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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
[X]ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the year ended December 31, 1999
OR
[X]TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
Commission file number 0-11303
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SYNBIOTICS CORPORATION
(Name of small business issuer in its charter)
95-3737816
California (I.R.S. Employer
(State or other jurisdiction Identification No.)
of incorporation or organization)
92127
11011 Via Frontera (Zip Code)
San Diego, California
(Address of principal executive
offices)
Issuer's telephone number, including area code: (858) 451-3771
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock
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Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [X]
No [_]
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
KSB or any amendment to this Form 10-KSB. [X]
The issuer's revenues for the year ending December 31, 1999 were
$30,757,000.
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of December 31, 1999 was approximately $15,170,000 based on the
closing sale price as reported by the Nasdaq National Market.
As of March 20, 2000, 9,346,613 shares of Common Stock were outstanding.
Transitional Small Business Disclosure Format (check one): Yes [_] No [X]
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PART I
ITEM 1. BUSINESS
General
Synbiotics Corporation is a leading provider of rapid diagnostic and
laboratory diagnostic products for the animal health care industry. We also
market certain feline vaccine products. We were founded in 1982 to research and
develop monoclonal antibody-based diagnostic and therapeutic products. In the
early years, we, like most biotechnology firms, were focused on developing
therapeutics for human diseases. The high cost of human drug development,
coupled with the lengthy FDA approval process, motivated us to begin
commercializing our technology through the less restrictive animal health care
market. We are one of a small number of companies that focuses exclusively on
animal health and we are the second largest provider of diagnostic products to
the animal health market.
On March 6, 1998, we acquired by merger Prisma Acquisition Corp. ("Prisma"),
a privately-held company located in Rome, NY, which develops, manufactures and
markets instruments and reagents used by veterinarians to measure blood
chemistry information at the point-of-care.
On July 9, 1997, we acquired Synbiotics Europe SAS ("SBIO-E") (formerly
Rhone Merieux Diagnostics, S.A.S.), the worldwide veterinary diagnostic
business of Rhone Merieux S.A.S.
We are combining our ability to generate products through research and
development, acquisitions, and licensing agreements with our ability to
distribute products through established global channels. Our product portfolio
consists of sixty-two diagnostic test kits and detection devices, one
veterinary immunotherapeutic product, and two vaccines. Many of our products
hold strong positions in their specific markets.
On January 13, 2000, we acquired W3Commerce LLC, a privately-held Internet
marketing services provider, based in San Diego, CA, which uses its "meta-
domain" approach to drive targeted Internet traffic at low cost. W3Commerce
builds business-to-business and affinity group networks, and generates revenue
via sponsorship fees for its web sites and from commissions earned on sales
made form its web sites. Synbiotics is one of a growing list of clients and
sponsors of W3Commerce within the veterinary, pet and animal health meta-
domain. W3Commerce is also developing similar meta-domain structures, and has
begun to attract clients and sponsors, for the food-beverage-hospitality,
sports-and-leisure and small-business-services sectors. If this business
succeeds, it could significantly shift our overall business mix and strategy.
We are currently awaiting shareholder approval to change our name to W3 Inc.
W3 Inc. will serve as a holding company owning and operating two subsidiaries,
Synbiotics and W3Commerce.
Business Strategy
Our strategy in the animal health business is to grow from our established
position in the market through new products and technologies, expanded
distribution, enhanced marketing and acquisitions and licensing.
Market and Product Overview
We sell our products both in the United States and in foreign countries. The
total number of family owned dogs and cats is estimated to exceed 120 million
in the United States alone. We believe that our current and intended future
products will offer veterinarians an opportunity to improve the quality and
expand the scope of veterinary health care services.
Our most commercially successful products are our canine heartworm
diagnostics (representing 32% of 1999 sales). We estimate that we have a 30%
share of the estimated $30 million U.S. heartworm diagnostics
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market. Sales of these products have historically been strongest during the
first half of the year when distributors purchase merchandise to sell to
veterinarians for the heartworm season.
Marketing
We sell our products in the United States, Canada, Europe, Asia and, to a
limited extent, Latin America. In the United States, we market our line both
directly and through independent distributors which, taken together, have
approximately 90 outlets, 600 field sales representatives, and 200
telemarketing representatives covering the 25,000 veterinary clinics throughout
the country. In addition, we sell our vaccine products to distributors and on a
private label basis. Sales to laboratories and other centralized facilities
(approximately 50 in the U.S.) are handled directly. Outside the United States,
we sell our small-animal products through distributors and on an original
equipment manufacturer ("OEM") basis, and our large-animal products directly to
laboratories. We maintain a marketing and sales force, which sells products
directly to veterinarians, trains distributor representatives, responds to
technical inquiries, advertises and promotes products through direct mail,
telemarketing, and journal advertisements, and provides other marketing support
functions. This strategy has historically resulted in a large percentage of our
sales which are made to only a few of our customers. However, through our
increased telemarketing and Internet selling capabilities, we have been able to
reduce the percentage of our sales which are made to only a small number of our
customers. As a result, we had no significant customers during 1999, whereas
two distributors totalled 33% of our net sales during 1998.
Manufacturing
We manufacture most of our products at our facilities located in San Diego,
California, Rome, New York and Lyons, France. However, we rely on outside
manufacturers for our ICT Gold(R), VetRED(R) and WITNESS(R) diagnostic tests,
our vaccine products and our SCA 2000(TM) products. Our WITNESS(R), VetRED(R)
and ICT Goldproducts and our feline leukemia virus vaccine are licensed to us
by their respective outside manufacturers.
Patents and Trade Secrets
We believe that our proprietary technology is an important competitive
factor in our business, and that protection of our intellectual property rights
is a high priority. The basic hybridoma (the cell that produces the monoclonal
antibody) technology is in the public domain and is therefore not patentable.
However, numerous improvements, variations and applications of hybridoma
technology may prove to be patentable. Considering the difficulty of enforcing
any patent rights to such improvements, and the rapid advancements in the
field, we generally seek, and will continue to seek, to protect our interests
by treating our particular variations in the production of monoclonal
antibodies as trade secrets. We also pursue, and intend to continue to
aggressively pursue, protection for new products, new methodological concepts,
and compositions of matter through the use of patents where obtainable. We
currently are in litigation to enforce our important canine heartworm patent
against a competitor. At present, we have been granted eleven U.S. patents and
we have two U.S. patents pending.
Government Regulation
Most diagnostic test kits and vaccines for animal health applications
marketed in the U.S. require approval by the United States Department of
Agriculture ("USDA"). Animal vaccines also require governmental approval in
foreign countries, but Germany and Japan are the only foreign countries in
which we market our diagnostic products that require governmental approval. Our
instrumentation products are not subject to USDA regulation. Our semen freezing
products and ovulation timing diagnostic products for dogs fall within the
definition of devices as that term is defined in the Federal Food, Drug, and
Cosmetic Act and, therefore, may be subject to regulation by the FDA. We are
also subject to additional regulation in connection with our pet food products.
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Our manufacturing facilities in San Diego and Lyons, France are licensed by
the USDA and adhere to Good Manufacturing Practices ("GMP") standards. The
instrumentation manufacturing facility located in Rome, New York is not
licensed by the USDA as the manufactured products are not subject to USDA
regulation. Our SBIO-E manufacturing facility is not licensed by any foreign
regulatory agency as there is no licensing requirement. The manufacturing
facilities of our important suppliers are subject to licensing and regulatory
approval in both the United States and Europe.
In addition to the foregoing, 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. We have no reason to
believe that any such future legislation and/or rules would be materially
adverse to our business.
Competition
We believe that we are the second-leading competitor in the animal health
diagnostic market. Most of our competitors are either small divisions of larger
human health and chemical companies or smaller companies that sell veterinary
products while trying to diversify into the higher profile, and more regulated,
human health field. The principal competitor in the industry is IDEXX
Laboratories, Inc., a publicly traded company with annual revenues of
$356,000,000 that develops, manufactures, and distributes detection and
diagnostic products for animal health, food, and environmental testing
applications.
Competition in the animal health care industry is intense, and is
particularly intense in vaccines. Many competitors, such as Pfizer Animal
Health, Merial Animal Health, Schering-Plough, and IDEXX Laboratories, have
substantially greater financial, manufacturing, marketing and product research
resources than us. Large companies in particular have extensive expertise in
conducting pre-clinical and clinical testing of new products and in obtaining
the necessary regulatory approvals to market products. Competition in animal
diagnostics is based on test sensitivity, accuracy and speed, product price and
similar factors. IDEXX Laboratories requires its distributors not to carry the
products of its competitors.
Research and Development
The Company spent approximately $2,201,000 and $2,386,000 on research and
development activities during the years ended December 31, 1999 and 1998,
respectively. These figures include both internal research and development and
expenditures under contracts for research and development activities with
outside parties relating to certain veterinary diagnostic products which
utilize licensed technology.
Employees
As of December 31, 1999, we had a total of 151 employees worldwide, 149 of
whom were full-time.
Raw Materials
The manufacturing of diagnostics, diagnostic instruments, therapeutics and
vaccines requires raw materials which generally are, and have been, readily
available from several sources. All of our vaccine products (other than our
feline leukemia 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 in the third quarter of 1999. Sales of
the affected products totalled $1,645,000, $2,073,000 and $1,596,000 during
1999, 1998 and 1997, respectively.
ITEM 2. PROPERTIES
We lease two buildings in San Diego, California. The buildings contain
approximately 49,000 square feet of space, and house our corporate and sales
headquarters, executive offices, U.S. research and development
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laboratories and manufacturing facilities. In addition, the manufacturing and
research and development facilities related to the products obtained in the
acquisition of Prisma are housed in a 6,000 square foot building located in
Rome, New York. We also lease an approximately 25,000 square foot building in
Lyons, France which houses SBIO-E's corporate and sales headquarters, executive
offices, research and development laboratories and manufacturing facilities. We
also lease a Malvern, Pennsylvania facility for operating our PennHIP(R)
business and a sales office in Kansas City, Missouri.
We believe that these facilities are adequate for our current level of
operations.
ITEM 3. LEGAL PROCEEDINGS
Synbiotics Corporation v. Heska Corporation--United States District Court for
the Southern District of California
On November 12, 1998, we filed a lawsuit against Heska Corporation ("Heska")
claiming that Heska infringes a patent owned by us, which covers both our and
Heska's heartworm diagnostic products. On January 14, 1999, Heska filed a
counterclaim against us seeking a declaratory judgment that our patent is
invalid and unenforceable. We deny Heska's allegations that our patent is
invalid and unenforceable, and plan to vigorously defend our patent against the
allegations. In the event that we were to lose our lawsuit against Heska, we
believe our only direct liability would be our out-of-pocket legal expenses.
Although Heska's counterclaim does not include a claim for damages, if we were
to lose on Heska's counterclaim, we could face additional competition for our
canine heartworm diagnostic products as other third parties would be able to
manufacture products incorporating our patented technology.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is quoted in the Nasdaq National Market under the symbol
SBIO. Price ranges reported are the high and low trade price information as
reported by the Nasdaq National Market. No cash dividends have ever been paid,
and we do not anticipate paying cash dividends in the foreseeable future. As of
March 20, 2000, there were approximately 617 shareholders of record of our
common stock.
<TABLE>
<CAPTION>
Year Quarter High Low
---- ------- ----- -----
<S> <C> <C> <C>
1998..................................................... 1 $4.00 $2.88
...................................................... 2 $3.88 $2.75
...................................................... 3 $3.67 $2.31
...................................................... 4 $2.88 $2.00
1999..................................................... 1 $5.38 $2.25
...................................................... 2 $4.63 $3.31
...................................................... 3 $3.94 $2.50
...................................................... 4 $2.81 $2.00
</TABLE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The information contained in this Management's Discussion and Analysis or
Plan of Operation and elsewhere in this Annual Report on Form 10-KSB contains
both historical financial information and forward-looking statements. 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, even 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 32% 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, Abbott
Laboratories entered the canine heartworm diagnostic market in March 2000, and
our market share and average selling prices may decline, perhaps significantly.
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We have a history of losses and an accumulated deficit
Although we generated profits for the year ended December 31, 1997, we did
not achieve profitability for the years ended December 31, 1998 and 1999, and
we have had a history of losses. We have incurred a consolidated accumulated
deficit of $13,312,000 at December 31, 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. The additional expenses which we anticipate we
will incur while building W3Commerce's business may prevent us from being
profitable, even if our traditional animal health business were to be
profitable.
We depend on third party manufacturers
We contract for the manufacture of some of our products, including our
vaccines, our Witness(R), VetRED(R) and ICT Gold(TM) diagnostic kits, and our
SCA 2000(TM) hematology 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.
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. For example, all of our vaccine products (other than 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 $1,645,000, $2,073,000 and $1,596,000 during 1999, 1998 and 1997,
respectively.
