<PAGE>
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 September 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 November 9, 1999, 9,188,595 shares of Common Stock were outstanding.
Transitional Small Business Disclosure Format: Yes [_] No [X]
<PAGE>
SYNBIOTICS CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I. Condensed Consolidated Statement of Operations and Comprehensive Income -
Three and nine months ended September 30, 1999 and 1998 3
Condensed Consolidated Balance Sheet -
September 30, 1999 and December 31, 1998 4
Condensed Consolidated Statement of Cash Flows -
Nine months ended September 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 15
</TABLE>
-2-
<PAGE>
Item 1. Financial Statements
--------------------
Synbiotics Corporation
Condensed Consolidated Statements (unaudited) of Operations and Comprehensive
- -----------------------------------------------------------------------------
Income (unaudited)
- ------------------
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
----------------------------------- ------------------------------------
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Net sales $ 5,975,000 $ 6,735,000 $ 23,701,000 $ 24,472,000
License fees 1,458,000
Royalties 3,000 89,000 8,000 229,000
--------------- --------------- --------------- ---------------
5,978,000 6,824,000 25,167,000 24,701,000
--------------- --------------- --------------- ---------------
Operating expenses:
Cost of sales 3,893,000 3,820,000 11,380,000 11,725,000
Research and development 508,000 590,000 1,644,000 1,703,000
Selling and marketing 1,742,000 1,428,000 5,542,000 4,591,000
General and administrative 1,531,000 1,546,000 4,346,000 3,665,000
Patent litigation settlement 4,601,000
--------------- --------------- --------------- ---------------
7,674,000 7,384,000 22,912,000 26,285,000
--------------- --------------- --------------- ---------------
(Loss) income from operations (1,696,000) (560,000) 2,255,000 (1,584,000)
Other income (expense):
Interest, net (314,000) (358,000) (926,000) (873,000)
--------------- --------------- --------------- ---------------
(Loss) income before income taxes (2,010,000) (918,000) 1,329,000 (2,457,000)
(Benefit from) provision for income taxes (843,000) (175,000) 725,000 (792,000)
--------------- --------------- --------------- ---------------
(Loss) income before extraordinary item (1,167,000) (743,000) 604,000 (1,665,000)
Early extinguishment of debt, net of tax 116,000
--------------- --------------- --------------- ---------------
Net (loss) income (1,167,000) (743,000) 720,000 (1,665,000)
Cumulative translation adjustment 323,000 616,000 (931,000) 556,000
--------------- --------------- --------------- ---------------
Comprehensive (loss) income $ (844,000) $ (127,000) $ (211,000) $ (1,109,000)
=============== =============== =============== ===============
Basic (loss) income per share:
(Loss) income from continuing operations $ (0.13) $ (0.09) $ 0.06 $ (0.21)
Early extinguishment of debt, net of tax 0.01
--------------- --------------- --------------- ---------------
Net (loss) income $ (0.13) $ (0.09) $ 0.07 $ (0.21)
=============== =============== =============== ===============
Diluted (loss) income per share:
(Loss) income from continuing operations $ (0.13) $ (0.09) $ 0.05 $ (0.21)
Early extinguishment of debt, net of tax 0.01
--------------- --------------- --------------- ---------------
Net (loss) income $ (0.13) $ (0.09) $ 0.06 $ (0.21)
=============== =============== =============== ===============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-3-
<PAGE>
Item 1. Financial Statements (continued)
--------------------
Synbiotics Corporation
Condensed Consolidated Balance Sheet
- ------------------------------------
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(unaudited) (audited)
<S> <C> <C>
Assets
Current assets:
Cash and equivalents $ 4,144,000 $ 4,357,000
Securities available for sale 2,760,000 1,613,000
Accounts receivable 3,942,000 4,135,000
Inventories 5,561,000 5,179,000
Deferred tax assets 467,000 341,000
Other current assets 759,000 820,000
------------- --------------
Total current assets 17,633,000 16,445,000
Property and equipment, net 2,095,000 1,774,000
Goodwill 12,490,000 13,372,000
Deferred tax assets 7,047,000 7,873,000
Deferred debt issuance costs 498,000 653,000
Other assets 4,593,000 5,329,000
------------- --------------
$ 44,356,000 $ 45,446,000
============= ==============
Liabilities and Shareholders' Equity:
Current liabilities:
Accounts payable and accrued expenses $ 4,691,000 $ 5,217,000
Current portion of long-term debt 1,000,000 2,000,000
Income taxes payable 7,000
------------- --------------
Total current liabilities 5,698,000 7,217,000
------------- --------------
Long-term debt 6,115,000 6,716,000
Other liabilities 1,458,000 1,369,000
------------- --------------
7,573,000 8,085,000
------------- --------------
Mandatorily redeemable common stock 2,380,000 2,287,000
------------- --------------
Non-mandatorily redeemable common stock and other shareholders' equity:
Common stock, no par value, 24,800,000 share authorized,
9,188,000 and 8,246,000 shares issued and outstanding at
