<PAGE>
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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________
FORM 10-QSB/A
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-11303
SYNBIOTICS CORPORATION
(Exact name of small business issuer as specified in its charter)
California 95-3737816
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11011 Via Frontera
San Diego, California 92127
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (858) 451-3771
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [_]
As of November 9, 1999, 9,188,595 shares of Common Stock were outstanding.
Transitional Small Business Disclosure Format: Yes [_] No [X]
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<PAGE>
In March 1999, we recognized $1,453,000 of non-refundable license fee revenue
related to the amendment of a supply agreement with Merial Limited ("Merial") in
exchange for giving Merial broadened U.S. distribution rights. After initial
consultations with our independent accounting firm, and based on our belief that
our future commitments would be insignificant, we recorded the $1,453,000 cash
received as revenue in the first quarter of 1999. Upon further review of the
facts and circumstances, we remain contractually obligated to continue to supply
Merial with product under this agreement. Based on this, and recent trends in
the accounting profession, we decided it would be more appropriate to recognize
the revenue over the remaining six year life of the supply agreement even though
the cash was received. As a result, we are amending our Quarterly Report on Form
10-QSB for the quarterly period ended September 30, 1999 to reflect the
adjustment to the license fee revenue.
SYNBIOTICS CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I Condensed Consolidated Statement of Operations and Comprehensive
Income - Three and nine months ended September 30, 1999 and 1998 3
Condensed Consolidated Balance Sheet -
September 30, 1999 and December 31, 1998 4
Condensed Consolidated Statement of Cash Flows -
Nine months ended September 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Management's Discussion and Analysis or Plan of Operation 9
Part II Other Information 16
</TABLE>
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<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Synbiotics Corporation
Condensed Consolidated Statement of Operations and Comprehensive (Loss)
- -----------------------------------------------------------------------
(unaudited)
- -----------
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- --------------------------------
1999 1998 1999 1998
------------- ------------ ------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Net sales $ 5,975,000 $ 6,735,000 $ 23,701,000 $ 24,472,000
License fees 61,000 187,000
Royalties 3,000 89,000 8,000 229,000
------------- ----------- ------------- ------------
6,039,000 6,824,000 23,896,000 24,701,000
------------- ----------- ------------- ------------
Operating expenses:
Cost of sales 3,893,000 3,820,000 11,380,000 11,725,000
Research and development 508,000 590,000 1,644,000 1,703,000
Selling and marketing 1,742,000 1,428,000 5,542,000 4,591,000
General and administrative 1,531,000 1,546,000 4,346,000 3,665,000
Patent litigation settlement 4,601,000
------------- ----------- ------------- ------------
7,674,000 7,384,000 22,912,000 26,285,000
------------- ----------- ------------- ------------
(Loss) income from operations (1,635,000) (560,000) 984,000 (1,584,000)
Other income (expense):
Interest, net (314,000) (358,000) (926,000) (873,000)
------------- ----------- ------------- ------------
(Loss) income before income taxes (1,949,000) (918,000) 58,000 (2,457,000)
(Benefit from) provision for income taxes (650,000) (175,000) 292,000 (792,000)
------------- ----------- ------------- ------------
(Loss) before extraordinary item (1,299,000) (743,000) (234,000) (1,665,000)
Early extinguishment of debt, net of tax 116,000
------------- ----------- ------------- ------------
Net (loss) (1,299,000) (743,000) (118,000) (1,665,000)
Cumulative translation adjustment 323,000 616,000 (931,000) 556,000
------------- ----------- ------------- ------------
Comprehensive (loss) $ (976,000) $ (127,000) $ (1,049,000) $ (1,109,000)
============= =========== ============= ============
Basic (loss) per share:
(Loss) from continuing operations $ (0.15) $ (0.09) $ (0.04) $ (0.21)
Early extinguishment of debt, net of tax 0.01
------------- ----------- ------------- ------------
Net (loss) $ (0.15) $ (0.09) $ (0.03) $ (0.21)
============= =========== ============= ============
Diluted (loss) per share:
(Loss) from continuing operations $ (0.15) $ (0.09) $ (0.04) $ (0.21)
Early extinguishment of debt, net of tax 0.01
============= =========== ============= ============
Net (loss) $ (0.15) $ (0.09) $ (0.03) $ (0.21)
============= =========== ============= ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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<PAGE>
Item 1. Financial Statements (continued)
Synbiotics Corporation
Condensed Consolidated Balance Sheet
- ------------------------------------
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- -------------
(unaudited) (audited)
<S> <C> <C>
Assets
Current assets:
Cash and equivalents $ 4,144,000 $ 4,357,000
Securities available for sale 2,760,000 1,613,000
Accounts receivable 3,942,000 4,135,000
Inventories 5,561,000 5,179,000
Deferred tax assets 467,000 341,000
