<PAGE>
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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
[X]QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
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 registrant as specified in its charter)
<TABLE>
<S> <C>
California 95-3737816
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11011 Via Frontera 92127
San Diego, California (Zip Code)
(Address of principal executive offices)
</TABLE>
Registrant's telephone number, including area code: (858) 451-3771
----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
As of October 31, 2000, 9,373,355 shares of Common Stock were outstanding.
--------------------------------------------------------------------------------
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<PAGE>
SYNBIOTICS CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
Part I Condensed Consolidated Statement of Operations and Comprehensive 1
Loss--Three and nine months ended September 30, 2000 and 1999...
Condensed Consolidated Balance Sheet--September 30, 2000 and 2
December 31, 1999..............................................
Condensed Consolidated Statement of Cash Flows--Nine months 3
ended September 30, 2000 and 1999..............................
Notes to Condensed Consolidated Financial Statements............ 4
Management's Discussion and Analysis of Financial Condition and 9
Results of Operations..........................................
Quantitative and Qualitative Disclosures About Market Risk...... 17
Part II Legal Proceedings............................................... 19
Changes in Securities........................................... 19
Defaults Upon Senior Securities................................. 19
Submission of Matters to a Vote of Security Holders............. 19
Other Information............................................... 19
Exhibits and Reports on Form 8-K................................ 20
</TABLE>
<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 Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Net sales................ $ 7,451,000 $ 6,016,000 $25,356,000 $23,800,000
Internet revenues........ 86,000 134,000
License fees............. 61,000 61,000 182,000 187,000
Royalties................ 3,000 2,000 6,000 8,000
----------- ----------- ----------- -----------
7,601,000 6,079,000 25,678,000 23,995,000
----------- ----------- ----------- -----------
Operating expenses:
Cost of sales............ 3,781,000 3,933,000 12,439,000 11,479,000
Research and
development............. 534,000 508,000 1,618,000 1,644,000
Selling and marketing.... 2,637,000 1,742,000 7,950,000 5,542,000
General and
administrative.......... 1,442,000 1,531,000 5,133,000 4,346,000
----------- ----------- ----------- -----------
8,394,000 7,714,000 27,140,000 23,011,000
----------- ----------- ----------- -----------
(Loss) income from
operations................ (793,000) (1,635,000) (1,462,000) 984,000
Other income (expense):
Interest, net............ (308,000) (314,000) (913,000) (926,000)
----------- ----------- ----------- -----------
(Loss) income before income
taxes..................... (1,101,000) (1,949,000) (2,375,000) 58,000
(Benefit from) provision
for income taxes.......... (293,000) (650,000) 58,000 292,000
----------- ----------- ----------- -----------
Loss before extraordinary
item...................... (808,000) (1,299,000) (2,433,000) (234,000)
Early extinguishment of
debt, net of tax.......... (583,000) 116,000
----------- ----------- ----------- -----------
Net loss................... (808,000) (1,299,000) (3,016,000) (118,000)
Translation adjustment..... (756,000) 323,000 (550,000) (931,000)
----------- ----------- ----------- -----------
Comprehensive loss......... $(1,564,000) $ (976,000) $(3,566,000) $(1,049,000)
=========== =========== =========== ===========
Basic loss per share:
Loss from continuing
operations.............. $ (0.09) $ (0.15) $ (0.27) $ (0.04)
Early extinguishment of
debt, net of tax........ (0.06) 0.01
----------- ----------- ----------- -----------
Net loss................. $ (0.09) $ (0.15) $ (0.33) $ (0.03)
=========== =========== =========== ===========
Diluted loss per share:
Loss from continuing
operations.............. $ (0.09) $ (0.15) $ (0.27) $ (0.04)
Early extinguishment of
debt, net of tax........ (0.06) 0.01
----------- ----------- ----------- -----------
Net loss................. $ (0.09) $ (0.15) $ (0.33) $ (0.03)
=========== =========== =========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
1
<PAGE>
SYNBIOTICS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
September December 31,
30, 2000 1999
------------ ------------
(unaudited) (audited)
<S> <C> <C>
ASSETS
------
Current assets:
Cash and equivalents............................. $ 1,715,000 $ 2,260,000
Securities available for sale.................... 617,000 3,443,000
Accounts receivable.............................. 3,845,000 4,517,000
Inventories...................................... 6,766,000 5,178,000
Deferred tax assets.............................. 454,000 505,000
Other current assets............................. 1,151,000 1,570,000
------------ ------------
Total current assets........................... 14,548,000 17,473,000
Property and equipment, net........................ 2,839,000 1,744,000
Goodwill........................................... 17,988,000 12,137,000