We rely on third party distributors for a substantial portion of our sales, but
we are experiencing difficulties with the distribution channel
Because we have historically depended upon distributors for such a large
portion of our sales (although we did not have any significant customer during
1999, sales to two distributors totaled 33% of our net sales during 1998), our
ability to establish and maintain an adequate independent 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
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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 1999 and 1998 on these sales of FeLV to Merial in
Europe was $570,000 and $520,000, respectively. 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 January 2000
acquisition of W3Commerce LLC ("W3"), the 1998 acquisition of Prisma
Acquisition Corp. ("Prisma") 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 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.
Our acquisition of W3Commerce may not prove profitable
There can be no assurance that our January 2000 acquisition of W3Commerce
will result in profits to us or that we will be able to recover the money we
invest in W3Commerce's operations. The efforts of W3Commerce to integrate our
business with the retailing of products over the Internet may not be
successful, and this may harm our business. Our acquisition of W3Commerce
subjects us to risks associated with the acquisition of any business, as well
as the following risks specifically associated with doing business over the
Internet:
. W3Commerce's business model has not been demonstrated as profitable;
. W3Commerce's business model could be replicated by other companies if it
is perceived as being successful;
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. larger, more established competitors may enter the online markets in
which we intend to operate;
. the Internet may not continue to grow as a focal point of business
transactions;
. the Internet may become subject to additional government regulation that
may harm our business;
. retail sales of products on the Internet has not been widely
demonstrated as profitable; and
. we do not have experience in marketing products other than animal health
products, yet W3Commerce's business plan calls for expansion into other
markets.
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 even more intense in the Internet marketing business, 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
In our animal health business 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 the expenses of
building W3Commerce's Internet business, 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 complement our existing product offerings or enhance
our technical capabilities. While we have no current agreements 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
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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 SBIO-E. 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.
As of December 31, 1999, we were not in compliance with some of our
financial covenants, and we had not obtained a waiver from Banque Paribas. In
March 2000, we reached an agreement with Imperial Bank ("Imperial") to
refinance our Banque Paribas loans. The new Imperial debt agreement includes a
$6,000,000 term loan and a $4,000,000 revolving line of credit.
The term loan is due in April 2005, bears interest at the rate of prime plus
0.50%, is payable beginning in May 2000 in monthly installments of $100,000 of
principal plus accrued interest and is secured by substantially all our assets.
The line of credit bears interest at the rate of prime plus 0.50%, with
interest only payments to be made monthly beginning in May 2000. Any
outstanding principal under the line of credit is due in April 2002. The
Company is required to pay a quarterly commitment fee equal to 0.50% per annum
on the average unused portion of the line of credit facility.
Imperial 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 Imperial's consent.
We will record an approximately $1,000,000 extraordinary loss on early
extinguishment of debt in the second quarter of 2000, which represents the
remaining unamortized debt issuance costs and debt discount on the Bank debt.
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 and our Internet business will also reduce our
seasonality.
Our failure to adequately establish or protect our proprietary rights may
adversely affect 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
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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 require
significant management attention. For example, in 1997, Barnes-Jewish Hospital
(the "Hospital") filed an action against us 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.
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 FeLV
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.
10
<PAGE>
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, 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
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Our net sales for the year ended December 31, 1999 decreased by $881,000 or
3% from the year ended December 31, 1998. The decrease reflects a decrease in
our sales of diagnostic products of $788,000, a decrease in our vaccine product
sales of $1,093,000, and an increase in our instrument sales of $1,000,000. The
decrease in our sales of diagnostic products is due primarily to a decrease in
our canine heartworm diagnostics sales of 3% which resulted from increased
competition, both from former Synbiotics distributors who now carry
competitor's products and from a new Heska Corporation product. We are suing
Heska for patent infringement with respect to this product. The decreased
vaccine sales comprises a decrease of 15% in sales of our vaccines to private
label partners resulting from the phase-out of sales of most of our Synbiotics-
labeled vaccines, offset by an increase of 20% in sales of bulk FeLV vaccine
(related to the timing of shipments as requested by our OEM customer).
All of our vaccine products (other than our FeLV vaccine products) are
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 totalled
$1,645,000 and $2,073,000 during 1999 and 1998, respectively.
The increase in our instrument product sales is due to sales of our SCA
2000(TM) blood coagulation timing instrument, which we introduced in the second
quarter of 1999, and an increase in sales of our ProChem(R) instrument
products, which we acquired in conjunction with our 1998 acquisition of Prisma.
Although veterinary products manufacturers, including us, have traditionally
relied on distributors, we are 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. See "We rely on third party
distributors for a substantial portion of our sales, but we are experiencing
difficulties with the distribution channel".
Our cost of sales as a percentage of net sales was 51% during the year ended
December 31, 1999 compared to 49% during the year ended December 31, 1998
(i.e., our gross margin decreased to 49% from 51%). The lower gross margin is a
direct result of two factors: i) the decrease in our sales and ii) the fact
that a
11
<PAGE>
significant portion of our manufacturing costs are fixed costs. Among our major
products, DiroCHEK(R) canine heartworm diagnostic products and the ProChem(R)
analyzer are manufactured at our facilities, whereas WITNESS(R), all vaccines
and the SCA 2000(TM) 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. See "We depend on third party
manufacturers".
In March 1999, we amended (effective July 1, 1998) our FeLV vaccine supply
agreement with Merial Limited ("Merial"). Since 1992, we have supplied 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 were 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 totalled $2,431,000 and
$2,029,000 during 1999 and 1998, respectively. In the meantime, we will
continue to resell Bio-Trends-supplied FeLV vaccine to Merial at cost for the
U.S. Sales of our own VacSyn FeLV vaccine product, our sales to Merial S.A.S.
in France, which are at a profit rather than at cost, and the collaborative
research relationship between Merial Limited and us were not affected by this
amendment.
Our research and development expenses decreased during the year ended
December 31, 1999 by $185,000 or 8% from the year ended December 31, 1998. The
decrease is primarily due to decreases in our contracted research and
development expenses. Our research and development expenses as a percentage of
our net sales were 7% and 8% during the years ended December 31, 1999 and 1998,
respectively.
Our selling and marketing expenses increased during the year ended December
31, 1999 by $1,153,000 or 19% over the year ended December 31, 1998. The
increase is due primarily to the addition of our outbound direct-to-
veterinarian telemarketing group in the third quarter of 1998, with additional
new hires for the group in 1999, expenses for increasing our Internet selling
capabilities and an increase in our field sales force during the fourth quarter
of 1998. Our selling and marketing expenses as a percentage of our net sales
were 24% and 20% during the year ended December 31, 1999 and 1998,
respectively.
Our general and administrative expenses increased during the year ended
December 31, 1999 by $764,000 or 14% over the year ended December 31, 1998. The
increase is due primarily to legal expenses related to our patent litigation
with Heska. Our general and administrative expenses as a percentage of our net
sales were 20% and 17% during the years ended December 31, 1999 and 1998,
respectively.
On July 28, 1998, we entered into a settlement agreement with Barnes-Jewish
Hospital resolving the Hospital's patent infringement lawsuit . We paid the
Hospital $1,600,000 in cash, 333,000 shares of the our common stock, and
undisclosed future payments and royalties. In 1998, we settled the case to
avoid future litigation expenses and to eliminate the risk to our key canine
heartworm diagnostic products. We recorded a one-time pre-tax charge of
approximately $3,922,000 and we reclassified $678,000 of legal expenses related
to the patent litigation from general and administrative expenses. In January
2000, we issued an additional 135,000 shares of common stock to the Hospital
upon the resolution of a contingency contained in the settlement agreement. We
recorded a one-time pre-tax charge of $479,000 in the fourth quarter of 1999 to
accrue the liability for the issuance of the common stock.
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 on the early extinguishment of debt, net of income tax, in the first
quarter of 1999.
Our royalty income during the year ended December 31, 1999 decreased by
$305,000 or 96% from the year ended December 31,1998. As a result of the
amended supply agreement with Merial (see above), we no
12
<PAGE>
longer receive royalties from Merial. Our net interest expense during 1999
increased by $22,000 over 1998 due to an increase in the LIBOR interest rate.
We recognized a benefit from income taxes of $580,000 during 1999, as
compared to a benefit from income taxes of $1,422,000 during 1998. The decrease
in the benefit from income taxes in 1999 is primarily due to a smaller net
operating loss in 1999, and the expiration of approximately $1,342,000 of state
net operating loss carryforwards.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Our net sales for the year ended December 31, 1998 increased by $8,093,000
or 35% over the year ended December 31, 1997. The increase in our net sales was
due to $3,649,000 resulting from a full year of SBIO-E sales, an increase in
the overall sales of our diagnostic products of $4,008,000 and an increase in
our vaccine product sales of $436,000. The increase in the sales of our
diagnostic products was due to an increase in our canine heartworm diagnostics
sales of 33% and an increase in our feline diagnostics sales of 33%. The
increased canine heartworm diagnostics sales were due to a full year of sales
of VetRED(R), the introduction of our WITNESS(R) product in the U.S. and
further increases in our DiroCHEK(R) and ICT Gold products. The increase in our
feline diagnostic sales was due to the introduction of our feline heartworm
diagnostic test and our WITNESS(R) FeLV diagnostic test. The increased vaccine
sales comprise an increase of 39% in sales of our vaccines to private label
partners and an increase of 19% in sales of bulk FeLV vaccine (related to the
timing of shipments as requested by our OEM customer), offset by a 38% decrease
in sales of other vaccine products resulting from the beginning of the phase-
out of sales of most of our Synbiotics-label vaccines.
Our cost of sales as a percentage of our net sales was 49% during the year
ended December 31, 1998 compared to 55% during the year ended December 31, 1997
(i.e., our gross margin increased to 51% from 45%). The higher gross margin was
a direct result of two factors: i) the fact that a high percentage of SBIO-E's
sales relate to products manufactured by SBIO-E rather than by third party
manufacturers and ii) our U.S. sales during the year ended December 31, 1998
had a 46% gross margin as compared to 43% during the year ended December 31,
1997. The increased margin on our 1998 domestic sales was due primarily to
increases in our average selling prices as a result of the non-recurrence of
the severe canine heartworm diagnostics price competition we encountered during
the first six months of 1997, the non-recurrence of distributor promotional
programs and a general price increase in January 1998. These factors were
offset by the increased sales of bulk FeLV vaccine to Merial. Those sales were
at cost; instead, we received a royalty on the U.S. sales of Merial's FeLV
vaccine products. Our gross margin, exclusive of the no margin bulk FeLV
vaccine sales, would have been 54% and 48% for 1998 and 1997, respectively. Our
manufacturing costs were predominantly fixed costs. Among our major products,
our DiroCHEK(R) canine heartworm diagnostic products were manufactured at our
facilities, whereas our ICT GOLD(TM) HW, VetRED(R) and WITNESS(R) products, and
all of our vaccines were manufactured by third parties. In addition to
affecting our gross margins, outsourcing of manufacturing renders us relatively
more dependent on the third-party manufacturers. See "We depend on third party
manufacturers".
In March 1999, we amended (effective July 1, 1998) our FeLV vaccine supply
agreement with Merial Limited ("Merial"). Since 1992, we have supplied 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 were 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 totalled $2,029,000 and
$1,309,000 1998 and 1997, respectively. In the meantime, we will continue to
resell Bio-Trends-supplied FeLV vaccine to Merial at cost for the U.S. Sales of
our own VacSyn and other FeLV-labeled vaccine products, our sales to Merial
S.A. in France, which are at a profit rather than at cost, and the
collaborative research relationship between Merial Limited and us were not
affected by this amendment.
13
<PAGE>
Our research and development expenses increased during the year ended
December 31, 1998 by $694,000 or 41% over the year ended December 31, 1997. The
increase was primarily due to the acquisitions of SBIO-E and Prisma, which have
their own research and development groups, as well as increases in our
contracted research and development expenses. Our research and development
expenses as a percentage of our net sales were 8% and 7% during the year ended
December 31, 1998 and 1997, respectively.
Our selling and marketing expenses increased during the year ended December
31, 1998 by $1,677,000 or 37% over the year ended December 31, 1997. The
increase was due primarily to the acquisition of SBIO-E, which has its own
sales and marketing group. Our selling and marketing expenses as a percentage
of our net sales were 20% and 19% during the year ended December 31, 1998 and
1997, respectively.
Our general and administrative expenses increased during the year ended
December 31, 1998 by $1,833,000 or 52% over the year ended December 31, 1997.
The increase was due primarily to amortization of goodwill and additional
payroll costs related to the acquisitions of SBIO-E and Prisma. Our general and
administrative expenses as a percentage of our net sales were 17% and 15%
during the year ended December 31, 1998 and 1997, respectively.