Other current assets 787,000 820,000
------------- -------------
Total current assets 17,661,000 16,445,000
Property and equipment, net 2,095,000 1,774,000
Goodwill 12,490,000 13,372,000
Deferred tax assets 7,445,000 7,873,000
Deferred debt issuance costs 498,000 653,000
Other assets 4,593,000 5,329,000
------------- -------------
$ 44,782,000 $ 45,446,000
============= =============
Liabilities and Shareholders' Equity:
Current liabilities:
Accounts payable and accrued expenses $ 4,691,000 $ 5,217,000
Current portion of long-term debt 1,000,000 2,000,000
Deferred revenue 242,000
------------- -------------
Total current liabilities 5,933,000 7,217,000
------------- -------------
Long-term debt 6,115,000 6,716,000
Deferred revenue 1,029,000
Other liabilities 1,458,000 1,369,000
------------- -------------
8,602,000 8,085,000
------------- -------------
Mandatorily redeemable common stock 2,380,000 2,287,000
------------- -------------
Non-mandatorily redeemable common stock and other shareholders' equity:
Common stock, no par value, 24,800,000 share authorized,
9,188,000 and 8,246,000 shares issued and outstanding at
September 30, 1999 and December 31, 1998 39,287,000 38,134,000
Common stock warrants 1,003,000 1,003,000
Accumulated other comprehensive (loss) income (435,000) 496,000
Accumulated deficit (11,988,000) (11,776,000)
------------- -------------
Total non-mandatorily redeemable common stock and
other shareholders' equity 27,867,000 27,857,000
------------- -------------
$ 44,782,000 $ 45,446,000
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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<PAGE>
Item 1. Financial Statements (continued)
Synbiotics Corporation
Condensed Consolidated Statement of Cash Flows (unaudited)
- ----------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1999 1998
-------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) $ (118,000) $ (1,665,000)
Adjustments to reconcile net (loss) to net cash provided by (used for)
operating activities:
Depreciation and amortization 1,880,000 1,428,000
Early extinguishment of debt (200,000)
Changes in assets and liabilities:
Account receivable 193,000 299,000
Inventories (382,000) (303,000)
Deferred taxes 302,000 (854,000)
Other assets 317,000 (301,000)
Accounts payable and accrued expenses 299,000 1,343,000
Deferred revenue 1,271,000
Income taxes payable (25,000)
Other liabilities 89,000 1,341,000
------------- --------------
Net cash provided by operating activities 3,651,000 1,263,000
------------- --------------
Cash flows from investing activities:
Acquisition of property and equipment (625,000) (357,000)
Investment in securities available for sale (1,147,000)
Proceeds from sale of securities available for sale 1,779,000
Acquisition of Prisma Acquisition Corp. (133,000)
------------- --------------
Net cash (used for) provided by investing activities (1,772,000) 1,289,000
------------- --------------
Cash flows from financing activities:
Payments of long-term debt (1,550,000) (883,000)
Proceeds from issuance of long-term debt, net 133,000
Mandatorily redeemable stock issuance costs (16,000)
Proceeds from issuance of common stock, net 389,000 (25,000)
------------- --------------
Net cash (used for) financing activities (1,161,000) (791,000)
------------- --------------
Net increase in cash and equivalents 718,000 1,761,000
Effect of exchange rates on cash (931,000) 556,000
Cash and equivalents - beginning of period 4,357,000 2,190,000
------------- --------------
Cash and equivalents - end of period $ 4,144,000 $ 4,507,000
============= ==============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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Item 1. Financial Statements (continued)
SYNBIOTICS CORPORATION
Notes to Condensed Consolidated Financial Statements (unaudited)
- --------------------------------------------------------------------------------
Note 1 - Interim Financial Statements:
The accompanying condensed consolidated balance sheet as of September 30, 1999
and the condensed consolidated statements of operations and comprehensive income
and of cash flows for the three and nine month periods ended September 30, 1999
and 1998 have been prepared by Synbiotics Corporation (the "Company") and have
not been audited. The condensed consolidated financial statements of the
Company include the accounts of its wholly-owned subsidiary Synbiotics Europe
SAS. All significant intercompany transactions and accounts have been
eliminated in consolidation. These financial statements, in the opinion of
management, include all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation of the financial position, results
of operations and cash flows for all periods presented. The financial
statements should be read in conjunction with the financial statements and notes
thereto included in the Company's Annual Report on Form 10-KSB filed for the
year ended December 31, 1998. Interim operating results are not necessarily
indicative of operating results for the full year.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Note 2 - Extraordinary Item:
In February 1999, the Company repaid the $1,000,000 note issued in conjunction
with the March 1998 acquisition of Prisma Acquisition Corp., which was due in
March 1999, for $800,000. As a result, in the first quarter of 1999 the Company
recognized a $116,000 extraordinary gain upon early extinguishment of the debt,
net of income taxes totaling $84,000.
