 2. On the date of each Annual Stockholders Meeting, beginning with the 1995 Annual Meeting, each individual who is to continue to serve as a non-employee director after such meeting, shall automatically be granted, whether or not such individual is standing for re-election as a Board member at that Annual Meeting, a Non-Statutory Option to purchase an additional 7,000 shares of Common Stock, provided such individual has served as a non-employee Board member for at least six (6) months prior to the date of such Annual Meeting. There shall be no limit on the number of such 7,000-share option grants any one non-employee director may receive over his or her period of Board service. -10- B. Exercise Price. -------------- 1. The exercise price per share shall be equal to one hundred percent (100%) of the Fair Market Value per share of Common Stock on the option grant date. 2. The exercise price shall be payable in one or more of the alternative forms authorized under the Discretionary Option Grant Program. Except to the extent the sale and remittance procedure specified thereunder is utilized, payment of the exercise price for the purchased shares must be made on the exercise date. C. Option Term. Each option shall have a term of ten (10) years measured ----------- from the option grant date. D. Exercise and Vesting of Options. Each option shall be immediately ------------------------------- exercisable for any or all of the option shares. However, any shares purchased under the option shall be subject to repurchase by the Corporation, at the exercise price paid per share, upon the Optionee's cessation of Board service prior to vesting in those shares. Each grant shall vest, and the Corporation's repurchase right shall lapse, in a series of four (4) equal and successive quarterly installments over the Optionee's period of continued service as a Board member, with the first such installment to vest upon the Optionee's completion of three (3) months of Board service measured from the option grant date. E. Effect of Termination of Board Service. The following provisions -------------------------------------- shall govern the exercise of any options held by the Optionee at the time the Optionee ceases to serve as a Board member: (i) The Optionee (or, in the event of Optionee's death, the personal representative of the Optionee's estate or the person or persons to whom the option is transferred pursuant to the Optionee's will or in accordance with the laws of descent and distribution) shall have the balance of the option term in which to exercise each such option. (ii) Following cessation of service on the Board for other than death or disability, the option may not be exercised in the aggregate for more than the number of vested shares of Common Stock for which the option was exercisable at the time of the Optionee's cessation of Board service. (iii) Should the Optionee cease to serve as a Board member by reason of death or Permanent Disability, then all shares at the time subject to the option shall immediately vest so that such option may be exercised for all or any portion of such shares as fully-vested shares of Common Stock. (iv) Upon expiration of the option term, the option shall terminate and cease to be outstanding for any vested shares for which the option has not been exercised. However, the option shall, immediately upon the Optionee's cessation of Board service, terminate and cease to be outstanding to the extent it is not exercisable for vested shares on the date of such cessation of Board service. -11- II. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-OVER A. In the event of any Corporate Transaction, the shares of Common Stock at the time subject to each outstanding option but not otherwise vested shall automatically vest in full so that each such option shall, immediately prior to the effective date of the Corporate Transaction, become fully exercisable for all of the shares of Common Stock at the time subject to such option and may be exercised for all or any portion of such shares as fully-vested shares of Common Stock. Immediately following the consummation of the Corporate Transaction, each automatic option grant shall terminate and cease to be outstanding, except to the extent assumed by the successor corporation (or parent thereof). B. In connection with any Change in Control, the shares of Common Stock at the time subject to each outstanding option but not otherwise vested shall automatically vest in full so that each such option shall, immediately prior to the effective date of the Change in Control, become fully exercisable for all of the shares of Common Stock at the time subject to such option and may be exercised for all or any portion of such shares as fully-vested shares of Common Stock. Each such option shall remain exercisable for such fully-vested option shares until the expiration or sooner termination of the option term or the surrender of the option in connection with a Hostile Take-Over. C. Upon the occurrence of a Hostile Take-Over, the Optionee shall have a thirty (30)-day period in which to surrender to the Corporation each automatic option held by him or her for a period of at least six (6) months. The Optionee shall in return be entitled to a cash distribution from the Corporation in an amount equal to the excess of (i) the Take-Over Price of the shares of Common Stock at the time subject to the surrendered option (whether or not the Optionee is otherwise at the time vested in those shares) over (ii) the aggregate exercise price payable for such shares. Such cash distribution shall be paid within five (5) days following the surrender of the option to the Corporation. No approval or consent of the Board shall be required in connection with such option surrender and cash distribution. D. The grant of options under the Automatic Option Grant Program shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. III. REMAINING TERMS --------------- The remaining terms of each option granted under the Automatic Option Grant Program shall be the same as the terms in effect for option grants made under the Discretionary Option Grant Program. ARTICLE FIVE MISCELLANEOUS ------------- I. ACCELERATION A. The Plan Administrator shall have the discretion, exercisable either at the time an option is granted under the Discretionary Stock Option Program, at the time that stock is issued under the Stock Issuance Program or at any time while the option or stock remains outstanding, to provide for the acceleration of one or -12- more outstanding options and the termination of repurchase rights on one or more outstanding shares upon the occurrence of such events as the Plan Administrator may determine, including upon a Corporate Transaction regardless or whether or not such options are to be assumed or replaced or the repurchase rights are to be assigned in the Corporate Transaction. B. The Plan Administrator shall not have the discretion to provide for the acceleration of any options granted under the Automatic Option Grant Program. II. FINANCING A. The Plan Administrator may permit any Optionee or Participant to pay the option exercise price under the Discretionary Option Grant Program or the purchase price for shares issued under the Stock Issuance Program by delivering a promissory note payable in one or more installments. The terms of any such promissory note (including the interest rate and the terms of repayment) shall be established by the Plan Administrator in its sole discretion. Promissory notes may be authorized with or without security or collateral. In all events, the maximum credit available to the Optionee or Participant may not exceed the sum of (i) the aggregate option exercise price or purchase price payable for the purchased shares plus (ii) any Federal, state and local income and employment tax liability incurred by the Optionee or the Participant in connection with the option exercise or share purchase. B. The Plan Administrator may, in its discretion, determine that one or more such promissory notes shall be subject to forgiveness by the Corporation in whole or in part upon such terms as the Plan Administrator may deem appropriate. III. TAX WITHHOLDING A. The Corporation's obligation to deliver shares of Common Stock upon the exercise of options or upon the issuance or vesting of such shares under the Plan shall be subject to the satisfaction of all applicable Federal, state and local income and employment tax withholding requirements. B. The Plan Administrator may, in its discretion, provide any or all holders of Non-Statutory Options or unvested shares of Common Stock under the Plan (other than the options granted or the shares issued under the Automatic Option Grant Program) with the right to use shares of Common Stock in satisfaction of all or part of the federal, state and local income or employment taxes incurred by such holders in connection with the exercise of their options or the vesting of their shares. Such right may be provided to any such holder in either or both of the following formats: (i) Stock Withholding: The election to have the Corporation ----------------- withhold, from the shares of Common Stock otherwise issuable upon the exercise of such Non-Statutory Option or the vesting of such shares, a portion of those shares with an aggregate Fair Market Value equal to the percentage of such taxes (not to exceed one hundred percent (100%)) designated by the holder. (ii) Stock Delivery: The election to deliver to the Corporation, at -------------- the time the Non-Statutory Option is exercised or the shares vest, one or more shares of Common Stock previously acquired by such holder (other than in connection with the option exercise or share vesting triggering the taxes) with an aggregate Fair Market Value equal to the percentage of such taxes (not to exceed one hundred percent (100%)) designated by the holder. -13- IV. EFFECTIVE DATE AND TERM OF THE PLAN A. The Plan shall become effective on the date the Plan is adopted by the Board, and options may be granted under the Discretionary Option Grant Program from and after the effective date. However, no options granted under the Plan may be exercised, and no shares shall be issued under the Plan, until the Plan is approved by the Corporation's stockholders. If such stockholder approval is not obtained within twelve (12) months after such effective date, then all options previously granted under this Plan shall terminate and cease to be outstanding, and no further options shall be granted and no shares shall be issued under the Plan. B. The Plan shall serve as the successor to the Predecessor Plan, and no further option grants shall be made under the Predecessor Plan after the effective date of the Plan. All options outstanding under the Predecessor Plan as of such date shall, immediately upon approval of the Plan by the Corporations's stockholders, be incorporated into the Plan and treated as outstanding options under the Plan. However, each outstanding option so incorporated shall continue to be governed solely by the terms of the documents evidencing such option. No provision of the Plan shall be deemed to adversely affect or otherwise diminish the rights or obligations of the holders of such incorporated options with respect to their acquisition of shares of Common Stock which may exist under the terms of the Predecessor Plan under which such incorporated option was issued. Subject to the rights of the optionee under the incorporated option documents and Predecessor Plan, the discretion delegated to the Plan Administrator hereunder may be exercised with respect to incorporated options to the same extent as it is exercisable with respect to options originally granted under this Plan. C. The option/vesting acceleration provisions of Article Two relating to Corporate Transactions and Changes in Control may, in the Plan Administrator's discretion, be extended to one or more options incorporated from the Predecessor Plan which do not otherwise provide for such acceleration. D. The Plan shall terminate upon the earliest of (i) April 27, 2005, (ii) -------- the date on which all shares available for issuance under the Plan shall have been issued pursuant to the exercise of the options or the issuance of shares (whether vested or unvested) under the Plan or (iii) the termination of all outstanding options in