On July 28, 1998, we entered into a settlement agreement with Barnes-Jewish
Hospital resolving the Hospital's patent infringement lawsuit . We paid the
Hospital $1,600,000 in cash, 333,000 shares of the our common stock, and
undisclosed future payments and royalties. We settled the case to avoid future
litigation expenses and to eliminate the risk to our key canine heartworm
diagnostic products. We recorded a one-time pre-tax charge of approximately
$3,922,000 and reclassified $678,000 of legal expenses related to the patent
litigation from general and administrative expenses.
The change in our royalty income during 1998 was not significant. As a
result of the amended supply agreement with Merial (see above), we no longer
receive royalties from Merial. Our royalty income totalled $317,000 and
$332,000 during 1998 and 1997, respectively. Our net interest expense during
1998 increased by $812,000 from 1997 due to a full year of interest expense
related to the debt incurred in conjunction with the acquisition of SBIO-E.
We recognized a benefit from income taxes of $1,422,000 during 1998, as
compared to a provision for income taxes of $559,000 for 1997. The benefit from
income taxes in 1998 is a result of a deferred tax asset related to the patent
litigation settlement , offset by a decrease in our deferred state tax assets
resulting from enacted tax rate changes, as well as foreign income taxes
related to the operations of SBIO-E.
Financial Condition
We believe that our present capital resources, which included working
capital of $10,400,000 at December 31, 1999, are sufficient to meet our current
working capital needs and service our debt through 2000. However, pursuant to
our 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 December 31, 1999, we had
outstanding principal balances on our Banque Paribas debt of $7,500,000, and we
may borrow up to $5,000,000 (subject to a borrowing base calculation) on our
revolving line of credit.
As of December 31, 1999, we were not in compliance with some of our
financial covenants, and we had not obtained a waiver from Banque Paribas. In
March 2000, we reached an agreement with Imperial Bank ("Imperial") to
refinance our Banque Paribas loans. The new Imperial debt agreement includes a
$6,000,000 term loan and a $4,000,000 revolving line of credit.
The term loan is due in April 2005, bears interest at the rate of prime plus
0.50%, is payable beginning in May 2000 in monthly installments of $100,000 of
principal plus accrued interest and is secured by substantially all our assets.
The line of credit bears interest at the rate of prime plus 0.50%, with
interest only payments to be
14
<PAGE>
made monthly beginning in May 2000. Any outstanding principal under the line of
credit is due in April 2002. The Company is required to pay a quarterly
commitment fee equal to 0.50% per annum on the average unused portion of the
line of credit facility.
Imperial 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 Imperial's consent.
We will record an approximately $1,000,000 extraordinary loss on early
extinguishment of debt in the second quarter of 2000, which represents the
remaining unamortized debt issuance costs and debt discount on the Bank debt.
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 instruments and supplies and success in our Internet marketing
business would also reduce our 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. 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 have resulted 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 completed the implementation of an enterprise resource planning system in
the third quarter of 1999. The total cost of the new system (including
software, hardware and implementation) was approximately $1,000,000, for which
we obtained lease financing. The new system is year 2000 compliant.
The computer systems of SBIO-E were not affected by the year 2000 issue as
new systems were implemented during 1999, and those systems are year 2000
compliant. Our telephone systems and equipment used in our manufacturing and
research and development processes are also year 2000 compliant.
We did not incur any disruption of our operations related to the year 2000
issue, nor are we aware of any disruption in the operations of our major
suppliers and customers due to the year 2000 issue.
15
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants......................................... 16
Consolidated Balance Sheet as of December 31, 1999 and 1998............. 18
Consolidated Statement of Operations and Comprehensive Income (Loss) for
the years ended December 31, 1999, 1998 and 1997....................... 19
Consolidated Statement of Cash Flows for the years ended December 31,
1999, 1998 and 1997.................................................... 20
Consolidated Statement of Non-Mandatorily Redeemable Common Stock and
Other Shareholders' Equity for the years ended December 31, 1999, 1998
and 1997............................................................... 21
Notes to Consolidated Financial Statements.............................. 22
</TABLE>
16
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Synbiotics Corporation
In our opinion, the consolidated balance sheet and the related consolidated
statements of operations and comprehensive income, of cash flows and of non-
mandatorily redeemable common stock and other shareholders' equity present
fairly, in all material respects, the financial position of Synbiotics
Corporation and its subsidiary at December 31, 1999 and December 31, 1998, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1999 in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
San Diego, California
March 29, 2000
17
<PAGE>
SYNBIOTICS CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents........................ $ 2,260,000 $ 4,357,000
Securities available for sale.................... 3,443,000 1,613,000
Accounts receivable, net......................... 4,606,000 4,135,000
Inventories...................................... 5,178,000 5,179,000
Defe rred tax assets............................. 468,000 341,000
Other current assets............................. 1,570,000 820,000
------------ ------------
Total current assets........................... 17,525,000 16,445,000
Property and equipment, net...................... 1,744,000 1,774,000
Goodwill, net.................................... 12,137,000 13,372,000
Deferred tax assets.............................. 8,159,000 7,873,000
Deferred debt issuance costs..................... 447,000 653,000
Other assets..................................... 4,191,000 5,329,000
------------ ------------
$ 44,203,000 $ 45,446,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
-------------------------------------
Current liabilities:
Accounts payable and accrued expenses............ $ 5,921,000 $ 5,217,000
Current portion of long-term debt................ 1,000,000 2,000,000
Deferred revenue................................. 242,000
------------ ------------
Total current liabilities...................... 7,163,000 7,217,000
------------ ------------
Long-term debt................................... 5,914,000 6,716,000
Deferred revenue................................. 969,000
Other liabilities................................ 1,546,000 1,369,000
------------ ------------
8,429,000 8,085,000
------------ ------------
Mandatorily redeemable common stock................ 2,412,000 2,287,000
------------ ------------
Commitments and contingencies (Note 10)
Non-mandatorily redeemable common stock and other
shareholders' equity:
Common stock, no par value, 24,800,000 shares
authorized, 8,576,000 and
8,246,000 shares issued and outstanding at
December 31, 1999 and 1998...................... 39,424,000 38,134,000
Common stock warrants............................ 1,003,000 1,003,000
Accumulated other comprehensive income (loss).... (916,000) 496,000
Accumulated deficit.............................. (13,312,000) (11,776,000)
------------ ------------
Total non-mandatorily redeemable common stock
and other shareholders' equity................ 26,199,000 27,857,000
------------ ------------
$ 44,203,000 $ 45,446,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE>
SYNBIOTICS CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Net sales............................ $30,498,000 $31,379,000 $23,286,000
License fees......................... 247,000
Royalties............................ 12,000 317,000 332,000
----------- ----------- -----------
30,757,000 31,696,000 23,618,000
----------- ----------- -----------
Operating expenses:
Cost of sales........................ 15,553,000 15,352,000 12,791,000
Research and development............. 2,201,000 2,386,000 1,692,000
Selling and marketing................ 7,340,000 6,187,000 4,510,000
General and administrative........... 6,138,000 5,374,000 3,541,000
Patent litigation settlement......... 479,000 4,600,000
----------- ----------- -----------
31,711,000 33,899,000 22,534,000
----------- ----------- -----------
Income (loss) from operations.......... (954,000) (2,203,000) 1,084,000
Other income (expense):
Interest, net.......................... (1,152,000) (1,130,000) (318,000)
----------- ----------- -----------
(Loss) income before income taxes...... (2,106,000) (3,333,000) 766,000
(Benefit from) provision for income
taxes................................. (580,000) (1,422,000) 559,000
----------- ----------- -----------
(Loss) income before extraordinary
item.................................. (1,526,000) (1,911,000) 207,000
Early extinguishment of debt, net of
tax................................... 116,000
----------- ----------- -----------
Net (loss) income...................... (1,410,000) (1,911,000) 207,000
Cumulative translation adjustment...... (1,412,000) 647,000 (151,000)
----------- ----------- -----------
Comprehensive (loss) income............ $(2,822,000) $(1,264,000) $ 56,000
=========== =========== ===========
Basic (loss) income per share:
(Loss) income from continuing
operations............................ $ (0.18) $ (0.23) $ 0.02
Early extinguishment of debt, net of
tax................................... 0.01
----------- ----------- -----------
Net (loss) income...................... $ (0.17) $ (0.23) $ 0.02
=========== =========== ===========
Diluted (loss) income per share:
(Loss) income from continuing
operations............................ $ (0.18) $ (0.23) $ 0.02
Early extinguishment of debt, net of
tax................................... 0.01
----------- ----------- -----------
Net (loss) income...................... $ (0.17) $ (0.23) $ 0.02
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE>
SYNBIOTICS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income....................... $(1,410,000) $(1,911,000) $ 207,000
Adjustments to reconcile net (loss)
income to net cash provided by
operating activities:
Depreciation and amortization......... 2,504,000 1,897,000 1,399,000
Early extinguishment of debt.......... (200,000)
Changes in assets and liabilities:
Account receivable.................. (471,000) 261,000 (1,989,000)
Inventories......................... 1,000 8,000 2,216,000
Deferred tax assets................. (413,000) (1,494,000) 438,000
Other assets........................ 104,000 236,000 761,000
Accounts payable and accrued
expenses........................... 1,594,000 1,037,000 418,000
Deferred revenue.................... 1,211,000
Other liabilities................... 177,000 1,369,000 (650,000)
----------- ----------- -----------
Net cash provided by operating
activities............................. 3,097,000 1,403,000 2,800,000
----------- ----------- -----------
Cash flows from investing activities:
Acquisition of property and
equipment............................ (383,000) (499,000) (479,000)
Proceeds from sale of securities
available for sale................... 1,781,000
Investment in securities available for
sale................................. (1,830,000) (522,000)
Investment in W3Commerce LLC.......... (168,000)
Acquisiton of Synbiotics Europe SAS... (10,659,000)
----------- ----------- -----------
Net cash (used for) provided by
investing activities................... (2,381,000) 1,282,000 (11,660,000)
----------- ----------- -----------
Cash flows from financing activities:
Payments of long-term debt............ (1,800,000) (1,133,000) (1,993,000)
Proceeds from issuance of long-term
debt................................. 11,493,000
Debt issuance costs................... (949,000)
Mandatorily redeemable stock issuance
costs................................ (17,000) (493,000)
Proceeds from issuance of non-
mandatorily redeemable common stock,
net.................................. 399,000 (15,000) 93,000
----------- ----------- -----------
Net cash (used for) provided by
financing activities................... (1,401,000) (1,165,000) 8,151,000
----------- ----------- -----------
Net (decrease) increase in cash and
equivalents............................ (685,000) 1,520,000 (709,000)
Effect of exchange rates on cash........ (1,412,000) 647,000 (151,000)
Cash and cash equivalents--beginning of
year................................... 4,357,000 2,190,000 3,050,000
----------- ----------- -----------
Cash and cash equivalents--end of year.. $ 2,260,000 $ 4,357,000 $ 2,190,000
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE>
SYNBIOTICS CORPORATION
CONSOLIDATED STATEMENT OF NON-MANDATORILY REDEEMABLE COMMON STOCK AND OTHER
SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Common Stock Common Other
--------------------- Stock Comprehensive Accumulated
Shares Amount Warrants Income (Loss) Deficit Total
--------- ----------- ---------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balance,
December 31,
1996........... 7,392,000 $35,566,000 $ (9,890,000) $25,676,000
Issuance of
common stock
warrants in
conjunction
with the
acquisition of
Synbiotics
Europe SAS
(Note 3)....... $1,003,000 1,003,000
Issuance of
common stock
pursuant to
exercise of
stock options.. 34,000 93,000 93,000
Cumulative
translation
adjustment..... $ (151,000) (151,000)
Accretion of
manditorily
redeemable
common stock... (71,000) (71,000)
Net income...... 207,000 207,000
--------- ----------- ---------- ----------- ------------ -----------
Balance,
December 31,
1997........... 7,426,000 35,659,000 1,003,000 (151,000) (9,754,000) 26,757,000
Issuance of
common stock in
conjunction
with the
acquisition of
Prisma
Acquisition
Corp. (Note
3)............. 458,000 1,423,000 1,423,000
Issuance of
common stock in
conjunction
with the
settlement of
patent
litigation
(Note 2)....... 333,000 1,000,000 1,000,000
Issuance of
common stock
pursuant to
exercise of
stock options.. 4,000 12,000 12,000
Issuance of
common stock
pursuant to
employee bonus
plan........... 25,000 40,000 40,000
Cumulative
translation
adjustment..... 647,000 647,000
Accretion of
manditorily
redeemable
common stock... (111,000) (111,000)
Net loss........ (1,911,000) (1,911,000)
--------- ----------- ---------- ----------- ------------ -----------
Balance,
December 31,
1998........... 8,246,000 38,134,000 1,003,000 496,000 (11,776,000) 27,857,000
Issuance of
common stock
pursuant to
exercise of
stock options.. 278,000 1,081,000 1,081,000
Expiration of
stock options.. 69,000 69,000
Issuance of
common stock
pursuant to
employee bonus
plan........... 52,000 140,000 140,000
Cumulative
translation
adjustment..... (1,412,000) (1,412,000)
Accretion of
manditorily
redeemable
common stock... (126,000) (126,000)
Net loss........ (1,410,000) (1,548,000)
--------- ----------- ---------- ----------- ------------ -----------
Balance,
December 31,
1999........... 8,576,000 $39,424,000 $1,003,000 $ (916,000) $(13,312,000) $26,061,000
========= =========== ========== =========== ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE>
SYNBIOTICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES:
The Company
Synbiotics Corporation (the "Company"), incorporated in 1982, is an animal
health business which develops, manufactures and markets diagnostic products
and biological products for animals. In addition, the Company also develops
and manufactures specialty products which are marketed to veterinarians and
purebred dog enthusiasts. The Company's principal markets are veterinarians
and veterinary clinical laboratories in the United States and Europe. The
Company's products are sold primarily to wholesale distributors and direct to
veterinarians and veterinary clinical laboratories.