Note 3 - Inventories:
Inventories consist of the following:
September 30, December 31,
1999 1998
---- ----
(unaudited) (audited)
Raw materials $2,232,000 $2,219,000
Work in progress 724,000 904,000
Finished goods 2,605,000 2,056,000
---------- ----------
$5,561,000 $5,179,000
========== ==========
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Item 1. Financial Statements (continued)
SYNBIOTICS CORPORATION
Notes to Condensed Consolidated Financial Statements (unaudited)
- --------------------------------------------------------------------------------
Note 4 - (Loss) per Share:
The following is a reconciliation of net (loss) and share amounts used in the
computations of (loss) per share:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Basic net (loss) used:
(Loss) from continuing operations $(1,299,000) $ (743,000) $ (234,000) $(1,665,000)
Less accretion of mandatorily redeemable
common stock (32,000) (37,000) (94,000) (107,000)
----------- ---------- ----------- -----------
(Loss) from continuing operations used in computing
basic (loss) from continuing operations per share (1,331,000) (780,000) (328,000) (1,772,000)
Early extinguishment of debt, net of tax 116,000
----------- ---------- ----------- -----------
Net (loss) used in computing basic net (loss) per
share $(1,331,000) $ (780,000) $ (212,000) $(1,772,000)
=========== ========== =========== ===========
Diluted net (loss) used:
(Loss) from continuing operations $(1,299,000) $ (743,000) $ (234,000) $(1,665,000)
Less accretion of mandatorily redeemable
common stock (32,000) (37,000) (94,000) (107,000)
----------- ---------- ----------- -----------
(Loss) from continuing operations used in computing
diluted (loss) from continuing operations per
share (1,331,000) (780,000) (328,000) (1,772,000)
Early extinguishment of debt, net of tax 116,000
----------- ---------- ----------- -----------
Net (loss) used in computing diluted net (loss)
per share $(1,331,000) $ (780,000) $ (212,000) $(1,772,000)
=========== ========== =========== ===========
Shares used:
Weighted average common shares outstanding
used in computing basic (loss) per share 9,179,000 8,838,000 9,049,000 8,632,000
Weighted average options and warrants to
purchase common stock as determined by
application of the treasury method
----------- ---------- ----------- -----------
Shares used in computing diluted (loss) per share 9,179,000 8,838,000 9,049,000 8,632,000
=========== ========== =========== ===========
</TABLE>
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<PAGE>
Item 1. Financial Statements (continued)
Synbiotics Corporation
Notes to Condensed Consolidated Financial Statements (unaudited)
- --------------------------------------------------------------------------------
Weighted average options and warrants to purchase common stock as determined by
the application of the treasury method and weighted average shares of common
stock issuable upon assumed conversion of debt totaling 260,000 shares, 722,000
shares, 330,000 shares and 672,000 shares have been excluded from the shares
used in computing diluted net loss for the three months ended September 30, 1999
and 1998 and the nine months ended September 30, 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 per share for the three and nine months ended
September 30, 1999 and 1998 as their exercise price is higher than the weighted
average market price for those periods, as well as their effect is anti-
dilutive.
Note 5 - Segment Information and Significant Customers:
The Company has determined that it has only one reportable segment based on the
fact that all of its products are animal health products. Although the Company
sells diagnostic, vaccine and instrument products, it does not base its business
decision making on a product category basis.
The following are revenues for the Company's diagnostic, vaccine and instrument
products:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Diagnostics $3,879,000 $4,400,000 $18,017,000 $18,064,000
Vaccines 1,654,000 2,268,000 4,759,000 6,258,000
Instruments 442,000 67,000 925,000 150,000
Other revenues 64,000 89,000 195,000 229,000
---------- ---------- ----------- -----------
$6,039,000 $6,824,000 $23,896,000 $24,701,000
========== ========== =========== ===========
</TABLE>
The following are revenues and long-lived asset information by geographic area:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues:
United States $4,074,000 $4,879,000 $16,685,000 $17,787,000
France 1,065,000 1,055,000 3,266,000 3,868,000
Other foreign countries 900,000 890,000 3,945,000 3,046,000
---------- ---------- ----------- -----------
$6,039,000 $6,824,000 $23,896,000 $24,701,000
========== ========== =========== ===========
<CAPTION>
September 30, December 31,
------------- ------------
1999 1998
---- ----
(unaudited) (audited)
<S> <C> <C>
Long-lived assets:
United States $12,446,000 $13,038,000
France 7,231,000 8,090,000
----------- -----------
$19,677,000 $21,128,000
=========== ===========
</TABLE>
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<PAGE>
The Company had sales to one customer totaling $689,000 during the three months
ended September 30, 1999. Sales to two customers totaled $1,811,000 during the
three months ended September 30, 1998. During the nine months ended September
30, 1998, sales to one customer totaled $4,530,000.
Item 2. Management's Discussion and Analysis or Plan of Operation
The information contained in this Management's Discussion and Analysis or Plan
of Operation and elsewhere in this Quarterly Report on Form 10-QSB/A contains
both historical financial information and forward-looking statements. We do not
provide forecasts of future financial performance. While we are optimistic about
our long-term prospects, the historical financial information may not be
indicative of future financial performance. In fact, future financial
performance may be materially different than the historical financial
information presented herein. Moreover, the forward-looking statements about
future business or future results of operations are subject to significant
uncertainties and risks, which could cause actual future results to differ
materially from what is suggested by the forward-looking information. The
following risk factors should be considered in evaluating our forward-looking
statements and assessing our future financial condition, results of operations
and cash flows:
The market in which we operate is intensely competitive, particularly with
regard to our key canine heartworm diagnostic products, and many of our
competitors are larger and more established
The market for animal health care products is extremely competitive. Companies
in the animal health care market compete to develop new products, to market and
manufacture products efficiently, to implement effective research strategies,
and to obtain regulatory approval. Our current competitors include
significantly larger companies such as Pfizer Animal Health, Merial S.A.S. (the
successor to Rhone-Merieux), Schering-Plough and IDEXX Laboratories. These
companies are substantially larger and have greater financial, manufacturing,
marketing, and research resources than we do. Our current competitors also have
extensive expertise in conducting pre-clinical and clinical testing of new
products and in obtaining the necessary regulatory approvals to market products.