Deferred tax assets................................ 8,417,000 8,055,000
Deferred debt issuance costs....................... 39,000 447,000
Other assets....................................... 3,647,000 4,191,000
------------ ------------
$ 47,478,000 $ 44,047,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
-------------------------------------
Current liabilities:
Accounts payable and accrued expenses............ $ 6,320,000 $ 5,921,000
Current portion of long-term debt................ 1,200,000 1,000,000
Deferred revenue................................. 263,000 242,000
Other current liabilities........................ 1,000,000
------------ ------------
Total current liabilities...................... 8,783,000 7,163,000
------------ ------------
Long-term debt..................................... 10,743,000 5,914,000
Deferred revenue................................... 787,000 969,000
Other liabilities.................................. 1,635,000 1,546,000
------------ ------------
13,165,000 8,429,000
------------ ------------
Mandatorily redeemable common stock................ 2,510,000 2,412,000
------------ ------------
Non-mandatorily redeemable common stock and other
shareholders' equity:
Common stock, no par value, 24,800,000 share
authorized, 9,373,000 and 8,576,000 shares
issued and outstanding at September 30, 2000 and
December 31, 1999............................... 40,065,000 39,424,000
Common stock warrants............................ 1,003,000 1,003,000
Accumulated other comprehensive loss............. (1,466,000) (916,000)
Accumulated deficit.............................. (16,582,000) (13,468,000)
------------ ------------
Total non-mandatorily redeemable common stock
and other shareholders' equity................ 23,020,000 26,043,000
------------ ------------
$ 47,478,000 $ 44,047,000
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
SYNBIOTICS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................ $(3,016,000) $ (118,000)
Adjustments to reconcile net loss to net cash (used
for) provided by operating activities:
Depreciation and amortization..................... 2,083,000 1,880,000
Early extinguishment of debt...................... 937,000 (200,000)
Changes in assets and liabilities, net of effects
of acquisitions:
Accounts receivable............................. 672,000 193,000
Inventories..................................... (1,588,000) (382,000)
Deferred taxes.................................. (311,000) 302,000
Other assets.................................... (302,000) 317,000
Accounts payable and accrued expenses........... 904,000 299,000
Deferred revenue................................ (161,000) 1,271,000
Other liabilities............................... 89,000 89,000
----------- -----------
Net cash (used for) provided by operating
activities................................... (693,000) 3,651,000
----------- -----------
Cash flows from investing activities:
Acquisition of property and equipment............. (460,000) (625,000)
Proceeds from sale of (investment in) securities
available for sale............................... 2,826,000 (1,147,000)
Acquisition of KPL poultry product line........... (3,554,000)
----------- -----------
Net cash used for investing activities........ (1,188,000) (1,772,000)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt.......... 10,000,000
Payments of long-term debt........................ (8,250,000) (1,550,000)
Proceeds from issuance of common stock, net....... 136,000 389,000
----------- -----------
Net cash provided by (used for) financing
activities................................... 1,886,000 (1,161,000)
----------- -----------
Net increase in cash and equivalents................ 5,000 718,000
Effect of exchange rates on cash.................... (550,000) (931,000)
Cash and equivalents--beginning of period........... 2,260,000 4,357,000
----------- -----------
Cash and equivalents--end of period................. $ 1,715,000 $ 4,144,000
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
SYNBIOTICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1--Interim Financial Statements:
The accompanying condensed consolidated balance sheet as of September 30,
2000 and the condensed consolidated statements of operations and comprehensive
loss and of cash flows for the three and nine months ended September 30, 2000
and 1999 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 subsidiaries Synbiotics Europe
SAS and W3COMMERCE inc. 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, 1999. 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--New Accounting Pronouncements:
In September 2000, the Emerging Issues Task Force (the "EITF") reached a
final consensus on Issue 00-10, "Accounting for Shipping and Handling Fees and
Costs" ("EITF 00-10"). EITF 00-10 requires companies to record as revenue
amounts charged to customers for shipping and handling. The Company had
previously been recording these amounts net against freight expense included in
cost of sales. The Company was required to adopt EITF 00-10 during the three
months ended September 30, 2000, and there was no effect on results of
operations as the amounts charged to customers for shipping and handling were
reclassified from cost of sales to net sales. Accordingly, the Company has
reclassified these amounts from cost of sales to net sales for all periods
presented.