Principles of Consolidation
The consolidated financial statements of the Company include the accounts
of its wholly-owned subsidiary Synbiotics Europe SAS (Note 3). All significant
intercompany transactions and accounts have been eliminated in consolidation.
Inventories
Inventories are stated at the lower of cost or market; cost is determined
using the first-in, first-out method.
Property and Equipment
Property and equipment, including leasehold improvements, are recorded at
cost. Maintenance costs are charged to operations as incurred. Depreciation
and amortization are computed using the straight-line method over the
estimated useful lives of five to eight years or the lease terms, if shorter.
Certain Investments in Debt and Equity Securities
The Company determines the appropriate classification of its U.S.
Government and debt securities at the time of acquisition and reevaluates such
designation as of each balance sheet date. The Company has recorded these
investments at fair market value as it has designated them as available for
sale. There were no significant unrealized gains or losses related to these
securities as of December 31, 1999 and 1998.
Patents and Licenses
Patents and licenses are recorded at cost and are amortized ratably over
the life of the respective patents or licenses.
Long-Lived Assets
The Company assesses potential impairments of long-lived assets, certain
identifiable intangibles and associated goodwill when there is evidence that
events or changes in circumstances have made recovery of an asset's carrying
value unlikely. An impairment loss is recognized when the sum of the expected
future net cash flows is less than the carrying amount of the asset. No such
impairments of long-lived assets existed through December 31, 1999.
Fair Value of Financial Instruments
The carrying amounts for cash and cash equivalents at December 31, 1999 and
1998 approximate their fair values. The carrying amount of long-term debt
approximates fair value at December 31, 1999 and 1998 as the variable interest
rate on the debt approximates current market rates of interest.
22
<PAGE>
SYNBIOTICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Translation of Financial Statements
The financial statements for subsidiaries whose functional currency is not
the U.S. dollar are translated in the following manner: assets and liabilities
at the year end rates; shareholders' equity at historical rates; and results of
operations at the monthly average exchange rates. The effects of exchange rate
changes are reflected as a separate component of shareholders' equity.
Revenue Recognition
Revenue from products is recognized when the products are shipped. License
fee revenue is recognized ratably over the license term when the Company has a
further performance obligation to the licensee. In the event that the Company
has no further performance obligation to the licensee, license fee revenue is
recognized upon receipt.
Advertising Costs
The Company recognizes the production costs of advertising at the time such
charges are incurred. Advertising expense totalled $775,000, $605,000 and
$450,000 during the years ended December 31, 1999, 1998 and 1997, respectively.
Stock-Based Compensation
The Company measures its stock-based employee compensation using the
intrinsic value method and provides pro forma disclosures of net income and
earnings per share as if the fair value method had been applied in measuring
compensation expense.
Income Taxes
The Company's current income tax expense is the amount of income taxes
expected to be payable for the current year. A deferred income tax asset or
liability is computed for the expected future impact of differences between the
financial reporting and tax bases of assets and liabilities as well as the
expected future tax benefit to be derived from tax loss and tax credit
carryforwards. Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amount more likely than not to be realized in future
tax returns. The effect of tax rate changes are reflected in income during the
period such changes are enacted.
Net Income Per Share
Basic net income per share is computed as net income less accretion of
mandatorily redeemable common stock divided by the weighted average number of
common shares outstanding during the period. Diluted net income per share is
computed as net income less accretion of mandatorily redeemable common stock
divided by the weighted average number of common shares and potential common
shares, using the treasury stock method, outstanding during the period (Note
9).
Cash and Cash Equivalents
Cash and cash equivalents include cash investments which are highly liquid
and have an original maturity of three months or less.
23
<PAGE>
SYNBIOTICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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.
Comprehensive Income
Comprehensive income is defined as the change in equity (net assets) of a
business enterprise during a period from transactions and other events and
circumstances from non-owner sources. It includes all changes in equity during
a period except those resulting from investments by owners and distributions to
owners. The Company reports in the financial statements, in addition to net
income, comprehensive income and its components including foreign currency
items and unrealized gains and losses on certain investments in debt and equity
securities.
Segment Reporting
Operating segments are determined consistent with the way that management
organizes and evaluates financial information internally for making operating
decisions and assessing performance. The Company operates in one segment.
NOTE 2--PATENT LITIGATION SETTLEMENT:
In September 1997, Barnes-Jewish Hospital of St. Louis (the "Hospital")
filed a lawsuit against the Company claiming that the Company infringed a
patent owned by the Hospital which covers the Company's canine heartworm
diagnostic products. On July 28, 1998, the Company entered into a settlement
agreement with the Hospital calling for the Company to pay the Hospital or its
affiliates $1,600,000 in cash, 333,000 shares of the Company's common stock,
and undisclosed future payments and royalties. The Company recorded a one-time
pre-tax charge of approximately $3,922,000 and reclassified $678,000 of legal
expenses related to the patent litigation from general and administrative
expenses. The common stock portion of the settlement of $1,000,000 is
considered a non-cash financing activity for purposes of the statement of cash
flows.
In January 2000, the Company issued an additional 135,000 shares of common
stock to the Hospital upon the resolution of a contingency contained in the
settlement agreement. The Company recorded a one-time pre-tax charge of
$479,000 in the fourth quarter of 1999 to accrue the liability for the issuance
of the common stock.
NOTE 3--ACQUISITIONS:
On March 6, 1998, the Company acquired by merger Prisma Acquisition Corp.
("Prisma"), a privately-held company located in Rome, NY, which develops,
manufactures and markets instruments and reagents used by veterinarians to
measure blood chemistry information at the point-of-care. The consideration
paid to the stockholders of Prisma was a $1,000,000 convertible note (Note 6),
458,000 newly issued, unregistered shares of the Company's common stock valued
at $1,490,000 (based on the average closing price of Synbiotics' common stock
for the thirty trading days prior to March 6, 1998, which was $3.25) and the
issuance of options to purchase 157,000 shares of the Company's common stock
for $.0016 per share in replacement of Prisma's outstanding stock options. The
157,000 stock options were valued at $609,000 using the Black-Scholes option
pricing model.
24
<PAGE>
SYNBIOTICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The transaction was accounted for as a purchase. Goodwill arising from the
transaction totalled $2,848,000 which is being amortized over an estimated
useful life of 15 years utilizing the straight-line method. The convertible
debt, common stock and common stock option portion of the of the purchase price
and liabilities assumed totalling $3,632,000 is considered a non-cash financing
activity for purposes of the statement of cash flows.
On July 9, 1997, the Company acquired Synbiotics Europe SAS ("SBIO-E")
(formerly Rhone Merieux Diagnostics, S.A.S.), the worldwide veterinary
diagnostic business of Rhone Merieux S.A.S. (now known as "Merial"), pursuant
to purchase agreements dated May 14, 1997 and amended July 9, 1997. The
consideration paid to Merial was $10,659,000 in cash and 759,000 shares of
newly issued, unregistered Synbiotics common stock valued at $3,178,000 (based
upon the closing price of Synbiotics' common stock on July 9, 1997 which was
$4.1875 per share) (Note 7). The shares issued by the Company included 230,000
shares which were placed in escrow pending certain U.S. regulatory approvals
and subsequent sales of related products. During 1998, 138,000 of the 230,000
escrowed shares were cancelled due to delays in obtaining U.S. regulatory
approvals and subsequent sales of related products. The cancellations were
recorded as a reduction of the purchase price. The cash portion of the
consideration was provided by a series of loans obtained from Banque Paribas
(Note 5). Depending on performance of the combined business in the three years
following the acquisition, Synbiotics may also pay up to $3,600,000 in
contingent cash payments; any such payments will be recorded as additional
purchase price. The transaction was accounted for as a purchase. Goodwill
arising from the transaction totalled $6,612,000 which is being amortized over
an estimated useful life of 15 years utilizing the straight-line method. The
$3,178,000 common stock portion of the purchase price is considered a non-cash
financing activity for purposes of the statement of cash flows. The acquisition
was effective as of July 1, 1997.
Merial and Synbiotics also entered into related agreements covering the
supply of various products and services, collaborative research and
development, licenses of Merial patents, and the distribution of certain of the
acquired products by Merial. The collaborative research agreement gives
Synbiotics a right of first refusal to acquire technology or products emanating
from Merial's future research efforts that have potential veterinary diagnostic
applications.
The Company's statement of operations includes the results of operations of
Prisma for the period March 6, 1998 to December 31, 1998 and for the year ended
December 31, 1999. The following are unaudited pro forma results of operations
as if the Prisma transaction had been consummated on January 1, 1998:
<TABLE>
<CAPTION>
Year Ended
December
31, 1998
-----------
(unaudited)
<S> <C>
Revenues:
As Reported.................................................. $31,696,000
===========
Pro forma.................................................... $31,763,000
===========
Net (loss) income:
As reported.................................................. $(1,911,000)
===========
Pro forma.................................................... $(1,997,000)
===========
Basic net (loss) income per share:
As reported.................................................. $ (0.23)
===========
Pro forma.................................................... $ (0.23)
===========
Diluted net (loss) income per share:
As reported.................................................. $ (0.23)
===========
Pro forma.................................................... $ (0.23)
===========
</TABLE>
25
<PAGE>
SYNBIOTICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 4--COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS:
<TABLE>
<CAPTION>
December 31,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Inventories:
Raw materials................................... $ 2,320,000 $ 2,219,000
Work in process................................. 589,000 904,000
Finished goods.................................. 2,269,000 2,056,000
----------- -----------
$ 5,178,000 $ 5,179,000
=========== ===========
Property and equipment:
Laboratory equipment............................ $ 1,868,000 $ 3,002,000
Leasehold improvements.......................... 309,000 1,835,000
Office equipment................................ 698,000 950,000
Construction in progress........................ 13,000 81,000
----------- -----------
2,888,000 5,868,000
Less accumulated depreciation and amortization.... (1,144,000) (4,094,000)
----------- -----------
$ 1,744,000 $ 1,774,000
=========== ===========
Depreciation expense was $465,000, $364,000 and $256,000 during the years
ended December 31, 1999, 1998 and 1997, respectively.
<CAPTION>
December 31,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Other assets:
Patents, net.................................... $ 3,110,000 $ 4,104,000
Licenses, net................................... 805,000 1,165,000
Other........................................... 276,000 60,000
----------- -----------
$ 4,191,000 $ 5,329,000
=========== ===========
Accumulated amortization of patents, licenses and goodwill was $4,491,000
and $2,719,000 at December 31, 1999 and 1998, respectively.
<CAPTION>
December 31,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Accounts payable and accrued expenses:
Accounts payable................................ $ 2,661,000 $ 2,725,000
Accrued vacation................................ 460,000 419,000
Accrued compensation............................ 137,000 1,153,000
Accrued royalties............................... 484,000 457,000
Accrued patent litigation settlement............ 479,000
Accrued professional fees....................... 218,000 112,000
Other........................................... 1,482,000 351,000
----------- -----------
$ 5,921,000 $ 5,217,000
=========== ===========
</TABLE>
26
<PAGE>
SYNBIOTICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 5--NOTE PAYABLE AND LONG-TERM DEBT:
In conjunction with the acquisition of Prisma (Note 3), the Company issued a
$1,000,000 convertible note which was due March 5, 1999. In February 1999, the
Company repaid the note prior to its original due date for $800,000 and
recognized an extraordinary gain of $116,000, net of $84,000 of income tax.