In addition, IDEXX Laboratories prohibits its distributors from selling
competitors' products, including ours. Further, additional competition could
come from new entrants to the animal health care market. We cannot assure you
that we will be able to compete successfully in the future or that competition
will not harm our business.
Our canine heartworm products constitute 46% of our sales. In addition to our
historic competition with IDEXX Laboratories, the sales leader in this product
category, our sales were substantially affected in 1999 by a new heartworm
product from Heska Corporation. We have filed a lawsuit against Heska, claiming
that its heartworm product infringes our patent. Also, we believe Abbott
Laboratories may enter the canine heartworm diagnostic market in 2000. If so,
our market share and average selling prices may decline, perhaps materially.
We have a history of losses and an accumulated deficit
Although we generated profits for the years ended December 31, 1997 and 1996, we
did not achieve profitability for the year ended December 31, 1998 and we have
had a history of losses. We have incurred a consolidated accumulated deficit of
$11,988,000 at September 30, 1999. We may not achieve profitability again and
if we are profitable in the future there can be no assurance that profitability
can be sustained.
We depend on third party manufacturers
We contract for the manufacture of some of our products, including all of our
vaccines, our Witness(R), VetRED(R) and ICT Gold(TM) diagnostic kits, and our
SCA 2000(TM) instrument. We also expect that some of our anticipated new
products will be manufactured by third parties. In addition, some of the
products manufactured for us by third parties, including Witness(R), VetRED(R)
and ICT Gold(TM) are licensed to us by their manufacturers. There are a number
of risks associated with our dependence on third-party manufacturers including:
. reduced control over delivery schedules;
. quality assurance;
. manufacturing yields and costs;
. the potential lack of adequate capacity during periods of excess
demand;
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<PAGE>
. 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. In fact, all of our vaccine products (exclusive of our FeLV and canine
corona virus products) were manufactured using bulk antigen fluids that were
supplied by a third party. The supply agreement expired and we were unable to
locate a replacement supplier for these bulk antigen fluids. We decided to
discontinue the sales of the affected products once our remaining supplies were
exhausted, which occurred during the third quarter of 1999. Sales of the
affected products totaled $2,073,000, $1,596,000 and $1,225,000 during 1998,
1997 and 1996, respectively.
We rely on third party distributors for a substantial portion of our sales, but
we are experiencing difficulties with the distribution channel
During the year ended December 31, 1998, sales to two distributors totaled 33%
of our net sales. Because we have historically depended upon distributors for
such a large portion of our sales, our ability to establish and maintain an
adequate sales and marketing capability in any or all of our targeted markets
may be impaired. Our failure to independently sell and market our products
could materially harm our business. Further, distributor agreements render our
sales exposed to the efforts of third parties who are not employees of
Synbiotics and over whom we have no control. Their failure to generate
significant sales of our products could materially harm our business. Reduction
by these distributors of the quantity of our products which they distribute
would materially harm our business. In addition, IDEXX Laboratories'
prohibition against its distributors carrying competitors' products, including
ours, has and could continue to make some distributors unavailable to us. We
adopted a similar policy in the second quarter of 1999, which caused some of our
distributors to abandon our product line. Although we have rescinded this
policy, we do not expect to get the distributors back to any meaningful extent.
We are also exposed to the risk that any sales by us directly to veterinarians
could alienate our current distributors.
Our direct selling efforts may not succeed
We are increasing our efforts to sell our products directly to veterinarians,
including by telesales and over the Internet. We are inexperienced in large-
scale direct selling efforts and may not be able to successfully execute this
strategy. Also, veterinarians have traditionally relied on distributors, and
the number of veterinarians willing to purchase directly from manufacturers may
be smaller than we believe.
Our profitable vaccine sales in Europe may decline soon
Merial distributes in Europe our FeLV vaccine, which we obtain from Bio-Trends.
Our gross profit in 1998 on these sales of FeLV to Merial in Europe was
$520,000. Merial has exercised a contractual right which will enable it, in
2002, to introduce its own FeLV vaccine product in Europe. If Merial does so,
our sales to Merial in Europe would probably decline sharply.
There is no assurance that acquired businesses can be successfully combined
There can be no assurance that the anticipated benefits of the 1998 acquisition
of Prisma Acquisition Corp. ("Prisma"), the 1997 acquisition of the veterinary
diagnostics business of Synbiotics Europe SAS ("SBIO-E"), or any other future
acquisitions (collectively, the "Acquired Business") will be realized.
Acquisitions of businesses involve numerous risks, including difficulties in the
assimilation of the operations, technologies and products of the Acquired
Business, introduction of different distribution channels, potentially dilutive
issuances of equity and/or increases in leverage and risk resulting from
issuances of debt securities, the need to establish internally operating
functions which had been previously provided pre-acquisition by a corporate
parent,
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<PAGE>
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.
We depend on key executives and personnel
Our future success will depend, to a significant extent, on the ability of our
management to operate effectively, both individually and as a group.