Note 3--Acquisitions:
On January 12, 2000, the Company acquired W3COMMERCE LLC, now W3COMMERCE
inc., a privately-held e-commerce and Internet solutions company based in San
Diego, CA. The consideration paid was $2,913,000, which consisted of $100,000
in cash and a 5 year, $2,813,000 note payable, 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 members 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.
The transaction was accounted for as a purchase. Goodwill arising from the
transaction totalled $3,064,000 which is being amortized over an estimated
useful life of 10 years utilizing the straight-line method. The convertible
debt portion of the purchase price and liabilities assumed totalling $2,893,000
is considered a non-cash financing activity for purposes of the statement of
cash flows.
On April 21, 2000, the Company acquired the poultry diagnostic product line
from Kirkegaard & Perry Laboratories, Inc. ("KPL"). The consideration paid was
$3,500,000 in cash upon closing, and an additional $1,000,000 due upon the
earlier of the transfer of manufacturing or one year from the date of closing.
In addition, the Company will be required to pay up to $1,500,000, during the
three years from the date of closing, based upon its sales of the acquired
products, which will be recorded as additional purchase price as the related
sales are recognized.
4
<PAGE>
SYNBIOTICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued
The transaction was accounted for as a purchase. Goodwill arising from the
transaction totalled $4,640,000 which is being amortized over an estimated
useful life of 10 years utilizing the straight-line method. The $1,000,000
manufacturing transfer liability portion of the purchase price is considered a
non-cash investing activity for purposes of the statement of cash flows.
The Company's statement of operations includes the results of operations of
W3COMMERCE for the period January 1, 2000 to September 30, 2000 and the results
of operations of the KPL poultry product line for the period April 21, 2000 to
September 30, 2000. The following are pro forma results of operations as if the
W3COMMERCE and KPL transactions had been consummated on January 1, 1999:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues:
As Reported............. $7,601,000 $ 6,079,000 $25,678,000 $23,995,000
========== =========== =========== ===========
Pro forma............... $7,601,000 $ 6,889,000 $26,487,000 $26,126,000
========== =========== =========== ===========
Loss before extraordinary
Item:
As reported............. $ (808,000) $(1,299,000) $(2,433,000) $ (234,000)
========== =========== =========== ===========
Pro forma............... $ (808,000) $(1,250,000) $(2,152,000) $ (110,000)
========== =========== =========== ===========
Net (loss) income:
As reported............. $ (808,000) $(1,299,000) $(3,016,000) $ (118,000)
========== =========== =========== ===========
Pro forma............... $ (808,000) $(1,250,000) $(2,735,000) $ 6,000
========== =========== =========== ===========
Basic net loss per share:
As reported............. $ (0.09) $ (0.15) $ (0.33) $ (0.03)
========== =========== =========== ===========
Pro forma............... $ (0.09) $ (0.14) $ (0.30) $ (0.01)
========== =========== =========== ===========
Diluted net loss per
share:
As reported............. $ (0.09) $ (0.15) $ (0.33) $ (0.03)
========== =========== =========== ===========
Pro forma............... $ (0.09 $ (0.14) $ (0.30) $ (0.01)
========== =========== =========== ===========
</TABLE>
Note 4--Inventories:
Inventories consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
(unaudited) (audited)
<S> <C> <C>
Inventories:
Raw materials................................... $2,584,000 $2,320,000
Work in process................................. 391,000 589,000
Finished goods.................................. 3,791,000 2,269,000
---------- ----------
$6,766,000 $5,178,000
========== ==========
</TABLE>
5
<PAGE>
SYNBIOTICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued
Note 5--Long-Term Debt:
In April 2000, the Company refinanced its outstanding Banque Paribas debt
with Imperial Bank ("Imperial"). The new Imperial debt agreement included 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 the
Company's assets. The line of credit, of which the Company had drawn the entire
$4,000,000 as of September 30, 2000, 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 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. As of June 30, 2000 and September 30, 2000, the Company was
not in compliance with certain Imperial Bank financial covenants, and has
obtained waivers from the bank. In exchange for the waivers, the Company has:
1) paid the bank waiver fees totalling $70,000 and 2) made a one time principal
payment on its term loan of $500,000. In addition, in November 2000 the Company
amended the Imperial agreement to: 1) convert $1,500,000 from the line of
credit to the term loan; 2) reduce the line of credit to a maximum of
$2,500,000, subject to a borrowing base calculation; 3) change the due date of
the term debt to March 31, 2002; 4) revise the calculation of certain financial
ratios and the required levels of tangible net worth and 5) increase the
interest rate on both the term debt and the line of credit to prime plus 1.50%
to 2.50% (dependent upon the Company's ratio of senior funded debt to earnings
before interest, taxes, depreciation and amortization).