September 30, 1999 and December 31, 1998 39,287,000 38,134,000
Common stock warrants 1,003,000 1,003,000
Accumulated other comprehensive income (435,000) 496,000
Accumulated deficit (11,150,000) (11,776,000)
------------- --------------
Total non-mandatorily redeemable common stock and
other shareholders' equity 28,705,000 27,857,000
------------- --------------
$ 44,356,000 $ 45,446,000
============= ==============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-4-
<PAGE>
Item 1. Financial Statements (continued)
--------------------
Synbiotics Corporation
Condensed Consolidated Statement of Cash Flows (unaudited)
- ----------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-----------------------------------
1999 1998
-------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 720,000 $ (1,665,000)
Adjustments to reconcile net income (loss) to net cash provided by (used for)
operating activities:
Depreciation and amortization 1,880,000 1,428,000
Early extinguishment of debt (200,000)
Changes in assets and liabilities:
Account receivable 193,000 299,000
Inventories (382,000) (303,000)
Deferred taxes 700,000 (854,000)
Other assets 345,000 (301,000)
Accounts payable and accrued expenses 299,000 1,343,000
Income taxes payable 7,000 (25,000)
Other liabilities 89,000 1,341,000
-------------- -------------
Net cash provided by operating activities 3,651,000 1,263,000
-------------- -------------
Cash flows from investing activities:
Acquisition of property and equipment (625,000) (357,000)
Investment in securities available for sale (1,147,000)
Proceeds from sale of securities available for sale 1,779,000
Acquisiton of Prisma Acquisition Corp. (133,000)
-------------- -------------
Net cash (used for) provided by investing activities (1,772,000) 1,289,000
-------------- -------------
Cash flows from financing activities:
Payments of long-term debt (1,550,000) (883,000)
Proceeds from issuance of long-term debt, net 133,000
Mandatorily redeemable stock issuance costs (16,000)
Proceeds from issuance of common stock, net 389,000 (25,000)
-------------- -------------
Net cash (used for) financing activities (1,161,000) (791,000)
-------------- -------------
Net increase in cash and equivalents 718,000 1,761,000
Effect of exchange rates on cash (931,000) 556,000
Cash and equivalents - beginning 4,357,000 2,190,000
-------------- -------------
Cash and equivalents - ending $ 4,144,000 $ 4,507,000
============== =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-5-
<PAGE>
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 September 30, 1999
and the condensed consolidated statements of operations and comprehensive income
and of cash flows for the three and nine month periods ended September 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 $200,000 extraordinary gain upon early extinguishment of the debt,
which was recorded net of income taxes totaling $84,000.
Note 3 - Inventories:
Inventories consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---- ----
(unaudited) (audited)
<S> <C> <C>
Raw materials $ 2,232,000 $ 2,219,000
Work in progress 724,000 904,000
Finished goods 2,605,000 2,056,000
------------- ------------
$ 5,561,000 $ 5,179,000
============= ============
</TABLE>
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<PAGE>
Item 1. Financial Statements (continued)
--------------------
SYNBIOTICS CORPORATION
Notes to Condensed Consolidated Financial Statements (unaudited)
- --------------------------------------------------------------------------------
Note 4 - (Loss) Earnings per Share:
The following is a reconciliation of net (loss) income and share amounts used in
the computations of (loss) earnings per share:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
---------------------------------- ---------------------------------
1999 1998 1999 1998
---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Basic net (loss) income used:
(Loss) income from continuing operations $ (1,167,000) $ (743,000) $ 604,000 $ (1,665,000)
Less accretion of mandatorily redeemable
common stock (32,000) (37,000) (94,000) (107,000)
---------------- -------------- ----------------- ---------------
(Loss) income from continuing operations
used in computing basic (loss) income
from continuing operations per share (1,199,000) (780,000) 510,000 (1,772,000)
Early extinguishment of debt, net of tax 116,000
---------------- -------------- ----------------- ---------------
Net (loss) income used in computing basic
net (loss) income per share $ (1,199,000) $ (780,000) $ 626,000 $ (1,772,000)
================ ============== ================= ===============
Diluted net (loss) income used:
(Loss) income from continuing operations $ (1,167,000) $ (743,000) $ 604,000 $ (1,665,000)
Less accretion of mandatorily redeemable
common stock (32,000) (37,000) (94,000) (107,000)
---------------- -------------- ----------------- ---------------
(Loss) income from continuing operations
used in computing diluted (loss) income
from continuing operations per share (1,199,000) (780,000) 510,000 (1,772,000)
Early extinguishment of debt, net of tax 116,000
---------------- -------------- ----------------- ---------------