Competition for qualified personnel in the animal health care products industry
is intense, and we may not be successful in attracting and retaining such
personnel. There are only a limited number of persons with the requisite skills
to serve in those positions and it may become increasingly difficult to hire
such persons.
The loss of the services of any of our key personnel or the inability to attract
or retain qualified personnel could harm our business.
We rely on new and recent products
We rely to a significant extent on new and recently developed products, and
expect that we will need to continue to introduce new products to be successful
in the future. There can be no assurance that we will obtain and maintain
market acceptance of our products. There can be no assurance that future
products will meet applicable regulatory standards, be capable of being produced
in commercial quantities at acceptable cost or be successfully commercialized.
There can be no assurance that new products can be manufactured at a cost or in
quantities necessary to make them commercially viable. If we are unable to
produce internally, or to contract for, a sufficient supply of our new products
on acceptable terms, or if we should encounter delays or difficulties in our
relationships with manufacturers, the introduction of new products would be
delayed, which could have a material adverse effect on our business.
We may need additional capital in the future
We currently anticipate that our existing cash balances and short term
investments and cash flow expected to be generated from future operations will
be sufficient to meet our liquidity needs for at least the next twelve months.
However, we may need to raise additional funds if our estimates of revenues,
working capital and/or capital expenditure requirements change or prove
inaccurate or in order for us to respond to unforeseen technological or
marketing hurdles or to take advantage of unanticipated opportunities.
Further, our future capital requirements will depend on many factors beyond our
control or ability to accurately estimate, including continued scientific
progress in our product and development programs, the cost of manufacturing
scale-up, the costs involved in preparing, filing, prosecuting, maintaining and
enforcing patent claims, the cost involved in patent infringement litigation,
competing technological and market developments, and the cost of establishing
effective sales and marketing arrangements. In addition, we expect to review
potential acquisitions that would compliment our existing product offerings or
enhance our technical capabilities. While we have no current agreements or
negotiations underway with respect to any such acquisition, any future
transaction of this nature could require potentially significant amounts of
capital. Such funds may not be available at the time or times needed, or
available on terms acceptable to us. If adequate funds are not available, or
are not available on acceptable terms, we may not be able to take advantage of
market opportunities, to develop new products, or to otherwise respond to
competitive pressures. This inability could materially harm our business.
In July 1997, we obtained $15,000,000 of debt financing from Banque Paribas, of
which $11,493,000 was used in connection with our acquisition of portions of
Rhone Merieux S.A.S. The $15,000,000 included a $5,000,000 revolving line of
credit. Draws by us under this line of credit are subject to certain
requirements and can be used only for certain purposes. Additionally, Banque
Paribas requires us to maintain certain financial ratios and levels of tangible
net worth and also restricts our ability to pay dividends and make loans,
capital expenditures, or investments without its consent.
-11-
<PAGE>
If adequate funds are not available to us, or if they are not available on terms
reasonably favorable to us, we may need to delay, reduce, or eliminate one or
more of our research and development programs. Any of these events would impair
our competitive position and harm our business.
Our canine heartworm business is seasonal
Our operations are seasonal due to the success of our canine heartworm
diagnostic products. Our sales and profits tend to be concentrated in the first
half of the year as our distributors prepare for the heartworm season by
purchasing diagnostic products for resale to veterinarians. The operations of
SBIO-E have reduced our seasonality as sales of their large-animal diagnostic
products tend to occur evenly throughout the year. We believe that increased
sales of our instrument products will also reduce our seasonality.
Our failure to adequately establish or protect our proprietary rights may
adversely effect us
We rely on a combination of patent, copyright, and trademark laws, and on trade
secrets and confidentiality provisions and other contractual provisions to
protect our proprietary rights. These measures afford only limited protection.
We currently have 11 issued U.S. patents and several pending patent
applications. Our means of protecting our proprietary rights in the U.S. or
abroad may not be adequate and competitors may independently develop similar
technologies. Our future success will depend in part on our ability to protect
our proprietary rights and the technologies used in our principal products.
Despite our efforts to protect our proprietary rights, unauthorized parties may
attempt to copy aspects of our products or to obtain and use trade secrets or
other information that we regard as proprietary. In addition, the laws of some
foreign countries do not protect our proprietary rights as fully as do the laws
of the U.S. Issued patents may not preserve our proprietary position. Even if
they do, competitors or others may develop technologies similar to or superior
to our own. If we do not enforce and protect our intellectual property, our
business will be harmed.
From time to time, third parties, including our competitors, have asserted
patent, copyright, and other intellectual property rights to technologies that
are important to us. We expect that we will increasingly be subject to
infringement claims as the number of products and competitors in the animal
health care market increases.
The results of any litigated matter are inherently uncertain. In the event of
an adverse result in any litigation with third parties that could arise in the
future, we could be required to:
. pay substantial damages, including treble damages if we are held to
have willfully infringed;
. cease the manufacture, use and sale of infringing products;
. expend significant resources to develop non-infringing technology; or
. obtain licenses to the infringing technology.
Licenses may not be available from any third party that asserts intellectual
property claims against us on commercially reasonable terms, or at all.