In addition to amending the Imperial agreement, the Company also agreed to
issue to Imperial warrants to purchase 250,000 unregistered shares of the
Company's common stock at $2.00 per share.
The Company recorded an extraordinary loss on early extinguishment of debt
of $583,000, net of income tax benefit of $354,000, in the second quarter of
2000, which represents the remaining unamortized debt issuance costs and debt
discount on the Banque Paribas debt.
6
<PAGE>
SYNBIOTICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued
Note 6--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 Nine Months Ended
September 30, September 30,
------------------------ -----------------------
2000 1999 2000 1999
----------- ----------- ----------- ----------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Basic and diluted net loss
used:
Loss from continuing
operations................ $ (808,000) $(1,299,000) $(2,433,000) $ (234,000)
Less accretion of
mandatorily redeemable
common stock.............. (33,000) (32,000) (99,000) (94,000)
---------- ----------- ----------- ----------
Loss from continuing
operations used in
computing basic loss from
continuing operations per
share..................... (841,000) (1,331,000) (2,532,000) (328,000)
Early extinguishment of
debt, net of tax.......... (583,000) 116,000
---------- ----------- ----------- ----------
Net loss used in computing
basic and diluted net loss
per share................... $ (841,000) $(1,331,000) $(3,115,000) $ (212,000)
========== =========== =========== ==========
Shares used:
Weighted average common
shares outstanding used in
computing basic loss per
share..................... 9,373,000 9,179,000 9,327,000 9,049,000
Weighted average options
and warrants to purchase
common stock as determined
by the treasury method....
---------- ----------- ----------- ----------
Shares used in computing
diluted
loss per share.............. 9,373,000 9,179,000 9,327,000 9,049,000
========== =========== =========== ==========
</TABLE>
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 1,242,000, 260,000,
1,275,000 and 330,000 shares have been excluded from the shares used in
computing diluted net loss per share for the three months ended September 30,
2000 and 1999 and the nine months ended September 30, 2000 and 1999,
respectively, as their effect is anti-dilutive. In addition, warrants to
purchase 284,000 shares of common stock at $4.54 per share, which expired in
March 2000, have been excluded from the shares used in computing diluted net
loss per share for the three and nine months ended September 30, 1999 as their
exercise price is higher than the weighted average market price for those
periods, and in addition their effect is anti-dilutive for the three and nine
months ended September 30, 1999.
Note 7--Segment Information and Significant Customers:
The Company has determined that it has only one reportable segment based on
the fact that all of its net sales are from its animal health products, and its
Internet revenues are insignificant at this time. Although the Company sells
diagnostic, vaccine and instrument products, it does not base its business
decision making on a product category basis.
7
<PAGE>
SYNBIOTICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--Continued
The following are revenues for the Company's diagnostic, vaccine and
instrument products:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ------------------------
2000 1999 2000 1999
----------- ---------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Diagnostics............... $5,524,000 $3,920,000 $18,722,000 $18,116,000
Vaccines.................. 1,257,000 1,654,000 4,760,000 4,759,000
Instruments............... 670,000 442,000 1,874,000 925,000
Other revenues............ 150,000 63,000 322,000 195,000
---------- ---------- ----------- -----------
$7,601,000 $6,079,000 $25,678,000 $23,995,000
========== ========== =========== ===========
The following are revenues and long-lived assets information by geographic
area:
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ------------------------
2000 1999 2000 1999
----------- ---------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
United States........... $5,209,000 $4,114,000 $18,848,000 $16,784,000
France.................. 1,229,000 1,065,000 3,354,000 3,266,000
Other foreign
countries.............. 1,163,000 900,000 3,476,000 3,945,000
---------- ---------- ----------- -----------
$7,601,000 $6,079,000 $25,678,000 $23,995,000
========== ========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
September December
30, 2000 31, 1999
----------- -----------
(unaudited) (audited)
<S> <C> <C>
Long-lived assets:
United States..................................... $19,076,000 $12,079,000
France............................................ 5,418,000 6,440,000
Other foreign countries........................... 19,000
----------- -----------
$24,513,000 $18,519,000
=========== ===========
</TABLE>
During the three months ended September 30, 2000, sales to one customer
totalled $822,000. The Company had sales to one customer totalling $689,000
during the three months ended September 30, 1999. There were no sales to any
one customer that totalled 10% or more of total revenues during the nine months
ended September 30, 2000 and 1999.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information contained in this Management's Discussion and Analysis of
Financial Condition and Results of Operations and elsewhere in this Quarterly
Report on Form 10-Q contains both historical financial information and forward-
looking statements. We do not provide forecasts of future financial
performance. 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:
We may sell our primary business
We have announced that we have engaged investment bankers to consider means
of enhancing shareholder value, including the possible sale of our animal
health business. There can be no assurance that our animal health business can
be sold for a favorable price, and we have not decided what we would do with
the proceeds of any sale. Also, the uncertainties caused by this process may
undermine our relationships with our customers, employees and suppliers.