In conjunction with the acquisition of SBIO-E (Note 3), the Company obtained
a series of loans from Banque Paribas (the "Bank") as follows: 1) $5,000,000,
due May 31, 2002, bearing interest at the rate of LIBOR plus 2.50% (effectively
8.61% at December 31, 1999), payable quarterly beginning August 31, 1997 in the
amount of $250,000 of principal plus accrued interest, and secured by
substantially all of the Company's assets; and 2) $5,000,000, due May 31, 2003,
bearing interest at the rate of LIBOR plus 3.00% (effectively 9.11% at December
31, 1999), interest only payable quarterly beginning August 31, 1997, and
secured by substantially all of the Company's assets. In accordance with the
debt agreements, the Company has entered into an interest rate collar agreement
with a financial institution, which expires in May 2003, whereby the LIBOR rate
payable by the Company, on a notional principal amount equal to the then
outstanding principal balance, cannot fall below 5.70% nor rise above 7.08%.
The Company did not pay or receive any premiums associated with this agreement,
which is maintained for interest rate protection and not for speculative
purposes. Accordingly, no amounts have been recorded in the accompanying
financial statements with respect to this agreement. At December 31, 1999, the
fair value of the interest collar, as confirmed by the counterparty to the
instrument, was not material.
The Company incurred deferred debt issuance costs totalling $949,000 and a
debt discount totalling $1,003,000, representing the value of common stock
warrants issued to the Bank (Note 7). The debt discount and deferred debt
issuance costs, which have been allocated evenly to the two notes payable, are
being amortized over the lives of the loans using the effective interest
method.
In addition, the Company also obtained a revolving line of credit from the
Bank whereby the Company may borrow up to $5,000,000 as determined by a
borrowing base calculation. The line of credit bears interest at the rate of
prime plus .50% (effectively 8.50% at December 31, 1999), with interest only
payments to be made quarterly beginning August 31, 1997. Any outstanding
principal is due May 31, 2002, although a portion of the outstanding principal
may become due and payable as determined by a monthly borrowing base
calculation. There were no borrowings outstanding under the line of credit at
December 31, 1999 and 1998. The Company is required to pay a quarterly
commitment fee equal to 0.5% per annum on the average unused portion of the
line of credit facility.
The Bank requires the Company to maintain certain financial ratios and
levels of tangible net worth and also restricts the Company's ability to pay
dividends and make loans, capital expenditures or investments without the
Bank's consent. As of December 31, 1999, the Company was not in compliance with
certain financial covenants. In March 2000, the Company reached an agreement
with Imperial Bank to refinance the debt (Note 12).
Principal payments scheduled during the next five years are as follows:
2000--$1,000,000, 2001--$1,000,000, 2002--$500,000 and 2003--$5,000,000.
Interest paid during 1999, 1998 and 1997 totalled $710,000, $880,000 and
$262,000, respectively.
NOTE 6--MANDATORILY REDEEMABLE COMMON STOCK:
The 759,000 shares issued in conjunction with the acquisition of SBIO-E
(Note 3) are subject to certain registration rights as well as put and call
provisions. The put option gives Merial the right, beginning on July 9, 2001,
to sell all or any portion of its shares to the Company at a price of $5 per
share. The call option gives the
27
<PAGE>
SYNBIOTICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Company the right to acquire, at any time, all or any portion of the shares
then owned by Merial at a per share price of the greater of the average
closing sale price of the Company's common stock for the 30 day period prior
to the call or $5. Should the Company exercise its call option prior to July
9, 2001 at a call option price greater than $5 per share, the agreement
requires the difference between the per share call option price and $5 to be
shared by the Company and Merial on a sliding scale basis. In addition, should
Merial sell all or any portion of the shares to a third party prior to July 9,
2001 at a price greater than $5 per share, the agreement requires the
difference between the per share sales price and $5 to be shared by the
Company and Merial on a sliding scale basis. The Company has classified the
shares on the balance sheet as mandatorily redeemable and is accreting the
value of the shares to the put option price, using the interest method, with
the accretion being charged directly to retained earnings. During 1998,
138,000 of the 230,000 escrowed shares were cancelled due to delays in
obtaining U.S. regulatory approvals and subsequent sales of related products.
The cancellations were recorded as a reduction of the purchase price.
NOTE 7--SHAREHOLDERS' EQUITY:
In March and June 1999, the Company issued to its employees, under the 1995
Stock Option/Stock Issuance Plan, 47,000 shares and 5,000 shares of common
stock, respectively. The stock vests quarterly over two years beginning
January 1, 1999. The Company is recognizing compensation expense, as the
shares vest, at the rate of $4.25 and $3.75 per share (based upon the closing
price of the stock on the date of grant), respectively. In February 1998, the
Company issued to its employees, under the 1995 Stock Option/Stock Issuance
Plan, 25,000 shares of common stock. The stock vests quarterly over two years
beginning January 1, 1998. The Company is recognizing compensation expense, as
the shares vest, at the rate of $3.19 per share (based upon the closing price
of the stock on the date of grant). Compensation expense related to these
shares totalled $140,000 and $40,000 during 1999 and 1998, respectively.
Preferred Stock
In August 1998, the Company amended its Articles of Incorporation to
authorize the issuance of up to 25,000,000 shares of preferred stock. The
preferred stock may be issued in one or more series. The Board of Directors is
authorized to fix or alter the dividend rights, dividend rate, conversion
rights, voting rights, rights and terms of redemption (including sinking fund
provisions), redemption price or prices, and the liquidation preferences of
any wholly unissued series of preferred stock, and the number of shares
constituting any such series and the designation thereof, or any of them; and
to increase or decrease the number of shares of any series subsequent to the
issuance of shares of that series, but not below the number of shares of such
series then outstanding. In case the number of shares of any series shall be
so decreased, the shares constituting such decrease shall resume the status
that they had prior to the adoption of the resolution originally fixing the
number of shares of such series.
In September 1998, the Company created the Series A Junior Participating
Preferred Stock (the "Series A Preferred") consisting of 200,000 shares. Each
share of Series A Preferred is entitled to 1,000 votes. Each Series A
Preferred share is entitled to dividends, payable in cash quarterly, in an
amount equal to 1,000 times the aggregate per share amount of dividends
declared on the common stock. In the event that no common stock dividends are
declared, each share of Series A Preferred is entitled to $.001 per share. The
Series A Preferred is entitled to a liquidation preference of $1,000 per
share, plus accrued and unpaid dividends; provided, however, that each Series
A Preferred share is entitled to receive an aggregated amount per share equal
to 10,000 times the aggregate amount per share distributed to the holders of
common stock. In the event of a consolidation, merger, combination, etc., each
share of Series A Preferred shall be exchanged into 1,000 times the aggregate
per share consideration of the common stock.
There were no shares of Series A Preferred issued and outstanding as of
December 31, 1999 and 1998.
28
<PAGE>
SYNBIOTICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Preferred Stock Purchase Rights
In September 1998, Synbiotics declared a dividend on each share of common
stock outstanding on October 7, 1998. The per-share dividend consisted of one
preferred share purchase right (the "Rights") to purchase, for $10.00 (the
"Purchase Price"), 1/1000th of a share of Synbiotics' Series A Preferred (the
"Unit"). The dividend was paid on October 7, 1998 and was part of Synbiotics'
implementation of a "poison pill" shareholder rights plan. The Rights are not
exercisable until the earlier to occur of (i) a public announcement that
beneficial ownership of 20% or more of the Company's outstanding common stock
has been acquired or (ii) 10 business days (or a later date as determined by
the Board of Directors) following the commencement of, or announcement of an
intention to make, a tender offer or exchange offer to acquire beneficial
ownership of 20% or more of the outstanding common stock of the Company.
At any time after the beneficial ownership of 20% or more of the outstanding
shares of the Company's common stock has been acquired (but before the
acquiring party has acquired 50% of the outstanding common stock) the Company
may exchange all or part of the Rights for Units at an exchange ratio equal to
(subject to adjustment to reflect stock splits, stock dividends and similar
transactions) the Purchase Price divided by the then current per share market
price per Unit on the Distribution Date.
At any time prior to the public announcement that the beneficial ownership
of 20% or more of the outstanding common stock of the Company has been
acquired, the Company may redeem the Rights in whole, but not in part, at a
price of $0.001 per Right (the "Redemption Price"). The redemption of the
rights will be effective at such time as the Board of Directors in its sole
discretion may establish.
The Rights will expire on October 7, 2008, unless the expiration date is
extended or unless the Rights are earlier redeemed or exchanged by the Company.
Stock Warrants
In conjunction with the acquisition of SBIO-E (Note 3), the Company issued
to Banque Paribas a warrant to purchase 240,000 shares of the Company's common
stock at an exercise price of $.01 per share. The warrant is exercisable at any
time through May 31, 2007 and contains certain anti-dilution provisions and
registration rights. The Company has valued the warrant at $1,003,000 using the
Black-Scholes option pricing model.
In conjunction with the 1996 acquisition of International Canine Genetics,
Inc. ("ICG"), the Company assumed all of the outstanding ICG stock warrants,
which expire March 24, 2000, after giving effect to the exchange ratio inherent
in the transaction. As a result, 284,000 shares of the Company's common stock
were reserved for issuance with an exercise price of $4.54 per share.
29
<PAGE>
SYNBIOTICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock Option Plans
The Company recognizes compensation expense related to its stock option
plans using the intrinsic value method. Had compensation expense for the
Company's stock option plans been determined based on the fair value at the
grant dates, the Company's net (loss) income and net (loss) income per share
would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1999 1998 1997
----------- ----------- --------
<S> <C> <C> <C>
Net (loss) income:
As reported............................ $(1,410,000) $(1,911,000) $207,000
=========== =========== ========
Pro forma.............................. $(1,688,000) $(2,100,000) $ 17,000
=========== =========== ========
Basic net (loss) income per share:
As reported............................ $ (0.17) $ (0.23) $ 0.02
=========== =========== ========
Pro forma.............................. $ (0.19) $ (0.24) $ 0.00
=========== =========== ========
Diluted net (loss) income per share:
As reported............................ $ (0.17) $ (0.23) $ 0.02
=========== =========== ========
Pro forma.............................. $ (0.19) $ (0.24) $ 0.00
=========== =========== ========
</TABLE>
The Company has adopted the 1995 Stock Option/Stock Issuance Plan (the "1995
Plan") whereby an aggregate of 2,000,000 shares of the Company's common stock
were reserved for issuance. The 1995 Plan is administered by the Board of
Directors and provides that exercise prices shall not be less than 85 percent
(non-qualified options) and 100 percent (incentive options) of the fair market
value of the shares at the date of grant. Options will generally vest at the
rate of 1/16th of the granted shares in each continuous quarter of employment
and have an exercise period not more than ten years from date of grant.
In November 1999, the 1995 Plan was amended to add an additional 600,000
shares to the maximum authorized for issuance. Under the 1995 Plan, an
aggregate of 2,600,000 shares of the Company's common stock were reserved for
issuance.
The following is a summary of the stock option plans' activity:
<TABLE>
<CAPTION>
Weighted-Average
Shares Exercise Price
--------- ----------------
<S> <C> <C>
Outstanding at December 31, 1996................. 1,266,000 $3.64
Granted.......................................... 329,000 $3.69
Exercised........................................ (34,000) $2.88
Forfeited........................................ (7,000) $3.77
---------
Outstanding at December 31, 1997................. 1,554,000 $3.67
Granted.......................................... 366,000 $3.08
Exercised........................................ (4,000) $2.57
Forfeited........................................ (32,000) $3.57
---------
Outstanding at December 31, 1998................. 1,884,000 $3.56
Granted.......................................... 281,000 $3.86
Exercised........................................ (128,000) $3.11
Forfeited........................................ (362,000) $3.79
---------
Outstanding at December 31, 1999................. 1,675,000 $3.59
=========
</TABLE>
30
<PAGE>
SYNBIOTICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Options to purchase an aggregate of 1,063,000 shares and 1,171,000 shares
were exercisable under the 1995 Plan as of December 31, 1999 and 1998,
respectively. The weighted-average fair value of options granted under the 1995
Plan during the years ended December 31, 1999, 1998 and 1997 was $1.62 per
share, $1.22 per share and $1.53 per share, respectively. The Company
recognized compensation expense of $36,000 during the year ended December 31,
1998. There was no compensation expense during 1999 and 1997.
The following is a summary of stock options outstanding at December 31,
1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------- --------------------------
Weighted-Average
Remaining
Price Contractual Weighted-Average Weighted-Average
Range Number Life (Years) Exercise Price Number Exercise Price
- ------- --------- ---------------- ---------------- --------- ----------------
<S> <C> <C> <C> <C> <C>
$1.63--
$2.54 43,000 6.8 $2.73 26,000 $2.36
$2.55--
$3.81 793,000 7.1 $3.25 519,000 $3.20
$3.82--
$5.63 839,000 6.5 $3.99 518,000 $4.02
--------- ---------
$1.63--
$5.63 1,675,000 6.8 $3.59 1,063,000 $3.58
========= =========
</TABLE>
For disclosure purposes, the fair value of each option granted is estimated
on the date of grant using the Black-Scholes option pricing model with the
following weighted-average assumptions for grants in 1999, 1998 and 1997,
respectively: dividend yield of 0% for all years; expected volatility of 54.3%,
54.8% and 56.8%; risk-free interest rates of 5.5%, 5.1% and 6.2%; and expected
lives of 3.1 years, 2.7 years and 2.7 years.