connection with a Corporate Transaction. Upon such Plan termination, all options and unvested stock issuances outstanding on such date shall thereafter continue to have force and effect in accordance with the provisions of the documents evidencing such options or issuances. V. AMENDMENT OF THE PLAN A. The Board shall have complete and exclusive power and authority to amend or modify the Plan in any or all respects. However, no such amendment or modification shall adversely affect the rights and obligations with respect to options or unvested stock issuances at the time outstanding under the Plan unless the Optionee or the Participant consents to such amendment or modification. In addition, certain amendments may require stockholder approval if so determined by the Board or pursuant to applicable laws or regulations. B. If stockholder approval is required, pursuant to the previous sentence, to amend the Plan to increase the number of shares of Common Stock available for issuance under the Plan, then upon Board approval of such an amendment, options to purchase shares of Common Stock may be granted under the Discretionary Option Grant Program and shares of Common Stock may be issued under the Stock Issuance Program that are in each instance in excess of the number of shares then available for issuance under the Plan, provided any excess shares actually issued under those programs are held in -14- escrow until there is obtained stockholder approval of an amendment sufficiently increasing the number of shares of Common Stock available for issuance under the Plan. If such stockholder approval (if so required) is not obtained within twelve (12) months after the date the first such excess issuances are made, then (i) any unexercised options granted on the basis of such excess shares shall terminate and cease to be outstanding and (ii) the Corporation shall promptly refund to the Optionees and the Participants the exercise or purchase price paid for any excess shares issued under the Plan and held in escrow, together with interest (at the applicable Short Term Federal Rate) for the period the shares were held in escrow, and such shares shall thereupon be automatically cancelled and cease to be outstanding. VI. USE OF PROCEEDS Any cash proceeds received by the Corporation from the sale of shares of Common Stock under the Plan shall be used for general corporate purposes. VII. REGULATORY APPROVALS A. The implementation of the Plan, the granting of any option under the Plan and the issuance of any shares of Common Stock (i) upon the exercise of any option or (ii) under the Stock Issuance Program shall be subject to the Corporation's procurement of all approvals and permits required by regulatory authorities having jurisdiction over the Plan, the options granted under it and the shares of Common Stock issued pursuant to it. B. No shares of Common Stock or other assets shall be issued or delivered under the Plan unless and until there shall have been compliance with all applicable requirements of Federal and state securities laws, including the filing and effectiveness of the Form S-8 registration statement for the shares of Common Stock issuable under the Plan, and all applicable listing requirements of any stock exchange (or the Nasdaq National Market, if applicable) on which Common Stock is then listed for trading. VIII. NO EMPLOYMENT/SERVICE RIGHTS Nothing in the Plan shall confer upon the Optionee or the Participant any right to continue in Service for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation (or any Parent or Subsidiary employing or retaining such person) or of the Optionee or the Participant, which rights are hereby expressly reserved by each, to terminate such person's Service at any time for any reason, with or without cause. -15- APPENDIX -------- The following definitions shall be in effect under the Plan: A. Board shall mean the Corporation's Board of Directors. ----- B. Change in Control shall mean a change in ownership or control of the ----------------- Corporation effected through either of the following transactions: (i) the acquisition, directly or indirectly, by any person or related group of persons (other than the Corporation or a person that directly or indirectly controls, is controlled by, or is under common control with, the Corporation), of beneficial ownership (within the meaning of Rule 13d-3 of the Securities Exchange Act of 1934) of securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities pursuant to a tender or exchange offer made directly to the Corporation's stockholders which the Board does not recommend such stockholders to accept, or (ii) a change in the composition of the Board over a period of thirty- six (36) consecutive months or less such that a majority of the Board members ceases, by reason of one or more contested elections for Board membership, to be comprised of individuals who either (A) have been Board members continuously since the beginning of such period or (B) have been elected or nominated for election as Board members during such period by at least a majority of the Board members described in clause (A) who were still in office at the time the Board approved such election or nomination. C. Corporate Transaction shall mean either of the following stockholder- --------------------- approved transactions to which the Corporation is a party: (i) a merger or consolidation in which the Company is not the surviving entity, except for a transaction the principal purpose of which is to change the State of the Company's incorporation, (ii) the sale, transfer or other disposition of all or substantially all of the assets of the Company in liquidation or dissolution of the Company, or (iii) any reverse merger in which the Company is the surviving entity but in which securities possessing more than fifty percent (50%) of the total combined voting power of the Company's outstanding securities are transferred to holders different from those who held such securities immediately prior to such merger. D. Corporation shall mean Synbiotics Corporation, a California corporation. ----------- E. Employee shall mean an individual who is in the employ of the