Also, litigation is costly regardless of its outcome and can requires
significant management attention. For example, in 1997, Barnes-Jewish Hospital
filed an action against claiming that our canine heartworm diagnostic products
infringe their patent. We settled this lawsuit, but there can be no assurance
that we would be able to resolve similar incidents in the future.
Also, because our patents and patent applications cover novel diagnostic
approaches,
. the patent coverage which we receive could be significantly narrower
than the patent coverage we seek in our patent applications; and
. our patent positions involve complex legal and factual issues which
can be hard for patent examiners or lawyers asserting patent coverage
to successfully resolve.
Because of this, our patent position could be vulnerable and our business could
be materially harmed.
-12-
<PAGE>
The U.S. patent application system also exposes us to risks. In the United
States, the first party to make a discovery is granted the right to patent it
and patent applications are maintained in secrecy until the underlying patents
issue. For these reasons, we can never know if we are the first to discover
particular technologies. Therefore, we can never be certain that our
technologies will be patented and we could become involved in lengthy,
expensive, and distracting disputes concerning whether we were the first to make
the disputed discovery. Any of these events would materially harm our business.
Our business is regulated by the United States and various foreign governments
Our business is subject to substantial regulation by the United States
government, most notably the United States Department of Agriculture, and the
French government. In addition, our operations may be subject to future
legislation and/or rules issued by domestic or foreign governmental agencies
with regulatory authority relating to our business. There can be no assurance
that we will continue to be in compliance with any of these regulations.
For marketing outside the United States, we, and our suppliers, are subject to
foreign regulatory requirements, which vary widely from country to country.
There can be no assurance that we, and our suppliers, will meet and sustain
compliance with any such requirements. In particular, our sales of feline
leukemia virus vaccine to Merial S.A.S. or other distributors for resale in
Europe will be at risk unless Bio-Trends, our supplier, obtains European Union
regulatory approvals for its manufacturing facilities.
Our liability insurance may prove inadequate
Our products carry an inherent risk of product liability claims and associated
adverse publicity. While we have maintained product liability insurance for
such claims to date, we cannot be certain that this type of insurance will
continue to be available to us or that, if it is available, that it can be
obtained on acceptable terms. Also, our current coverage limits may not be
adequate. Any claim against us which results in our having to pay damages in
excess of our coverage limits will materially harm our business. Even if such a
claim is covered by our existing insurance, the resulting increase in insurance
premiums or other charges would increase our expenses and harm our business.
We use hazardous materials
Our business requires that we store and use hazardous materials and chemicals,
including radioactive compounds. Although we believe that our procedures for
storing, handling, and disposing of these materials comply with the standards
prescribed by local, state, and federal regulations, the risk of accidental
contamination or injury from these materials cannot be completely eliminated.
If any of these materials were mishandled, or if an accident with them occurred,
the consequences could be extremely damaging and we could be held liable for
them. Our liability for such an event would materially harm our business and
could exceed all of our available resources for satisfying it.
Results of Operations
Our net sales for the third quarter of 1999 decreased by $760,000 or 11% from
the third quarter of 1998. The decrease reflects a decrease in our sales of
diagnostic products of $521,000, a decrease in our vaccine product sales of
$614,000 and an increase in our instrument sales of $375,000. The decrease in
our sales of diagnostic products is due primarily to a decrease in canine
heartworm diagnostics sales of 38%, due to 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 7%
in sales of bulk FeLV vaccine (related to the timing of shipments as requested
our OEM customer), and a 55% decrease in sales of vaccines to private label
partners resulting from the phase-out of sales of most of our Synbiotics-labeled
vaccines. Our instrument business, which was acquired in March 1998,
contributed 7% of sales for the third quarter of 1999, as compared with less
than 1% for the prior year. The increased sales of our instrument products are
due primarily to our SCA 2000(TM) blood coagulation timing instrument which we
introduced in the second quarter of 1999, as well as growth in the sale of our
ProChem(R) instruments and consumables.
Our net sales for the nine months ended September 30, 1999 decreased by $771,000
or 3% from the nine month period ended September 30, 1998. The decrease
reflects a decrease in our vaccine product sales of $1,499,000 or 24% and a
$774,000 or 516% increase in our instrument sales, while our diagnostic sales
were flat compared to the prior year. The decreased sales of our vaccine
products reflected a decrease of 18% in sales of bulk FeLV vaccine (related to
the timing of shipments as requested by our OEM
-13-
<PAGE>
customer), and a 36% decrease in sales of vaccines to private label partners
resulting from the phase-out of sales of most of our Synbiotics-labeled
vaccines. The flat diagnostic sales were attributable to increased competition
in the canine heartworm market, both from former Synbiotics distributors who now
carry competitor's products and from a new Heska Corporation product, blunting
the growth of our Witness(R) canine heartworm product, which nonetheless had a
fine success, and reducing our sales of older-generation ICT GOLD HW and
VetRED(R) products Our instrument business, which was acquired in March, 1998
contributed 4% of sales for the first nine months of 1999, compared with less
than 1% for the prior year. The increased sales of instruments are due primarily
to our SCA 2000(TM) blood coagulation timing instrument which we introduced in
the second quarter of 1999, as well as growth in the sale of ProChem(R)
instruments and consumables.