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) and IDEXX Laboratories. These companies are
substantially larger and have greater financial, manufacturing, marketing, and
research resources than we do. 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 31% 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 and 2000 by a
new heartworm product from Heska Corporation. We have filed a lawsuit against
Heska, claiming that its heartworm product infringes our patent
We have a history of losses and an accumulated deficit
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 $16,582,000 at September 30, 2000. 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 rely on third party distributors for a substantial portion of our sales, but
we recently have experienced 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 customers representing 10%
or more of our net sales 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
9
<PAGE>
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 made, 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. We have rescinded this policy, and all but one of our former distributors
are again selling our products. We are also exposed to the risk that any sales
by us directly to veterinarians could alienate our current distributors.
Our direct selling strategy has been scaled back
We are inexperienced in large-scale direct selling. Also, veterinarians have
traditionally relied on distributors, and the number of veterinarians willing
to purchase directly from manufacturers may be smaller than we believe. In
fact, at the end of the third quarter of 2000, we refocused our sales and
marketing efforts towards traditional animal health distribution and, as a
result, we significantly reduce the headcount of our telesales force.
Our profitable vaccine sales in Europe may decline soon
Merial distributes in Europe our FeLV vaccine, which we obtain from
Intervet. Our gross profit in 1999 and 1998 on these sales of FeLV vaccine 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 April 2000
acquisition of the poultry product line from Kirkegaard & Perry Laboratories,
Inc., the January 2000 acquisition of W3COMMERCE, 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.
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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;
. 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 sale 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 may need additional capital in the future
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. The 621,000 shares of our
common stock which we issued to Merial in conjunction with the 1997 acquisition
of Synbiotics Europe are subject to a put provision. The put option gives
Merial the right, beginning on July 9, 2001, to sell all or any portion of its
shares to us at a price of $5 per share, for a total of $3,105,000. Although
the put option is subordinated to our Imperial Bank debt, if Merial were to
exercise its put option, we would be unable to pay for the shares.
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. 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, or we may need to delay, reduce,
or eliminate one or more of our operational activities or research and
development programs. Any of these events would impair our competitive position
and harm our business.
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We are not in compliance with our bank loan covenants
In April 2000, we refinanced our outstanding Banque Paribas debt with
Imperial Bank ("Imperial"). As of June 30, 2000 and September 30, 2000, we were
not in compliance with some of the financial covenants in our agreement with
Imperial, and we have obtained waivers from the bank. We cannot assure you that
we will be in compliance with the covenants in the future. Failure to be in
compliance with the covenants places us in technical default of the debt
agreement, and Imperial could theoretically demand repayment of the loans. We
do not have the funds to repay the loans on short notice.
We depend on third party manufacturers
We contract for the manufacture of some of our products, including our
vaccines, our Witness(R) and VetRED(R) diagnostic products, our poultry
diagnostic products and our SCA 2000(TM) blood coagulation timing 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) and VetRED(R), 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, Intervet, Inc. (formerly Bio-Trends International, Inc.)
("Intervet"), obtains European Union regulatory approvals for its manufacturing
facilities which make this product. 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 and $2,073,000 during 1999 and 1998, respectively.
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.
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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.
Our canine heartworm business is seasonal
Our operations are seasonal due to the timing of sales 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. Our European
operations 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, our newly acquired poultry
diagnostic 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, trade
secrets, and confidentiality 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 United
States. 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 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. Our patent infringement litigation against Heska's use of heartworm
diagnostic technology is also expensive.
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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 FeLV vaccine
to Merial S.A.S. or other distributors for resale in Europe will be at risk
unless Intervet, our supplier, obtains European Union regulatory approvals for
its manufacturing facilities which make this product.