Net (loss) income used in computing diluted
net (loss) income per share $ (1,199,000) $ (780,000) $ 626,000 $ (1,772,000)
================ ============== ================= ===============
Shares used:
Weighted average common shares outstanding
used in computing basic (loss) income
per share 9,179,000 8,838,000 9,049,000 8,632,000
Weighted average options and warrants to
purchase common stock as determined by
application of the treasury method 330,000
---------------- -------------- ----------------- ---------------
Shares used in computing diluted (loss)
income per share 9,179,000 8,838,000 9,379,000 8,632,000
================ ============== ================= ===============
</TABLE>
-7-
<PAGE>
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 260,000 shares, 722,000
shares and 672,000 shares have been excluded from the shares used in computing
diluted net loss for the three months ended September 30, 1999 and 1998 and the
nine months ended September 30, 1998, respectively, as their effect is anti-
dilutive. In addition, warrants to purchase 284,000 shares of common stock at
$4.54 per share have been excluded from the shares used in computing diluted net
loss per share for the three and nine months ended September 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 months
ended September 30, 1999 and 1998 and the nine months ended September 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:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------- ------------------------------
1999 1998 1999 1998
---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Diagnostics and other $ 3,879,000 $ 4,400,000 $ 18,017,000 $ 18,064,000
Vaccines 1,654,000 2,268,000 4,759,000 6,258,000
Instruments 442,000 67,000 925,000 150,000
------------ ------------ ------------ ------------
$ 5,975,000 $ 6,735,000 $ 23,701,000 $ 24,472,000
============ ============ ============ ============
</TABLE>
The following are revenues and long-lived asset information by geographic area:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------- ------------------------------
1999 1998 1999 1998
---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues:
United States $ 4,010,000 $ 4,790,000 $ 16,490,000 $ 17,558,000
France 1,065,000 1,055,000 3,266,000 3,868,000
Other foreign countries 900,000 890,000 3,945,000 3,046,000
------------ ------------ ------------ ------------
$ 5,975,000 $ 6,735,000 $ 23,701,000 $ 24,472,000
============ ============ ============ ============
<CAPTION>
September 30, December 31,
1999 1998
---- ----
(unaudited) (audited)
<S> <C> <C>
Long-lived assets:
United States $ 12,446,000 $ 13,038,000
France 7,231,000 8,090,000
------------ ------------
$ 19,677,000 $ 21,128,000
============ ============
</TABLE>
The Company had sales to one customer totaling $689,000 during the three months
ended September 30, 1999. Sales to two customers totaled $1,811,000 during the
three months ended September 30, 1998. During the nine months ended September
30, 1998, sales to one customer totaled $4,530,000.
-8-
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation
---------------------------------------------------------
The information contained in this Management's Discussion and Analysis or Plan
of Operation and elsewhere in this Quarterly Report on Form 10-QSB contains both
historical financial information and forward-looking statements. Synbiotics does
not provide forecasts of future financial performance. While management is
optimistic about the Company's long-term prospects, the historical financial
information may not be indicative of future financial performance. In fact,
future financial performance may be materially different than the historical
financial information presented herein. Moreover, the forward-looking statements
about future business or future results of operations are subject to significant
uncertainties and risks, which could cause actual future results to differ
materially from what is suggested by the forward-looking information. The
following risk factors should be considered in evaluating the Company's forward-
looking statements and assessing its 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 46% 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. Also, we believe Abbott
Laboratories may enter the canine heartworm diagnostic market in 2000. If so,
our market share and average selling prices may decline, perhaps materially.
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. Synbiotics has incurred a consolidated accumulated
deficit of $11,150,000 at September 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
. increases in prices and the potential misappropriation of our
intellectual property.
-9-
<PAGE>
If any of 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 are dependent 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 overt 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 believer.
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"), the 1996 acquisition
of the business of International Canine Genetics, Inc. ("ICG"), or any other
future acquisitions (collectively, the "Acquired Business") will be realized.