All of our vaccine products (exclusive of our FeLV vaccine products) were
manufactured using bulk antigen fluids that were supplied by a third party. The
supply agreement expired and we were unable to locate a replacement supplier for
these bulk antigen fluids. We decided to discontinue the sales of the affected
products once our remaining supplies were exhausted, which occurred during the
third quarter of 1999. Sales of the affected products totaled $2,073,000 and
$1,596,000 during 1998 and 1997, respectively.
Although veterinary products manufacturers, including us, have traditionally
relied on distributors, we have been increasing our direct sales of products to
veterinarians via telesales and the Internet as part of a focused strategy. In
addition, we stopped selling to several distributors and to Vedco, Inc., a
distributor co-op, in the second quarter of 1999. For the first time, direct-
to-veterinarian sales exceeded distributor sales in each of the months of the
third quarter of 1999.
Our cost of sales as a percentage of our net sales was 65% during the third
quarter of 1999 compared to 57% during the third quarter of 1998 (i.e., our
gross margin decreased to 35% from 43%). The lower gross margin is a direct
result of two factors: i) the decrease in our sales and ii) the fact that a
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), ICT GOLD HW,
VetRED(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. Our cost of
sales as a percentage of net sales was 48% during the nine months ended
September 30, 1999 and 1998.
In March 1999, we amended (effective July 1, 1998) our FeLV vaccine supply
agreement with Merial Limited ("Merial"). Since 1992, we have supplied Bio-
Trends-manufactured FeLV vaccine to Merial in the United States. This has
included shipments to Merial at our cost, while Merial has paid a royalty to us
on their sales of Merial-labeled FeLV vaccine. In exchange for $1,500,000 in
cash ($1,453,000 of which we are recognizing ratably over the remaining term of
the supply agreement, and the remainder was applied to royalties receivable from
Merial), the revised supply agreement broadens Merial's U.S. distribution rights
(which had been an area of ongoing discussions) and eliminates the royalty. In
addition, we will work with Merial to try to have Bio-Trends supply FeLV vaccine
directly to Merial for U.S. distribution. Our FeLV vaccine sales to Merial for
U.S. resale totaled $2,029,000 and $1,309,000 during 1998 and 1997,
respectively. If Merial buys its FeLV vaccine for U.S. resale from Bio-Trends
instead of from us, we will lose net sales but have a higher overall gross
margin. In the meantime, we will continue to resell Bio-Trends-supplied FeLV
vaccine to Merial at no profit for U.S. resale. Our sales of our own VacSyn and
other FeLV-labeled vaccine products, our sales of Bio-Trends supplied FeLV
vaccine to Merial S.A.S. in France, which are at a profit rather than at cost,
and the collaborative research relationship between Merial and us were not
affected by this amendment.
Our research and development expenses during the third quarter of 1999 decreased
$82,000 or 14% from the third quarter of 1998 and decreased during the nine
months ended September 30, 1999 by $59,000 or 3% from the nine months ended
September 30, 1998. The decreases relate to the timing of external research
projects. Our research and development expenses as a percentage of our net
sales were 9% during the third quarters of 1999 and 1998, and were 7% during the
nine months ended September 30, 1999 and 1998. We expect our research and
development expenses to increase during the remainder of 1999 due to further
development of our instrument product line.
Our selling and marketing expenses during the third quarter of 1999 increased by
$314,000 or 23% over the third quarter of 1998, and increased $951,000 or 21%
over the nine months ended September 30, 1998. The increases are due
primarily to the addition of an outbound direct-to-veterinarian telemarketing
group during the third quarter of 1998 and additional new hires in the third
quarter of 1999, expenses for increasing Internet selling capabilities,
increased royalties due to the 1998 introduction of the WITNESS(R) products, an
increase in our field sales force during the fourth quarter of 1998 and an
increase in promotional programs. Our selling and marketing expenses as a
percentage of our net sales were 29% and 21% during the third quarter of 1999
and 1998, respectively, and were 23% and 19% during the nine months ended
September 30, 1999 and 1998, respectively.
-14-
<PAGE>
Our general and administrative expenses during the third quarter of 1999 did not
change significantly from the third quarter of 1998, and increased $681,000 or
19% over the nine months ended September 30, 1998. The nine month increase is
due primarily to legal expenses related to the Heska patent litigation, and the
fact that we reclassified $463,000 of legal expenses related to the settlement
of patent litigation from general and administrative expenses in the third
quarter of 1998. Our general and administrative expenses as a percentage of our
net sales were 26% and 23% during the third quarters of 1999 and 1998,
respectively, and were 18% and 15% during the nine months ended September 30,
1999 and 1998, respectively.
Our royalty income during the third quarter of 1999 and for the nine months
ended September 30, 1999 decreased from the prior periods as a result of the
amended supply agreement with Merial (see above); we will no longer receive
royalties from Merial beginning in 1999. Our royalty income totaled $317,000
and $332,000 during 1998 and 1997, respectively.
In connection with our 1998 patent litigation settlement with Barnes-Jewish
Hospital (the "Hospital"), We issued 333,000 shares of common stock to the
Hospital and recorded a charge of $1,000,000 related to the stock issuance based
upon the fair market value of $3.00 per share. In addition, we guaranteed the
Hospital that the value of the stock issued would be no less than $5.00 per
share (or $1,667,000) on January 28, 2000, and that we would issue additional
shares to the Hospital if the value was less than $5.00 per share on that date.