In conjunction with the acquisition of Prisma (Note 3), the Company assumed
all of the outstanding Prisma stock options (the "1998 Plan"), after giving
effect to the exchange ratio inherent in the transaction. As a result, 157,000
shares of the Company's common stock were reserved for issuance with an
exercise price of $.0016 per share. As of December 31, 1999, there were 3,000
shares outstanding under the 1998 Plan with a weighted-average exercise price
of $.0016 per share and a weighted-average remaining contractual life of 8.2
years. Options to purchase 3,000 shares were exercisable under the 1998 Plan
with a weighted-average exercise price of $.0016 per share. No compensation
expense was recognized by the Company related to the 1998 Plan during the years
ended December 31, 1999 and 1998.
In conjunction with the acquisition of ICG, the Company assumed all of the
outstanding ICG stock options (the "ICG Plan"), after giving effect to the
exchange ratio inherent in the transaction. As a result, 93,000 shares of the
Company's common stock were reserved for issuance with exercise prices ranging
from $4.54 to $25.42 per share. As of December 31, 1999, there were 48,000
shares outstanding under the ICG Plan with a weighted-average exercise price of
$9.75 per share and a weighted-average remaining contractual life of 2.9 years.
Options to purchase 39,000 shares were exercisable under the ICG Plan with a
weighted-average exercise price of $9.80 per share. No compensation expense was
recognized by the Company related to the ICG Plan during the years ended
December 31, 1999, 1998 and 1997.
During 1999 and 1998, respectively, $682,000 and $3,000 of accrued stock
compensation expense was transferred to common stock upon the exercise of stock
options, and is considered a non-cash financing activity for purposes of the
statement of cash flows.
31
<PAGE>
SYNBIOTICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 8--INCOME TAXES:
The Company recorded a net (benefit from) provision for income taxes for the
years ended December 31, 1999, 1998 and 1997 as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1999 1998 1997
--------- ----------- --------
<S> <C> <C> <C>
Current income tax (benefit) expense:
State.................................... $ 3,000 $ 62,000 $ 6,000
Foreign.................................. 6,000 7,000 122,000
--------- ----------- --------
9,000 69,000 128,000
--------- ----------- --------
Deferred income tax (benefit) expense:
Federal.................................. (574,000) (1,149,000) 194,000
State.................................... (36,000) (322,000) 262,000
Foreign.................................. 21,000 (20,000) (25,000)
--------- ----------- --------
(589,000) (1,491,000) 431,000
--------- ----------- --------
Net income tax (benefit) expense........... $(580,000) $(1,422,000) $559,000
========= =========== ========
</TABLE>
Federal and state deferred tax assets comprise the following:
<TABLE>
<CAPTION>
December 31,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Federal:
Net operating loss carryforwards................... $5,059,000 $4,988,000
Tax credit carryforwards........................... 813,000 866,000
Patent litigation settlement....................... 828,000 804,000
Deferred revenue................................... 412,000
Equity losses of investee.......................... 313,000 313,000
Accrued compensation............................... 61,000 126,000
Other reserves and accruals........................ 286,000 168,000
---------- ----------
$7,772,000 $7,265,000
Less valuation allowance............................. (89,000)
---------- ----------
$7,683,000 $7,265,000
========== ==========
State:
Net operating loss carryforwards................... $ 53,000 $ 168,000
Tax credit carryforwards........................... 258,000 254,000
Patent litigation settlement....................... 215,000 209,000
Deferred revenue................................... 107,000
Equity losses of investee.......................... 150,000 150,000
Accrued compensation............................... 16,000 33,000
Other reserves and accruals........................ 125,000 88,000
---------- ----------
$ 924,000 $ 902,000
========== ==========
</TABLE>
As of December 31, 1999 and 1998, the Company had foreign deferred tax
assets of $21,000 and $47,000, respectively.
32
<PAGE>
SYNBIOTICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The valuation allowance for Federal deferred tax assets at December 31, 1999
is due to management's determination that it is more likely than not that
certain Federal tax credit carryforwards will not be realized before their
expiration dates.
A reconciliation of the (benefit from) provision for income taxes to the
amount computed by applying the statutory federal income tax rate to income
before income taxes follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1999 1998 1997
--------- ----------- ---------
<S> <C> <C> <C>
Amounts computed at statutory Federal rate.. $(716,000) $(1,133,000) $ 260,000
State income taxes.......................... (67,000) (226,000) 273,000
Foreign income taxes........................ 27,000 (13,000) 122,000
Income (deductions) for financial reporting
purposes for which there is no current tax
(benefit) provision........................ 34,000 (72,000) 164,000
Utilization of Federal net operating loss
carryforwards.............................. (260,000)
Expiration of Federal general business tax
credits.................................... 53,000
Expiration of state general business tax
credits.................................... 22,000
Increase in valuation allowance............. 89,000
--------- ----------- ---------
$(580,000) $(1,422,000) $ 559,000
========= =========== =========
</TABLE>
The Company has available Federal net operating loss carryforwards at
December 31, 1999 of approximately $14,879,000, which expire from 2003 to 2014.
Available state net operating loss carryforwards at December 31, 1999 total
approximately $602,000, which expire from 2000 to 2004. If certain substantial
changes in the Company's ownership should occur, there would be an annual
limitation on the amount of carryforwards which can be utilized. Unused
investment tax and research and development and alternative minimum tax credits
at December 31, 1999 aggregate approximately $1,071,000 and expire from 2000 to
2006.
NOTE 9--EARNINGS (LOSS) PER SHARE:
The following is a reconciliation of net income (loss) and share amounts
used in the computations of earnings (loss) per share:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1999 1998 1997
----------- ----------- ----------
<S> <C> <C> <C>
Basic and diluted net (loss) income used:
(Loss) income from continuing
operations............................ $(1,526,000) $(1,911,000) $ 207,000
Less accretion of mandatorily
redeemable common stock............... (126,000) (111,000) (71,000)
----------- ----------- ----------
(Loss) income from continuing
operations used in computing basic
(loss) income from continuing
operations per share.................. (1,652,000) (2,022,000) 136,000
Early extinguishment of debt, net of
tax................................... 116,000
----------- ----------- ----------
Net (loss) income used in computing
basic and diluted net (loss) income
per share............................. $(1,536,000) $(2,022,000) $ 136,000
=========== =========== ==========
Shares used:
Weighted average common shares
outstanding used in computing basic
(loss) income per share............... 9,079,000 8,679,000 7,710,000
Weighted average options and warrants
to purchase common stock as determined
by application of the treasury
method................................ 318,000
----------- ----------- ----------
Shares used in computing diluted net
(loss) income per share............... 9,079,000 8,679,000 8,028,000
=========== =========== ==========
</TABLE>
33
<PAGE>
SYNBIOTICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Weighted average options and warrants to purchase common stock as determined
by the application of the treasury method and weighted average shares of common
stock issuable upon assumed conversion of debt totalling 309,000 and 694,000
shares have been excluded from the shares used in computing diluted net (loss)
income per share for the years ended December 31, 1999 and 1998, respectively,
as their effect is anti-dilutive. In addition, warrants to purchase 284,000
shares of common stock at $4.54 per share have been excluded from the shares
used in computing diluted net (loss) income per share for the years December
31, 1999, 1998 and 1997 as their exercise price is higher than the weighted
average market price for those periods, and in addition their effect is anti-
dilutive for the years ended December 31, 1999 and 1998.
In January 2000, the Company issued a $2,183,000 convertible note in
conjunction with an acquisition (Note 12), and issued 135,000 newly issued and
unregistered shares in connection with the resolution of a contingency
contained in the patent litigation settlement agreement with the Hospital (Note
2).
NOTE 10--COMMITMENTS AND CONTINGENCIES:
The Company leases office, laboratory and manufacturing facilities and
equipment under operating leases. The facilities leases provide for escalating
rental payments. Future minimum rentals under noncancelable operating leases as
of December 31, 1999 are as follows:
<TABLE>
<S> <C>
2000.......................................................... $1,079,000
2001.......................................................... 962,000
2002.......................................................... 586,000
2003.......................................................... 358,000
2004.......................................................... 358,000
Thereafter.................................................... 3,478,000
----------
$6,821,000
==========
</TABLE>
Total rent expense under noncancelable operating leases was $1,150,000,
$542,000 and $608,000 during the years ended December 31, 1999, 1998 and 1997,
respectively.
The Company has filed a lawsuit against Heska Corporation ("Heska") claiming
that Heska infringes a patent owned by the Company and is seeking unspecified
damages. Heska has filed a counterclaim against the Company seeking a
declaratory judgment that the Company's patent is invalid and unenforceable.
The Company denies Heska's allegations that its patent is invalid and
unenforceable, and plans to vigorously defend its patent against the
allegations.
NOTE 11--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>
Year Ended December 31,
-----------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Diagnostics.............................. $23,152,000 $23,940,000 $16,616,000
Vaccines................................. 6,013,000 7,106,000 6,670,000
Instruments.............................. 1,333,000 333,000
Other revenues........................... 259,000 317,000 332,000
----------- ----------- -----------
$30,757,000 $31,696,000 $23,618,000
=========== =========== ===========
</TABLE>
34
<PAGE>
SYNBIOTICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following are revenues and long-lived assets information by geographic
area:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
United States......................... $21,857,000 $21,522,000 $17,491,000
France................................ 4,518,000 4,961,000 5,004,000
Other foreign countries............... 4,382,000 5,213,000 1,123,000
----------- ----------- -----------
$30,757,000 $31,696,000 $23,618,000
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
December 31,
-----------------------
1999 1998
----------- -----------
<S> <C> <C>
Long-lived assets:
United States...................................... $12,079,000 $13,038,000
France............................................. 6,440,000 8,090,000
----------- -----------
$18,519,000 $21,128,000
=========== ===========
</TABLE>
The Company had no significant customers during the year ended December 31,
1999. During the year ended December 31, 1998, sales to two customers totalled
$10,201,000. Sales totalling $9,224,000 during the year ended December 31, 1997
were made to two customers.
NOTE 12--SUBSEQUENT EVENTS:
On January 13, 2000, the Company acquired W3Commerce LLC, a privately-held
Internet systems and services provider based in San Diego, CA. The
consideration paid was $2,183,000 and was in the form of a 5 year note which
bears interest at 6.21% and is convertible into 1,000,000 shares of the
Company's common stock beginning January 12, 2002. Upon conversion, any accrued
interest will be forgiven. The former shareholders of W3Commerce may receive up
to an additional 800,000 shares of the Company's common stock if certain per
share stock price targets for the Company's common stock are reached prior to
January 12, 2003. As of December 31, 1999, the Company had made an investment
in W3Commerce of $168,000.
In March 2000, the Company reached an agreement with Imperial Bank
("Imperial") to refinance the outstanding Bank debt. The new debt agreement
includes a $6,000,000 term loan, which is due in April 2005, bears interest at
the rate of prime plus 0.50%, is payable in monthly installments, beginning in
May 2000, of $100,000 of principal plus accrued interest and is secured by
substantially all of the Company's assets.
In addition, the debt agreement also includes a $4,000,000 revolving line of
credit which bears interest at the rate of prime plus 0.50%, with interest only
payments to be made monthly beginning in May 2000. Any outstanding principal is
due in April 2002. The Company is required to pay a quarterly commitment fee
equal to 0.50% per annum on the average unused portion of the line of credit
facility.
Imperial requires the Company to maintain certain financial ratios and
levels of tangible net worth and also restricts the Company's ability to pay
dividends and make loans, capital expenditures or investments without
Imperial's consent.
The Company recorded an approximately $1,000,000 extraordinary loss on early
extinguishment of debt in the second quarter of 2000, which represents the
remaining unamortized debt issuance costs and debt discount on the Bank debt.
35
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
ITEM 10. EXECUTIVE COMPENSATION
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under Part III, Items 9, 10, 11 and 12, has been
omitted from this report since we intend to file with the Securities and
Exchange Commission, not later than 120 days after the close of our fiscal
year, a definitive proxy statement prepared pursuant to Regulation 14A, which
information is hereby incorporated by reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Index
Exhibits marked with an asterisk have not been included with this Annual
Report on Form 10-KSB, but instead have been incorporated by reference to other
documents filed by us with the Securities and Exchange Commission. We will
furnish a copy of any one or more of these exhibits, except for Exhibit 27
which is for electronic filing purposes only, to any shareholder who so
requests.