Acquisitions of businesses involve numerous risks, including difficulties in the
assimilation of the operations, technologies and products of the Acquired
Business, introduction of different distribution channels, potentially dilutive
issuances of equity and/or increases in leverage and risk resulting from
issuances of debt securities, the need to establish internally operating
functions which had been previously provided pre-acquisition by a corporate
parent, accounting charges, operating companies in different geographic
locations with different cultures, the potential loss of key employees of the
Acquired Business, the diversion of management's attention from other business
concerns and the risks of entering markets in which 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
-10-
<PAGE>
Synbiotics' 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 Synbiotics, 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.
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.
-11-
<PAGE>
Our 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 successfully 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.
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
-12-
<PAGE>
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 in such foreign jurisdictions, 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
Net sales for the third quarter of 1999 decreased by $760,000 or 11% from the
third quarter of 1998. The decrease in net sales is due to a decrease in the
overall sales of diagnostic products of $521,000 and a decrease in vaccine
product sales of $614,000, offset by an increase in instrument sales of
$375,000. The decrease in the sales of diagnostic products is primarily due to a
decrease in canine heartworm diagnostics sales of 38%. The decreased canine
heartworm diagnostics sales were due to increased competition, both from former
Synbiotics distributors who now carry competitor's products and from a new Heska
Corporation product. The Company is suing Heska for patent infringement with
respect to this product. The decreased vaccine sales reflected a decrease of 7%
in sales of bulk FeLV vaccine (related to the timing of shipments as requested
by Merial S.A.S., our OEM customer), and a 55% decrease in sales of vaccines to
private label partners. The Company's instrument business, which was acquired in
March 1998, contributed 7% of sales for the third quarter of 1999, as compared
with less than 1% for the prior year. The increased sales of instruments are due
primarily to the Company's SCA 2000(TM) blood coagulation timing instrument
which was introduced in the second quarter of 1999, as well as growth in the
sale of ProChem(R) instruments and consumables.
Net sales for the nine months ended September 30, 1999 decreased by $771,000 or
3% from the nine month period ended September 30, 1998. The decrease in net
sales is due primarily to a decrease in vaccine sales of $1,499,000 or 24%,
offset by a $774,000 or 516% increase in instrument sales, while diagnostic
sales were flat compared to the prior year. The decreased vaccine sales
reflected a decrease of 18% in sales of bulk FeLV vaccine (related to the timing
of shipments as requested by Merial S.A.S., our OEM customer), and a 36%
decrease in sales of vaccines to private label partners. The flat diagnostic
sales were attributable to increased competition in the canine heartworm market,
both from former Synbiotics distributors who now carry competitor's products and
from a new Heska Corporation product, blunting the growth of the Company's
Witness(R) canine heartworm product, which
-13-
<PAGE>
nonetheless had a fine success, and reducing our sales of older-generation ICT
GOLD HW and VetRED(R) products The Company's instrument business, which was
acquired in March, 1998 contributed 4% of sales for the first nine months of
1999, compared with less than 1% for the prior year. The increased sales of
instruments are due primarily to the Company's SCA 2000(TM) blood coagulation
timing instrument which was introduced in the second quarter of 1999, as well as
growth in the sale of ProChem(R) instruments and consumables.
All of the Company's vaccine products (exclusive of its FeLV and canine corona
virus vaccine products) were manufactured using bulk antigen fluids that were
supplied by a third party. The supply agreement expired and the Company was
unable to locate a replacement supplier for these bulk antigen fluids. The
Company had to discontinue the sales of the affected products once its 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 the Company, have
traditionally relied on distributors, the Company has been increasing its direct
sales of products to veterinarians via telesales and the Internet as part of a
focused strategy. In addition, the Company stopped selling to several
distributors and to Vedco, Inc., a distributor co-op, in the second quarter of
1999. Direct-to-veterinarian sales exceeded distributor sales in each of the
months of the third quarter of 1999; they had never done so in any previous
month.
The cost of sales as a percentage of net sales was 65% during the third quarter
of 1999 compared to 57% during the third quarter of 1998 (i.e., gross margin
decreased to 35% from 43%). The lower gross margin is a direct result of two
factors: i) the decrease in sales and ii) the fact that a significant portion of
the Company's manufacturing costs are fixed costs. Among the Company's major
products, DiroCHEK(R) canine heartworm diagnostic products and the ProChem(R)
analyzer are manufactured at Company facilities, whereas WITNESS(R), ICT
GOLD(TM) HW, VetRED(R), all vaccines and the SCA 2000(TM) are manufactured by
third parties. In addition to affecting gross margins, outsourcing of
manufacturing renders the Company relatively more dependent on the third-party
manufacturers. The cost of sales as a percentage of net sales was 48% during the
nine months ended September 30, 1999 and 1998.