Corporation -------- (or any Parent or Subsidiary), subject to the control and direction of the employer entity as to both the work to be performed and the manner and method of performance. F. Fair Market Value per share of Common Stock on any relevant date shall be ----------------- determined in accordance with the following provisions: (i) If the Common Stock is at the time traded on the Nasdaq National Market, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question, as such price is reported by the National Association of Securities Dealers on the Nasdaq National Market or any successor system. If there is no closing selling price for the Common Stock on the date in A-1 question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. (ii) If the Common Stock is at the time listed on any stock exchange, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question on the Stock Exchange determined by the Plan Administrator to be the primary market for the Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. (iii) If the Common Stock is at the time not traded on the Nasdaq National Market or listed on any stock exchange, then the Fair Market Value shall be determined according to whatever method is from time to time approved in good faith by the Board. G. Hostile Take-Over shall mean a change in ownership of the Corporation ----------------- effected through acquisition, directly or indirectly, by any person or related group of persons (other than the Corporation or a person that directly or indirectly controls, is controlled by, or is under common control with, the Corporation) of beneficial ownership (within the meaning of Rule 13d-3 of the Securities Exchange Act of 1934) of securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities pursuant to a tender or exchange offer made directly to the Corporation's stockholders which the Board does not recommend such stockholders to accept. H. Incentive Option shall mean an option which satisfies the requirements of ---------------- Internal Revenue Code Section 422. I. Involuntary Termination shall mean the termination of the Service of any ----------------------- individual which occurs by reason of: (i) such individual's involuntary dismissal or discharge by the Corporation for reasons other than Misconduct, or (ii) such individual's voluntary resignation following (A) a change in his or her position with the Corporation which materially reduces his or her level of responsibility, (B) a reduction in his or her level of compensation (including base salary, fringe benefits and any non-discretionary and objective-standard incentive payment or bonus award) by more than fifteen percent (15%) or (C) a relocation of such individual's place of employment by more than fifty (50) miles, provided and only if such change, reduction or relocation is effected by the Corporation without the individual's consent. J. Misconduct shall mean the commission of any act of fraud, embezzlement or ---------- dishonesty by the Optionee or Participant, any unauthorized use or disclosure by such person of confidential information or trade secrets of the Corporation (or any Parent or Subsidiary), or any other intentional misconduct by such person adversely affecting the business or affairs of the Corporation (or any Parent or Subsidiary) in a material manner. The foregoing definition shall not be deemed to be inclusive of all the acts or omissions which the Corporation (or any Parent or Subsidiary) may consider as grounds for the dismissal or discharge of any Optionee, Participant or other person in the Service of the Corporation (or any Parent or Subsidiary). K. Non-Statutory Option shall mean an option which is not an Incentive Option. -------------------- L. Parent shall mean any corporation (other than the Corporation) in an ------ unbroken chain of corporations ending with the Corporation, provided each corporation in the unbroken chain (other than the Corporation) owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power A-2 of all classes of stock in one of the other corporations in such chain. M. Permanent Disability or Permanently Disabled shall mean the inability of -------------------------------------------- the Optionee or the Participant to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment expected to result in death or to be of continuous duration of twelve (12) months or more. N. Predecessor Plan shall mean, collectively, the Corporation's existing 1986 ---------------- Stock Option Plan, 1987 Stock Option Plan, 1988 Stock Option Plan, 1991 Stock Option Plan, 1994 Stock Option Plan, 1996 Stock Option Plan and 1998 Stock Option Plan. O. Service shall mean the provision of services to the Corporation (or any ------- Parent or Subsidiary) by a person in the capacity of an Employee, a non- employee member of the board of directors or a consultant or independent advisor, except to the extent otherwise specifically provided in the documents evidencing the option grant. P. Subsidiary shall mean any corporation (other than the Corporation) in an ---------- unbroken chain of corporations beginning with the Corporation, provided each corporation (other than the last corporation) in the unbroken chain owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. Q. Take-Over Price shall mean the greater of (i) the Fair Market Value per --------------- ------- share of Common Stock on the date the option is surrendered to the Corporation in connection with a Hostile Take-Over or (ii) the highest reported price per share of Common Stock paid by the tender offeror in effecting such Hostile Take-Over. However, if the surrendered option is an Incentive Option, the Take-Over Price shall not exceed the clause (i) price per share. A-3 EX-27 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1999 AND THE RELATED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1999 INCLUDED ELSEWHERE IN THIS FORM 10-QSB/A AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 5,610 1,384 5,162 87 5,620 18,589 6,048 4,022 45,624 5,683 6,314 2,349 0 39,172 (10,413) 45,624 17,726 17,857 7,486 15,238 0 0 613 2,006 942 1,064 0 116 0 1,180 .12 .12
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