<TABLE>
<CAPTION>
Exhibit Title Method of Filing
------- ----- ----------------
<C> <C> <S>
2.4* Asset Purchase Agreement between Rhone Incorporated herein by reference to
Merieux, Inc. and the Registrant, Exhibit 2.4 to the Registrant's
dated May 14, 1997. Current Report on Form 8-K, dated July
9, 1997.
2.4.1* Amendment No. 1 to Asset Purchase Incorporated herein by reference to
Agreement between Rhone Merieux, Inc. Exhibit 2.4.1 to the Registrant's
and the Registrant, dated July 9, Current Report on Form 8-K, dated July
1997. 9, 1997.
2.4.2* Amendment No. 2 to Asset Purchase Incorporated herein by reference to
Agreement between Rhone Merieux, Inc. Exhibit 2.4.2 to the Registrant's
and the Registrant, dated July 9, Current Report on Form 8-K, dated July
1997. 9, 1997.
2.5* Stock Purchase Agreement between Rhone Incorporated herein by reference to
Merieux S.A., Institut De Selection Exhibit 2.5 to the Registrant's
Animale S.A., Rhone Merieux Current Report on Form 8-K, dated July
Diagnostics S.A.S. and the Registrant, 9, 1997.
dated May 14, 1997.
2.5.1* Amendment No. 1 to Stock Purchase Incorporated herein by reference to
Agreement between Rhone Merieux Exhibit 2.5.1 to the Registrant's
S.A.S., Institut De Selection Animale Current Report on Form 8-K, dated July
S.A., R.M.--Diagnostics S.A.S. and the 9, 1997.
Registrant, dated July 9, 1997.
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
Exhibit Title Method of Filing
------- ----- ----------------
<C> <C> <S>
2.5.2* Amendment No. 2 to Stock Purchase Incorporated herein by reference to
Agreement between Rhone Merieux Exhibit 2.5.2 to the Registrant's
S.A.S., Institut De Selection Animale Current Report on Form 8-K, dated July
S.A., R.M.--Diagnostics S.A.S. and the 9, 1997.
Registrant, dated July 9, 1997.
2.6* Agreement and Plan of Reorganization Incorporated herein by reference to
By and Among the Registrant, Prisma Exhibit 2.1 to the Registrant's
Acquisition Corp. and the Stockholders Current Report on Form 8-K dated March
and an Optionholder of Prisma 6, 1998.
Acquisition Corp., dated as of
February 27, 1998.
2.7* Agreement of Merger By and Between Incorporated herein by reference to
Prisma Acquisition Corp. and the Exhibit 2.2 to the Registrant's
Registrant, dated as of March 6, 1998. Current Report on Form 8-K dated March
6, 1998.
3.1* Articles of Incorporation, as amended. Incorporated herein by reference to
Exhibit 3.1 to the Registrant's Annual
Report on Form 10-KSB for the year
ended December 31, 1996.
3.1.1* Certificate of Amendment of Articles Incorporated herein by reference to
of Incorporation, filed August 4, Exhibit 3.1 to the Registrant's
1998. Quarterly Report on Form 10-QSB for
the quarter ended September 30, 1998.
3.2* Bylaws, as amended. Incorporated herein by reference to
Exhibit 3.2 to the Registrant's
Quarterly Report on Form 10-QSB for
the quarter ended June 30, 1998.
4.1* Certificate of Determination of Series Incorporated herein by reference to
A Junior Participating Preferred Stock Exhibit 4.1 to the Registrant's Annual
filed October 13, 1998. Report on Form 10-KSB for the year
ended December 31, 1998.
4.2* Rights Agreement, dated as of October Incorporated herein by reference to
1, 1998, between the Company and the Registrant's Form 8-A dated
ChaseMellon Shareholder Services, October 7, 1998.
L.L.C., which includes the form of
Certificate of Determination for the
Series A Junior Participating
Preferred Stock as Exhibit A, the form
of Rights Certificate as Exhibit B and
the Summary of Rights to Purchase
Series A Preferred Shares as Exhibit
C.
4.3* Credit Agreement among the Registrant, Incorporated herein by reference to
the Banks Named Herein and Banque Exhibit 10.64 to the Registrant's
Paribas as Agent, dated as of July 9, Quarterly Report on Form 10-QSB for
1997. the quarter ended September 30, 1997.
4.3.1* Waiver and First Amendment to Incorporated herein by reference to
$15,000,000 Credit Agreement Among the Exhibit 10.64.1 to the Registrant's
Registrant, the Banks Named Therein Quarterly Report on Form 10-QSB for
and Banque Paribas, as Agent, dated the quarter ended September 30, 1998.
March 6, 1998.
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
Exhibit Title Method of Filing
------- ----- ----------------
<C> <C> <S>
4.3.2* Waiver and Second Amendment to Incorporated herein by reference to
$15,000,000 Credit Agreement Among the Exhibit 4.3.2 to the Registrant's
Registrant, the Banks Named Therein Quarterly Report on Form 10-QSB for
and Banque Paribas, as Agent, dated the quarter ended March 31, 1999.
January 12, 1999.
10.1* Lease of Premises by Registrant Incorporated herein by reference to
located at 11011 Via Frontera, San Exhibit 10.1 to the Registrant's
Diego, California, dated November 28, Annual Report on Form 10-K for its
1989. fiscal year ended March 31, 1991.
10.2*+ Employment Agreement between the Incorporated herein by reference to
Registrant and Kenneth M. Cohen, dated Exhibit 10.2 to the Registrant's
May 7, 1996. Registration Statement on Form S-4,
Registration No. 333-10343, dated
September 12, 1996.
10.4*+ 1983 Stock Option Plan. Incorporated herein by reference to
the Registrant's Registration
Statement on Form S-18, Registration
No. 2-83602, dated August 25, 1983.
10.4.1*+ First Amendment to 1983 Stock Option Incorporated herein by reference to
Plan. Exhibit 10.4.1 to the Registrant's
Annual Report on Form 10-K for its
fiscal year ended March 31, 1988.
10.5*+ 1984 Stock Option Plan. Incorporated herein by reference to
Exhibit 10.5 to the Registrant's
Registration Statement on Form S-1,
Registration No. 33-5292, dated July
16, 1986.
10.5.1*+ First and Second Amendments to 1984 Incorporated herein by reference to
Stock Option Plan. Exhibit 10.5.1 to the Registrant's
Annual Report on Form 10-K for its
fiscal year ended March 31, 1988.
10.6*+ 1986 Stock Option Plan. Incorporated herein by reference to
Exhibit 10.6 to the Registrant's
Registration Statement on Form S-1,
Registration No. 33-5292, dated July
16, 1986.
10.6.1*+ First Amendment to 1986 Stock Option Incorporated herein by reference to
Plan. Exhibit 10.6.1 to the Registrant's
Annual Report on Form 10-K for its
fiscal year ended March 31, 1988.
10.7*+ Employment Agreement between the Incorporated herein by reference to
Registrant and Paul A. Rosinack, dated Exhibit 10.7 to the Registrant's
October 25, 1996. Quarterly Report on Form 10-QSB for
the quarter ended March 31, 1997.
10.9*+ Employment Contract between Synbiotics Incorporated herein by reference to
Europe, SAS and Francois Guillemin, Exhibit 10.9 to the Registrant's
dated as of July 22, 1999. Quarterly Report on Form 10-QSB for
the quarter ended March 31, 1999.
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
Exhibit Title Method of Filing
------- ----- ----------------
<C> <C> <S>
10.26*+ 1987 Stock Option Plan. Incorporated herein by reference to
Exhibit 28 to the Registrant's
Registration Statement on Form S-8,
Registration No. 33-15712, dated July
9, 1987.
10.26.1*+ First Amendment to 1987 Stock Option Incorporated herein by reference to
Plan. Exhibit 10.26.1 to the Registrant's
Annual Report on Form 10-K for its
fiscal year ended March 31, 1988.
10.34* Single-Tenant Industrial Lease by the Incorporated herein by reference to
Registrant of Premises located at Exhibit 10.34 to the Registrant's
16420 Via Esprillo, San Diego, Annual Report on Form 10-KSB for the
California, dated as of May 1, 1996. year ended December 31, 1996.
10.36* Marketing Agreement between the Incorporated herein by reference to
Registrant and Bio-Trends Exhibit 10.36 to the Registrant's
International, Inc., dated May 10, Annual Report on Form 10-K for its
1989. fiscal year ended March 31, 1989.
10.36.1* Distribution Agreement between the Incorporated herein by reference to
Registrant and Bio-Trends Exhibit 10.36.1 to the Registrant's
International, Inc., dated February 7, Annual Report on Form 10-K for its
1990. fiscal year ended March 31, 1990.
10.36.2* Amendment to FeLV Distribution Incorporated herein by reference to
Agreement between the Registrant and Exhibit 10.36.2 to the Registrant's
Bio-Trends International, Inc., dated Quarterly Report on Form 10-QSB for
as of August 22, 1996. the quarter ended September 30, 1996.
10.38.1* Addendum to Distribution Agreement Incorporated herein by reference to
between the Registrant and Rhone- Exhibit 10.38.1 to the Registrant's
Merieux, dated April 11, 1996. Quarterly Report on Form 10-QSB for
the quarter ended September 30, 1996.
10.38.2* Second Addendum to Distribution Incorporated herein by reference to
Agreement between the Registrant and Exhibit 10.38.2 to the Registrant's
Rhone-Merieux, dated August 27, 1996. Quarterly Report on Form 10-QSB for
the quarter ended September 30, 1996.
10.39* Distribution Agreement between the Incorporated herein by reference to
Registrant and Bio-Trends Exhibit 10.39 to the Registrant's
International, Inc., dated August 1, Annual Report on Form 10-K for its
1990. fiscal year ended March 31, 1991.
10.41* Agreement between the Registrant and Incorporated herein by reference to
Rhone Merieux, Inc., dated July 9, Exhibit 7.01 to the Registrant's
1992. Current Report on Form 8-K dated July
23, 1992.
10.41.1* Addendum to Agreement between the Incorporated herein by reference to
Registrant and Rhone Merieux, Inc., Exhibit 10.41.1 to the Registrant's
dated August 22, 1996. Quarterly Report on Form 10-QSB for
the quarter ended September 30, 1996.
10.41.2* Third Addendum to Distribution Incorporated herein by reference to
Agreement between the Registrant and Exhibit 10.41.2 to the Registrant's
Merial Limited, dated as of July 1, Quarterly Report on Form 10-QSB for
1998. the quarter ended March 31, 1999.
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
Exhibit Title Method of Filing
------- ----- ----------------
<C> <C> <S>
10.43*+ 1991 Stock Option Plan, as amended. Incorporated herein by reference to
Exhibit 4.1 to the Registrant's
Registration Statement on Form S-8,
Registration No. 33-55992, dated
December 21, 1992.
10.46* Agreement Regarding Licensing, Incorporated herein by reference to
Development, Marketing and Exhibit 10.46 to the Registrant's
Manufacturing between the Registrant Quarterly Report on Form 10-QSB for
and Binax, Inc., dated as of June 30, the quarter ended December 31, 1993.
1993.
10.47* Amendment No. One to Agreement Incorporated herein by reference to
Regarding Licensing, Development, Exhibit 10.47 to the Registrant's
Marketing and Manufacturing between Quarterly Report on Form 10-QSB for
the Registrant and Binax, Inc., dated the quarter ended December 31, 1993.
December 9, 1993.
10.48* Amendment No. Two to Agreement Incorporated herein by reference to
Regarding Licensing, Development, Exhibit 10.48 to the Registrant's
Marketing and Manufacturing between Annual Report on Form 10-KSB for the
the Registrant and Binax, Inc., dated year ended December 31, 1995.
as of July 27, 1994.
10.49* Amendment No. Three to Agreement Incorporated herein by reference to
Regarding Licensing, Development, Exhibit 10.49 to the Registrant's
Marketing and Manufacturing between Quarterly Report on Form 10-QSB for
the Registrant and Binax, Inc., dated the quarter ended June 30, 1999.
April 12, 1999.
10.50*+ 1995 Stock Option/Stock Issuance Plan, Incorporated herein by reference to
as amended. Exhibit 10.50 to the Registrant's
Quarterly Report on Form 10-QSB for
the quarter ended June 30, 1999.
10.51*+ Form of Notice of Grant/Stock Option Incorporated herein by reference to
Agreement, as used under the 1995 Exhibit 99.2 to the Registrant's
Stock Option/Stock Issuance Plan. Registration Statement on Form S-8,
Registration No. 33-61103, dated July
17, 1995.