In March 1999, the Company amended (effective July 1, 1998) its FeLV vaccine
supply agreement with Merial Limited ("Merial"). Since 1992, Synbiotics has
supplied Bio-Trends-manufactured FeLV vaccine to Merial in the United States.
This has included shipments to Merial at Synbiotics' cost, while Merial has paid
a royalty to Synbiotics on Merial's sales of Merial-labeled FeLV vaccine. In
exchange for $1,500,000 in cash (which the Company recorded as a one-time
license fee in the first quarter of 1999), 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, the Company and Merial
will seek to have Bio-Trends supply FeLV vaccine directly to Merial for U.S.
distribution. The Company's 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 Synbiotics,
Synbiotics will lose net sales but have a higher overall gross margin. In the
meantime, Synbiotics will continue to resell Bio-Trends-supplied FeLV vaccine to
Merial at no profit for U.S. resale. Synbiotics' sales of its own VacSyn and
other FeLV-labeled vaccine products, its 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 Synbiotics were
not affected by this amendment.
Research and development expenses during the third quarter of 1999 decreased
$82,000 or 14% from the third quarter of 1998 and decreased during the nine
months ended September 30, 1999 by $59,000 or 3% from the nine months ended
September 30, 1998. The decreases relate to the timing of external research
projects. Research and development expenses as a percentage of net sales were 9%
during the third quarters of 1999 and 1998, and were 7% during the nine months
ended September 30, 1999 and 1998. The Company expects its research and
development expenses to increase during the remainder of 1999 due to further
development of its instrument product line.
Selling and marketing expenses during the third quarter of 1999 increased by
$314,000 or 23% over the third quarter of 1998, and increased $951,000 or 21%
over the nine months ended September 30, 1998. The increases are due primarily
to the addition of an outbound direct-to-veterinarian telemarketing group during
the third quarter of 1998 and additional new hires in the third quarter of 1999,
expenses for increasing Internet selling capabilities, increased royalties due
to the 1998 introduction of the WITNESS(R) products, an increase in the field
sales force during the fourth quarter of 1998 and an increase in promotional
programs. Selling and marketing expenses as a percentage of net sales were 29%
and 21% during the third quarter of 1999 and 1998, respectively, and were 23%
and 19% during the nine months ended September 30, 1999 and 1998, respectively.
-14-
<PAGE>
General and administrative expenses during the third quarter of 1999 did not
change significantly from the third quarter of 1998, and increased $681,000 or
19% over the nine months ended September 30, 1998. The nine month increase is
due primarily to legal expenses related to the Heska patent litigation, and the
fact that $463,000 of legal fees related to the settlement of patent litigation
was reclassified from general and administrative expenses in the third quarter
of 1998. General and administrative expenses as a percentage of net sales were
26% and 23% during the third quarters of 1999 and 1998, respectively, and were
18% and 15% during the nine months ended September 30, 1999 and 1998,
respectively.
Royalty income during the third quarter of 1999 and for the nine months ended
September 30, 1999 decreased from the prior periods as a result of the amended
supply agreement with Merial (see above); the Company will no longer receive
royalties beginning in 1999. Royalty income totaled $317,000 and $332,000 during
1998 and 1997, respectively.
In connection with our 1998 patent litigation settlement with Barnes-Jewish
Hospital (the "Hospital"), the Company issued 333,000 shares of common stock to
the Hospital and recorded a charge of $1,000,000 related to the stock issuance
based upon the fair market value of $3.00 per share. In addition, the Company
guaranteed the Hospital that the value of the stock issued would be no less than
$5.00 per share (or $1,667,000) on January 28, 2000, and that the Company would
issue additional shares to the Hospital if the value was less than $5.00 per
share on that date. Based on the closing price of the Company's stock on
November 9, 1999 of $2.13 per share, on January 28, 2000 the Company might have
to issue an additional 451,000 shares of stock to the Hospital and record a
charge of $667,000. The charge would be recorded in the fourth quarter of 1999.
If the fair market value of the stock on January 28, 2000 were to differ from
the November 9, 1999 price by, for example, $1.00 per share, the Company would
issue to the Hospital a different number of shares: either 1,148,000 (assuming a
stock price of $1.13 per share), resulting in a charge of $667,000, or 200,000
(assuming a stock price of $3.13 per share), resulting in a charge of $625,000.