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
Our net sales for the third quarter of 2000 increased by $1,435,000 or 24%
over the third quarter of 1999. The increase reflects an increase in our
diagnostic product sales of $1,604,000 and an increase in our instrument
product sales of $228,000, offset by a decrease in our sales of vaccine
products of $397,000. The
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increase in our sales of diagnostic products is primarily due to sales of the
KPL poultry diagnostic products which we acquired in April 2000, and increased
sales to distributors due to the fact that all but one of our former
distributors are again selling our products. The weakening of the French franc
against the U.S. dollar negatively impacted our reported diagnostic sales in
Europe. Our decreased vaccine sales reflects the absence of sales of vaccines
to private label partners which we discontinued during the third quarter of
1999 because we were unable to obtain supply of a crucial manufacturing
material. Our instrument and reagent product sales increased due to sales in
the U.S. and in Europe (as these instruments have obtained the European CE
mark) and increased sales of reagents resulting from increased placements of
instruments.
Our net sales for the nine months ended September 30, 2000 increased
$1,556,000 or 7% over the nine months ended September 30, 1999. The increase
reflects an increase in our diagnostic product sales of $606,000 and an
increase in our instrument product sales of $949,000, while sales of our
vaccine products were flat. The increase in our sales of diagnostic products is
primarily due to sales of the KPL poultry diagnostic products which we acquired
in April 2000, offset by the effect of expensive promotional programs in the
United States during the first quarter of 2000 which attempted to respond to
increased competition in the canine heartworm diagnostic market. While our
sales in units have increased, these sales were at reduced average selling
prices. Our U.S. heartworm sales in units during the first half 2000 increased
by 6% over the first half of 1999, yet our sales in dollars for these products
decreased by 17%. In Europe, sales of our large animal diagnostic products
decreased due to increased competition, and a change in the timing of mandated
disease eradication testing required by certain European governmental
authorities. Tests that used to be required annually are now only required to
be performed every other year. The weakening of the French franc against the
U.S. dollar also negatively impacted our reported European diagnostic sales.
Our instrument product sales increased due to sales in the U.S. and in Europe
(as these instruments have obtained the European CE mark) increased sales of
reagents resulting from increased placements of instruments, and a full nine
month's worth of sales of our SCA 2000TM blood coagulation timing instrument,
which we introduced during the second quarter of 1999.
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
$1,645,000 and $2,073,000 during 1999 and 1998, respectively.
Our cost of sales as a percentage of our net sales was 51% during the third
quarter of 2000 compared to 65% during the third quarter of 1999 (i.e., our
gross margin increased to 49% from 35%). The higher gross margin is a direct
result of three factors: i) the increase in our sales; ii) the poultry
diagnostic products have relatively high margins and iii) a decrease in our
sales of lower margin vaccines. Our gross margins are restrained by the fact
that a significant portion of our manufacturing costs are fixed costs. Among
our major products, our DiroCHEK(R) canine heartworm diagnostic products and
the ProChem(R) analyzer are manufactured at our facilities, whereas our
WITNESS(R), VetRED(R), all poultry diagnostic, all vaccines and the SCA
2000(TM) products are manufactured by third parties. In addition to affecting
our gross margins, outsourcing of manufacturing renders us relatively more
dependent on the third-party manufacturers. Our cost of sales as a percentage
of our net sales was 49% during the nine months ended September 30, 2000
compared to 48% during the nine months ended September 30, 1999 (i.e. our gross
margins decreased to 51% from 52%). The lower gross margins are a result of the
effect of the promotional programs in the first quarter of 2000 discussed
above.
We are currently in the process of transferring the manufacturing of our
poultry diagnostic products to our manufacturing facilities in San Diego, and
we expect the transfer to be completed within the next twelve months. We
believe that our gross margins on these products will improve as we will have
more products to absorb our fixed manufacturing costs.
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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 until July 1998 Merial 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 of which was applied to royalties receivable from
Merial), the revised supply agreement broadened Merial's U.S. distribution
rights (which were an area of ongoing discussions) and eliminated the royalty.
In addition, we will work with Merial to try to have Intervet 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 Intervet-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 increased $26,000 or 5% during the
third quarter of 2000 as compared to the third quarter of 1999, and decreased
$26,000 or 2% during the nine months ended September 30, 2000 as compared to
the nine months ended September 30, 1999. Our research and development expenses
as a percentage of our net sales were 7% and 8% during the third quarter of
2000 and 1999, respectively, and were 6% and 7% during the nine months ended
September 30, 2000 and 1999, respectively.