Based on the closing price of our stock on November 9, 1999 of $2.13 per share,
on January 28, 2000 we might have to issue an additional 451,000 shares of stock
to the Hospital and record a charge of $667,000. The charge would be recorded
in the fourth quarter of 1999. If the fair market value of the stock on January
28, 2000 were to differ from the November 9, 1999 price by, for example, $1.00
per share, we would issue to the Hospital a different number of shares: either
1,148,000 (assuming a stock price of $1.13 per share), resulting in a charge of
$667,000, or 200,000 (assuming a stock price of $3.13 per share), resulting in a
charge of $625,000. However, regardless of the actual stock price on January
28, 2000, and regardless of the number of shares issued, the maximum charge to
be incurred by us would be $667,000 as $1,000,000 was charged in 1998, and the
entire additional charge would be recorded in the fourth quarter of 1999.
Financial Condition
We believe that our present capital resources, which included working capital of
$11,728,000 at September 30, 1999, are sufficient to meet our current working
capital needs and service our debt for at least the next twelve months.
However, pursuant to a debt agreement with Banque Paribas, we are required to
maintain certain financial ratios and levels of tangible net worth and we are
also restricted in our ability to pay dividends and make loans, capital
expenditures or investments without Banque Paribas' consent. As of September
30, 1999, we had outstanding principal balances on its Banque Paribas debt of
$7,750,000, and may borrow up to $5,000,000 (subject to a borrowing base
calculation) on our revolving line of credit.
In February 1999, we repaid the $1,000,000 note issued in conjunction with the
acquisition of Prisma for $800,000, and recognized a $116,000 extraordinary
gain, net of income taxes totaling $84,000, during the first quarter of 1999.
Our operations have become seasonal due to the success of our canine heartworm
diagnostic products. Our Sales and profits tend to be concentrated in the first
half of the year, as our distributors prepare for the heartworm season by
purchasing diagnostic products for resale to veterinarians. The operations SBIO-
E have reduced our seasonality as sales of their large-animal diagnostic
products tend to occur evenly throughout the. We believe that increased sales
of our instruments and supplies would also reduce seasonality.
Impact of the Year 2000 Issue
The year 2000 issue is the result of computer programs being written using two
digits rather than four digits to define the applicable year. Embedded
microprocessors or computer programs that have date-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculation causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices or engage in similar normal business activities.
We completed the implementation of an enterprise resource planning system during
the third quarter of 1999. The total cost of the new system (including
software, hardware and implementation) was approximately $1,000,000, for which
we have obtained lease financing. The new system is year 2000 compliant.
-15-
<PAGE>
The computer systems of SBIO-E are not affected by the year 2000 issue as new
systems were implemented during 1998, and those systems are year 2000 compliant.
We have also determined that our telephone systems and equipment used in our
manufacturing and research and development processes are year 2000 compliant.
We have been notified by our major suppliers and customers that they are testing
their systems for year 2000 compliance, and to the best of their knowledge those
systems are year 2000 compliant. In the event that these suppliers' and
customers' systems in fact fail to become year 2000 compliant and the suppliers
and customers suffer disruptions in their own operations, there could be a
material adverse impact on our results of operations and financial condition
beginning in 2000. The greatest disruption would occur if third-party
manufacturers of our diagnostic products and vaccines were interrupted due to
their own, or their own suppliers', year 2000 problems.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
No material changes.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
--------
27 Financial Data Schedule (for electronic filing purposes only).
(b) Reports on Form 8-K
-------------------
None.
-16-
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SYNBIOTICS CORPORATION
Date: April 10, 2000 /s/ Michael K. Green
--------------------
Michael K. Green
Senior Vice President and Chief Financial Officer
(signing both as a duly authorized officer and as
principal financial officer)
-17-
<PAGE>
EXHIBIT INDEX
Exhibit No. Exhibit
- ----------- -------
27 Financial Data Schedule (for electronic filing purposes only).
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1999 AND THE RELATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND CASH FLOWS FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 1999 INCLUDED ELSEWHERE IN THIS FORM 10-QSB/A AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 4,144
<SECURITIES> 2,760
<RECEIVABLES> 4,054
<ALLOWANCES> 112
<INVENTORY> 5,561
<CURRENT-ASSETS> 17,661
<PP&E> 3,130
<DEPRECIATION> 1,035
<TOTAL-ASSETS> 44,782
<CURRENT-LIABILITIES> 5,933
<BONDS> 6,115
2,380
0
<COMMON> 39,287
<OTHER-SE> (11,420)
<TOTAL-LIABILITY-AND-EQUITY> 44,782
<SALES> 23,701
<TOTAL-REVENUES> 23,896
<CGS> 11,380
<TOTAL-COSTS> 22,912
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 926
<INCOME-PRETAX> 58
<INCOME-TAX> 292
<INCOME-CONTINUING> (234)
<DISCONTINUED> 0
<EXTRAORDINARY> 116
<CHANGES> 0
<NET-INCOME> (118)
<EPS-BASIC> (.03)
<EPS-DILUTED> (.03)
</TABLE>