10.52* Contract Manufacturing Agreement, Incorporated herein by reference to
dated as of March 31, 1995. Exhibit 10.48 to the Registrant's
Annual Report on Form 10-KSB for the
year ended December 31, 1995.
10.53* Distribution Agreement between the Incorporated herein by reference to
Registrant and Daiichi Pharmaceutical Exhibit 10.53 to the Registrant's
Co., Ltd., dated January 16, 1996 Quarterly Report on Form 10-QSB for
the quarter ended March 31, 1996.
10.58*+ International Canine Genetics, Inc. Incorporated herein by reference to
Amended and Restated 1992 Stock Option Exhibit 99.1 to the Registrant's
Plan. Registration Statement on Form S-8,
Registration No. 333-18363, dated
December 20, 1996.
10.59*+ Form of International Canine Genetics, Incorporated herein by reference to
Inc. Grant of Nonstatutory Stock Exhibit 99.2 to the Registrant's
Option under the Amended and Restated Registration Statement on Form S-8,
1992 Stock Option Plan. Registration No. 333-18363, dated
December 20, 1996.
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
Exhibit Title Method of Filing
------- ----- ----------------
<C> <C> <S>
10.60*+ Form of International Canine Genetics, Incorporated herein by reference to
Inc. Grant of Incentive Stock Option Exhibit 99.3 to the Registrant's
under the Amended and Restated 1992 Registration Statement on Form S-8,
Stock Option Plan. Registration No. 333-18363, dated
December 20, 1996.
10.61* Patent and Know-How License Agreement Incorporated herein by reference to
Amdex A/S and the Registrant, dated Exhibit 10.61 to the Registrant's
August 29, 1996. Quarterly Report on Form 10-QSB for
the quarter ended March 31, 1997.
10.65* Stock Restriction and Rights Agreement Incorporated herein by reference to
between the Registrant and Rhone Exhibit 10.65 to the Registrant's
Merieux S.A.S., dated as of July 9, Quarterly Report on Form 10-QSB for
1997. the quarter ended September 30, 1997.
10.66* Warrant Agreement between the Incorporated herein by reference to
Registrant and Banque Paribas, dated Exhibit 10.66 to the Registrant's
as of July 9, 1997. Quarterly Report on Form 10-QSB for
the quarter ended September 30, 1997.
10.69* Settlement Agreement, Stipulation to Incorporated herein by reference to
Settlement Order Under Seal, Release Exhibit 10.70 to the Registrant's
and License Between Barnes-Jewish Quarterly Report on Form 10-QSB for
Hospital and the Registrant, dated as the quarter ended September 30, 1998.
of July 28, 1998.
21 List of Subsidiaries. Filed herewith.
23 Consent of Independent Accountants. Filed herewith.
27 Financial Data Schedule. Filed herewith for electronic filing
purposes only.
</TABLE>
- --------
* Incorporated by reference.
+ Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
None.
41
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Dated: April 10, 2000
Synbiotics Corporation
/s/ Michael K. Green
By: _________________________________
Michael K. Green
Senior Vice President
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Kenneth M. Cohen Chief Executive Officer, April 10,
______________________________________ President and Director 2000
Kenneth M. Cohen
/s/ Michael K. Green Chief Financial Officer April 10,
______________________________________ 2000
Michael K. Green
/s/ Keith A. Butler Chief Accounting Officer and April 10,
______________________________________ Corporate Controller 2000
Keith A. Butler
/s/ Patrick Owen Burns Director April 10,
______________________________________ 2000
Patrick Owen Burns
/s/ Rigdon Currie Director April 10,
______________________________________ 2000
Rigdon Currie
/s/ James C. DeCesare Director April 10,
______________________________________ 2000
James C. DeCesare
/s/ Brenda D. Gavin Director April 10,
______________________________________ 2000
Brenda D. Gavin
/s/ Joseph Klein III Director April 10,
______________________________________ 2000
Joseph Klein III
/s/ Colin Lucas-Mudd Director April 10,
______________________________________ 2000
Colin Lucas-Mudd
/s/ Donald E. Phillips Director April 10,
______________________________________ 2000
Donald E. Phillips
</TABLE>
42
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Exhibit
----------- -------
<C> <S>
2.4* Asset Purchase Agreement between Rhone Merieux, Inc. and the
Registrant, dated May 14, 1997.
2.4.1* Amendment No. 1 to Asset Purchase Agreement between Rhone Merieux,
Inc. and the Registrant, dated July 9, 1997
2.4.2* Amendment No. 2 to Asset Purchase Agreement between Rhone Merieux,
Inc. and the Registrant, dated July 9, 1997.
2.5* Stock Purchase Agreement between Rhone Merieux S.A., Institut De
Selection Animale S.A., Rhone Merieux Diagnostics S.A.S. and the
Registrant, dated May 14, 1997.
2.5.1* Amendment No. 1 to Stock Purchase Agreement between Rhone Merieux
S.A.S., Institut De Selection Animale S.A., R.M.--Diagnostics
S.A.S. and the Registrant, dated July 9, 1997.
2.5.2* Amendment No. 2 to Stock Purchase Agreement between Rhone Merieux
S.A.S., Institut De Selection Animale S.A., R.M.--Diagnostics
S.A.S. and the Registrant, dated July 9, 1997.
2.6* Agreement and Plan of Reorganization By and Among the Registrant,
Prisma Acquisition Corp. and the Stockholders and an Optionholder
of Prisma Acquisition Corp., dated as of February 27, 1998.
2.7* Agreement of Merger By and Between Prisma Acquisition Corp. and
the Registrant, dated as of March 6, 1998.
3.1* Articles of Incorporation, as amended.
3.1.1* Certificate of Amendment of Articles of Incorporation, filed
August 4, 1998.
3.2* Bylaws, as amended.
4.1* Certificate of Determination of Series A Junior Participating
Preferred Stock filed October 13, 1998.
4.2* Rights Agreement, dated as of October 1, 1998, between the Company
and ChaseMellon Shareholder Services, L.L.C., which includes the
form of Certificate of Determination for the Series A Junior
Participating Preferred Stock as Exhibit A, the form of Rights
Certificate as Exhibit B and the Summary of Rights to Purchase
Series A Preferred Shares as Exhibit C.
4.3* Credit Agreement among the Registrant, the Banks Named Herein and
Banque Paribas as Agent, dated as of July 9, 1997.
4.3.1* Waiver and First Amendment to $15,000,000 Credit Agreement Among
the Registrant, the Banks Named Therein and Banque Paribas, as
Agent, dated March 6, 1998.
4.3.2* Waiver and Second Amendment to $15,000,000 Credit Agreement Among
the Registrant, the Banks Named Therein and Banque Paribas, as
Agent, dated January 12, 1998.
10.1* Lease of Premises by Registrant located at 11011 Via Frontera, San
Diego, California, dated November 28, 1989.
10.2*+ Employment Agreement between the Registrant and Kenneth M. Cohen,
dated May 7, 1996.
10.4*+ 1983 Stock Option Plan.
10.4.1*+ First Amendment to 1983 Stock Option Plan.
10.5*+ 1984 Stock Option Plan.
10.5.1*+ First and Second Amendments to 1984 Stock Option Plan.
10.6*+ 1986 Stock Option Plan.
10.6.1*+ First Amendment to 1986 Stock Option Plan.
10.7*+ Employment Agreement between the Registrant and Paul A. Rosinack,
dated October 25, 1996.
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Exhibit
----------- -------
<C> <S>
10.9*+ Employment Contract between Synbiotics Europe, SAS and Francois
Guillemin, dated as of July 22, 1999.
10.26*+ 1987 Stock Option Plan.
10.26.1*+ First Amendment to 1987 Stock Option Plan.
10.34* Single-Tenant Industrial Lease by the Registrant of Premises
located at 16420 Via Esprillo, San Diego, California, dated as of
May 1, 1996.
10.36* Marketing Agreement between the Registrant and Bio-Trends
International, Inc., dated May 10, 1989.
10.36.1* Distribution Agreement between the Registrant and Bio-Trends
International, Inc., dated February 7, 1990.
10.36.2* Amendment to FeLV Distribution Agreement between the Registrant
and Bio-Trends International, Inc., dated as of August 22, 1996.
10.38.1* Addendum to Distribution Agreement between the Registrant and
Rhone-Merieux, dated April 11, 1996.
10.38.2* Second Addendum to Distribution Agreement between the Registrant
and Rhone-Merieux, dated August 27, 1996.
10.39* Distribution Agreement between the Registrant and Bio-Trends
International, Inc., dated August 1, 1990.
10.41* Agreement between the Registrant and Rhone Merieux, Inc., dated
July 9, 1992.
10.41.1* Addendum to Agreement between the Registrant and Rhone Merieux,
Inc., dated August 22, 1996.
10.43*+ 1991 Stock Option Plan, as amended
10.46* Agreement Regarding Licensing, Development, Marketing and
Manufacturing between the Registrant and Binax, Inc., dated as of
June 30, 1993.
10.47* Amendment No. One to Agreement Regarding Licensing, Development,
Marketing and Manufacturing between the Registrant and Binax,
Inc., dated December 9, 1993.
10.48* Amendment No. Two to Agreement Regarding Licensing, Development,
Marketing and Manufacturing between the Registrant and Binax,
Inc., dated as of July 27, 1994.
10.49* Amendment No. Three to Agreement Regarding Licensing, Development,
Marketing and Manufacturing between the Registrant and Binax,
Inc., dated as of April 12, 1999.
10.50*+ 1995 Stock Option/Stock Issuance Plan, as amended.
10.51*+ Form of Notice of Grant/Stock Option Agreement, as used under the
1995 Stock Option/Stock Issuance Plan.
10.52* Contract Manufacturing Agreement, dated as of March 31, 1995.
10.53* Distribution Agreement between the Registrant and Daiichi
Pharmaceutical Co., Ltd., dated January 16, 1996.
10.58*+ International Canine Genetics, Inc. Amended and Restated 1992
Stock Option Plan.
10.59*+ Form of International Canine Genetics, Inc. Grant of Nonstatutory
Stock Option under the Amended and Restated 1992 Stock Option
Plan.
10.60*+ Form of International Canine Genetics, Inc. Grant of Incentive
Stock Option under the Amended and Restated 1992 Stock Option
Plan.
10.61* Patent and Know-How License Agreement Amdex A/S and the
Registrant, dated August 29, 1996.
10.65* Stock Restriction and Rights Agreement between the Registrant and
Rhone Merieux S.A.S., dated as of July 9, 1997.
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Exhibit
----------- -------
<C> <S>
10.66* Warrant Agreement between the Registrant and Banque Paribas, dated
as of July 9, 1997.
10.69* Settlement Agreement, Stipulation to Settlement Order Under Seal,
Release and License Between Barnes-Jewish Hospital and the
Registrant, dated as of July 28, 1998.
21 List of Subsidiaries.
23 Consent of Independent Accountants.
27 Financial Data Schedule (for electronic filing purposes only).
</TABLE>
- --------
* Incorporated by reference.
+ Management contract or compensatory plan or arrangement.
45
<PAGE>
EXHIBIT 21
LIST OF SUBSIDIARIES
Synbiotics Europe SAS
Incorporated under the laws of France
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-3 (No.'s 333-42763, 333-63341, 333-90465 and 333-90493)
and in the Registration Statements on Form S-8 (No.'s 33-24444, 33-55992, 33-
85908, 33-61103, 333-18363, 333-42723 and 333-90471) of Synbiotics Corporation
of our report dated March 3, 2000 which appears in this Form 10-KSB.
PricewaterhouseCoopers LLP
San Diego, California
April 10, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1999 AND THE RELATED CONSOLIDATED
STATEMENTS OF OPERATIONS AND CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1999
INCLUDED ELSEWHERE IN THIS FORM 10-KSB AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 2,260
<SECURITIES> 3,443
<RECEIVABLES> 4,824
<ALLOWANCES> 218
<INVENTORY> 5,178
<CURRENT-ASSETS> 17,525
<PP&E> 2,888
<DEPRECIATION> 1,144
<TOTAL-ASSETS> 44,203
<CURRENT-LIABILITIES> 7,163
<BONDS> 5,914
2,412
0
<COMMON> 39,424
<OTHER-SE> (13,812)
<TOTAL-LIABILITY-AND-EQUITY> 44,203
<SALES> 30,498
<TOTAL-REVENUES> 30,757
<CGS> 15,553
<TOTAL-COSTS> 31,711
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,152
<INCOME-PRETAX> (2,106)
<INCOME-TAX> (580)
<INCOME-CONTINUING> (1,526)
<DISCONTINUED> 0
<EXTRAORDINARY> 116
<CHANGES> 0
<NET-INCOME> (1,410)
<EPS-BASIC> (.17)
<EPS-DILUTED> (.17)
</TABLE>