However, regardless of the actual stock price on January 28, 2000, and
regardless of the number of shares issued, the maximum charge to be incurred by
the Company would be $667,000 as $1,000,000 was charged in 1998, and the entire
additional charge would be recorded in the fourth quarter of 1999.
Financial Condition
Management believes that the Company's present capital resources, which included
working capital of $11,935,000 at September 30, 1999, are sufficient to meet its
current working capital needs and service the debt related to the acquisition of
SBIO-E for at least the next 12 months. However, pursuant to a debt agreement
with Banque Paribas, the Company is required to maintain certain financial
ratios and levels of tangible net worth and is also restricted in its ability to
pay dividends and make loans, capital expenditures or investments without Banque
Paribas' consent. As of September 30, 1999, the Company had outstanding
principal balances on its Banque Paribas debt of $7,750,000, and may borrow up
to $5,000,000 (subject to a borrowing base calculation) on its revolving line of
credit.
In February 1999, the Company repaid the $1,000,000 note issued in conjunction
with the acquisition of Prisma for $800,000, and recognized a $200,000
extraordinary gain, which was recorded, net of income taxes totaling $84,000,
during the first quarter of 1999.
The Company's operations have become seasonal due to the success of its canine
heartworm diagnostic products. Sales and profits tend to be concentrated in the
first half of the year, as distributors prepare for the heartworm season by
purchasing diagnostic products for resale to veterinarians. This seasonality has
been somewhat reduced by the SBIO-E operations, which are relatively less
seasonal. Increased sales of the SCA 2000(TM) and Prisma instruments and
supplies would also reduce seasonality.
Impact of the Year 2000 Issue
The year 2000 issue is the result of computer programs being written using two
digits rather than four digits to define the applicable year. Any of the
Company's 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.
The Company completed the implementation of an enterprise resource planning
system during the third quarter of 1999. The total cost of the new system
(including software, hardware and implementation) was approximately $1,000,000,
for which the Company has obtained lease financing. The new system is year 2000
compliant.
-15-
<PAGE>
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.
The Company has also determined that its telephone systems and equipment used in
its manufacturing and research and development processes are year 2000
compliant.
The Company has been notified by its 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 the Company's results of operations and
financial condition beginning in 2000. The greatest disruption would occur if
third-party manufacturers of Synbiotics' 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:
------------------
No material changes.
Item 2. Changes in Securities:
----------------------
None.
Item 3. Defaults Upon Senior Securities
-------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5. Other Information
-----------------
None.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
--------
27 Financial Data Schedule (for electronic filing purposes only).
(b) Reports on Form 8-K
-------------------
None
-16-
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SYNBIOTICS CORPORATION
Date: November 15, 1999 /s/ Michael K. Green
----------------------------------------
Michael K. Green
Vice President of Finance and Chief
Financial Officer (signing both as a
duly authorized officer and as principal
financial officer)
-17-
<PAGE>
EXHIBIT INDEX
Exhibit No. Exhibit
- ----------- -------
27 Financial Data Schedule (for electronic filing purposes only).
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
EXHIBITS
TO
FORM 10-QSB
UNDER
SECURITIES EXCHANGE ACT OF 1934
SYNBIOTICS CORPORATION
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1999 AND THE RELATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND CASH FLOWS FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 1999 INCLUDED ELSEWHERE IN THIS FORM 10-QSB AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 4,144
<SECURITIES> 2,760
<RECEIVABLES> 4,054
<ALLOWANCES> 112
<INVENTORY> 5,561
<CURRENT-ASSETS> 17,633
<PP&E> 3,130
<DEPRECIATION> 1,035
<TOTAL-ASSETS> 44,356
<CURRENT-LIABILITIES> 5,698
<BONDS> 0
2,380
0
<COMMON> 39,287
<OTHER-SE> (10,582)
<TOTAL-LIABILITY-AND-EQUITY> 44,356
<SALES> 23,701
<TOTAL-REVENUES> 25,257
<CGS> 11,380
<TOTAL-COSTS> 22,912
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 926
<INCOME-PRETAX> 1,329
<INCOME-TAX> 725
<INCOME-CONTINUING> 604
<DISCONTINUED> 0
<EXTRAORDINARY> 116
<CHANGES> 0
<NET-INCOME> 720
<EPS-BASIC> .07
<EPS-DILUTED> .06
</TABLE>