Our selling and marketing expenses during the third quarter of 2000
increased by $895,000 or 51% over the third quarter of 1999, and increased
$2,408,000 or 43% during the nine months ended September 30, 2000 as compared
to the nine months ended September 30, 1999. The increases are due primarily to
the acquisition of W3COMMERCE, promotional programs and an increase in our
direct-to-veterinarian telemarketing group. Our selling and marketing expenses
as a percentage of our net sales were 35% and 29% during the third quarter of
2000 and 1999, respectively, and were 31% and 23% during the nine months ended
September 30, 2000 and 1999, respectively. At the end of the third quarter of
2000, we refocused our sales and marketing efforts towards traditional animal
health distribution and, as a result, we significantly reduce the headcount of
our telesales force.
Our general and administrative expenses during the third quarter of 2000
decreased by $89,000 or 6% from the third quarter of 1999, and increased
$787,000 or 18% during the nine months ended September 30, 2000 as compared to
the nine months ended September 30, 1999. The decrease for the quarter is due
primarily to the non-recurrence of exit compensation to a former employee and a
decrease in consulting services, offset by an increase in goodwill amortization
related to our KPL acquisition. The increase for the nine month period is due
primarily to legal expenses related to our patent litigation with Heska,
increased goodwill amortization related to our KPL acquisition, increased use
tax resulting from a state use tax audit, and foreign currency losses related
to our intercompany receivable from Synbiotics Europe. Our general and
administrative expenses as a percentage of our net sales were 19% and 25%
during the third quarter of 2000 and 1999, respectively, and were 20% and 18%
during the nine months ended September 30, 2000 and 1999, respectively.
Financial Condition
We believe that our present capital resources, which included working
capital of $5,765,000 at September 30, 2000, are sufficient to meet our current
working capital needs and service our debt through September 30, 2001. As of
September 30, 2000, we had outstanding principal balances on our Imperial Bank
debt of $9,000,000, and outstanding principal balances on our convertible debt
issued in conjunction with the acquisition of W3COMMERCE of $2,813,000.
As of June 30, 2000 and September 30, 2000, we were not in compliance with
certain Imperial Bank financial covenants, and we have obtained waivers from
the bank. In exchange for the waivers, we have: 1) paid the bank waiver fees
totalling $70,000 and 2) made a one time principal payment on our term loan of
$500,000. In addition, in November 2000 we amended the Imperial agreement to:
1) convert $1,500,000 from
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the line of credit to the term loan; 2) reduce the line of credit to a maximum
of $2,500,000, subject to a borrowing base calculation; 3) change the due date
of the term debt to March 31, 2002; 4) revise the calculation of certain
financial ratios and the required levels of tangible net worth and 5) increase
the interest rate on both the term debt and the line of credit to prime plus
1.50% to 2.50% (dependent upon our ratio of senior funded debt to earnings
before interest, taxes, depreciation and amortization).
In addition to amending the Imperial agreement, we also agreed to issue to
Imperial warrants to purchase 250,000 unregistered shares of the Company's
common stock at $2.00 per share.
The 621,000 shares of our common stock which we issued to Merial S.A.S. in
conjunction with the 1997 acquisition of Synbiotics Europe are subject to a put
provision. The put option gives Merial S.A.S. the right, beginning on July 9,
2001, to sell all or any portion of its shares to us at a price of $5 per
share, for a total of $3,105,000. Although the put option is subordinated to
the Imperial bank debt, if Merial were to exercise its put option, we would be
unable to pay for the shares.
Our operations are seasonal due to the timing of sales 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. Our
European operations 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 our newly acquired poultry
diagnostic products and success in our Internet marketing business will also
reduce our seasonality. Success in our Internet marketing business would also
reduce our seasonality.
On June 19, 2000 we announced that we had retained investment bankers to
advise us in exploring strategic alternatives for enhancing the value of
Synbiotics to our shareholders. Included in these strategic alternatives is the
possible sale of our animal health business. If we were to sell the animal
health business, the financial condition and results of operations would be
materially affected, as substantially all of our assets, liabilities, revenues
and expenses are attributable to the animal health business. Subsequent to any
possible sale of the animal health business, our assets would consist primarily
of the sales proceeds and the operations of W3COMMERCE, and our future results
of operations would be contingent upon the efforts of W3COMMERCE.
Impact of the Year 2000 Issue
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.
Item 3--Quantitative and Qualitative Disclosures About Market Risk
Our market risk consists primarily of the potential for changes in interest
rates and foreign currency exchange rates.
Interest Rate Risk
The fair value of our investments available for sale at September 30, 2000
was $617,000, all of which consists of fixed interest rate securities. The
objectives of our investment policy are the safety and preservation of invested
funds, and liquidity of investments that is sufficient to meet cash flow
requirements. Our policy is to place our cash, cash equivalents, and
investments available for sale with high credit quality financial institutions,
commercial companies, and government agencies in order to limit the amount of
credit exposure.
The fair value of our long-term debt at September 30, 2000 was $11,813,000,
of which $2,813,000 has a fixed interest rate of 6.21%, and the remaining
$9,000,000 has a variable interest rate based on the prime rate.
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A 5% change in interest rates would have no material impact on our financial
condition, results of operations or cash flows as it relates to our securities
available for sale. However, a 5% change in interest rates would have a
material impact on our financial condition, results of operations and cash
flows as it relates to our variable rate long-term debt.
Foreign Currency Exchange Rate Risk
Our foreign currency exchange rate risk relates to the operations of
Synbiotics Europe as it transacts business in Euros, its local currency.
However, this risk is limited to our intercompany receivable from Synbiotics
Europe and the conversion of its financial statements into the U.S. dollar for
consolidation. There is no foreign currency exchange rate risk related to
Synbiotics Europe's transactions outside of the European Union as those
transactions are denominated in Euros. Similarly, all of the foreign
transactions of our U.S. operations are denominated in U.S. dollars. We do not
hedge our cash flows on intercompany transactions. As a result, the effects of
a 5% change in exchange rates would have a material impact on our financial
condition, results of operations and cash flows, but only to the extent that it
relates to the conversion of Synbiotics Europe's financial statements,
including its intercompany payable, into the U.S. dollar for consolidation.
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PART II--OTHER INFORMATION
Item 1. Legal Proceedings
Synbiotics Corporation vs. Heska Corporation--United States District Court for
the Southern District of California
No material changes.
SE Technologies, Inc. vs. Synbiotics Corporation--San Diego Superior Court
On July 13, 2000, SE Technologies, Inc. ("SE") file a lawsuit against us
alleging a breach of contract related to consulting services performed by SE in
conjunction with the 1999 implementation of our enterprise resource planning
system. We paid $430,000 for the implementation, of which $266,000 was for the
base implementation (which we believe was to be capped at $266,000) and
$164,000 for certain modifications to the software. SE has billed us an
additional $188,000 which we have not paid. We have repeatedly requested
details of the services performed for the amount billed, and we have not
received a response which justifies the additional billed amount. We plan to
vigorously defend ourselves against the allegations. In the event we were to
lose the lawsuit, we believe our direct liability would be the $188,000 plus
legal expenses.
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.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<C> <C> <S>
2.8 Asset Purchase Agreement by and between the Registrant and
Kirkegaard & Perry Laboratories, Inc., dated April 18, 2000.
The following schedules have been omitted from this filing:
1) Exhibit A:
a)Exhibit B--Specifications for the manufacture or each of the
products acquired.
b) Exhibit C--Plan of transition of manufacturing of the
products acquired from Kirkegaard & Perry Laboratories,
Inc. to the registrant.
c) Exhibit D--Transfer prices of the products manufactured by
Kirkegaard & Perry Laboratories, Inc for the registrant
during the manufacturing transition phase.
2) Exhibit L:
a)Attachment 2.15(a)--Kirkegaard & Perry Laboratories, Inc
customer list.
b)Attachment 2.15(b)--Kirkegaard & Perry Laboratories, Inc
supplier list.
The omitted schedules will be provided supplementally to the
Commission upon the Commission's request
10.1 Lease of Premises located at 11011 Via Frontera, San Diego,
California, dated November 20, 1996.
10.1.1 First Amendment to Lease of Premises located at 11011 Via Frontera,
San Diego, California.
10.74 Secured Promissory Note from the Registrant to Kirkegaard & Perry
Laboratories, Inc., dated April 18, 2000.
10.74.1 Security Agreement by and between the Registrant and Kirkegaard &
Perry Laboratories, Inc., dated April 18, 2000.
10.74.2 Intercreditor Agreement by and among the Registrant, Imperial Bank
and Kirkegaard & Perry Laboratories, Inc., dated April 18, 2000.
27 Financial Data Schedule (for electronic filing purposes only).
</TABLE>
(b) Reports on Form 8-K
None.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Synbiotics Corporation
Date: November 14, 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)
21
