<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 June 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
San Diego, California 92127
(Address of principal executive offices) (Zip Code)
</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 July 31, 2000, 9,374,577 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
(Loss) Income - Three and six months ended June 30, 2000 and
1999............................................................ 1
Condensed Consolidated Balance Sheet - June 30, 2000 and December
31, 1999........................................................ 2
Condensed Consolidated Statement of Cash Flows - Six months ended
June 30, 2000 and 1999.......................................... 3
Notes to Condensed Consolidated Financial Statements............. 4
Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 9
Quantitative and Qualitative Disclosures About Market Risk....... 16
Part II Other Information................................................ 17
</TABLE>
<PAGE>
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
Synbiotics Corporation
Condensed Consolidated Statement of Operations and Comprehensive (Loss) Income
(unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ------------------------
2000 1999 2000 1999
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Net sales................. $ 8,646,000 $8,336,000 $17,804,000 $17,726,000
Internet revenues......... 45,000 47,000
License fees.............. 61,000 66,000 122,000 126,000
Royalties................. 2,000 2,000 4,000 5,000
----------- ---------- ----------- -----------
8,754,000 8,404,000 17,977,000 17,857,000
----------- ---------- ----------- -----------
Operating expenses:
Cost of sales............. 3,623,000 3,409,000 8,555,000 7,486,000
Research and development.. 538,000 576,000 1,085,000 1,136,000
Selling and marketing..... 2,772,000 1,782,000 5,313,000 3,800,000
General and
administrative........... 1,966,000 1,401,000 3,693,000 2,816,000
----------- ---------- ----------- -----------
8,899,000 7,168,000 18,646,000 15,238,000
----------- ---------- ----------- -----------
(Loss) income from
operations................. (145,000) 1,236,000 (669,000) 2,619,000
Other income (expense):
Interest, net............. (273,000) (286,000) (605,000) (613,000)
----------- ---------- ----------- -----------
(Loss) income before income
taxes...................... (418,000) 950,000 (1,274,000) 2,006,000
Provision for income taxes.. 373,000 477,000 351,000 942,000
----------- ---------- ----------- -----------
(Loss) income before
extraordinary item......... (791,000) 473,000 (1,625,000) 1,064,000
Early extinguishment of
debt, net of tax........... (583,000) (583,000) 116,000
----------- ---------- ----------- -----------
Net (loss) income........... (1,374,000) 473,000 (2,208,000) 1,180,000
Translation adjustment...... 314,000 (350,000) 206,000 (1,254,000)
----------- ---------- ----------- -----------
Comprehensive (loss)
income..................... $(1,060,000) $ 123,000 $(2,002,000) $ (74,000)
=========== ========== =========== ===========
Basic (loss) income per
share:
(Loss) income from
continuing operations.... $ (0.09) $ 0.05 $ (0.18) $ 0.11
Early extinguishment of
debt, net of tax......... (0.06) (0.06) 0.01
----------- ---------- ----------- -----------
Net (loss) income......... $ (0.15) $ 0.05 $ (0.24) $ 0.12
=========== ========== =========== ===========
Diluted (loss) income per
share:
(Loss) income from
continuing operations.... $ (0.09) $ 0.05 $ (0.18) $ 0.11
Early extinguishment of
debt, net of tax......... (0.06) (0.06) 0.01
----------- ---------- ----------- -----------
Net (loss) income......... $ (0.15) $ 0.05 $ (0.24) $ 0.12
=========== ========== =========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
1
<PAGE>
Item 1. Financial Statements (continued)
Synbiotics Corporation
Condensed Consolidated Balance Sheet
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------ ------------
(unaudited) (audited)
<S> <C> <C>
Assets
Current assets:
Cash and equivalents.............................. $ 1,341,000 $ 2,260,000
Securities available for sale..................... 1,316,000 3,443,000
Accounts receivable............................... 5,257,000 4,517,000
Inventories....................................... 6,540,000 5,178,000
Deferred tax assets............................... 640,000 505,000
Other current assets.............................. 1,661,000 1,570,000
------------ -----------
Total current assets.............................. 16,755,000 17,473,000
Property and equipment, net......................... 1,981,000 1,744,000
Goodwill............................................ 18,763,000 12,137,000
Deferred tax assets................................. 7,942,000 8,055,000
Deferred debt issuance costs........................ 42,000 447,000
Other assets........................................ 3,868,000 4,191,000
------------ -----------
$ 49,351,000 $44,047,000
============ ===========
Liabilities and Shareholders' Equity:
Current liabilities:
Accounts payable and accrued expenses............. $ 5,837,000 $ 5,921,000
Current portion of long-term debt................. 1,200,000 1,000,000
Deferred revenue.................................. 290,000 242,000
Other current liabilities......................... 1,000,000
------------ -----------
Total current liabilities......................... 8,327,000 7,163,000
------------ -----------
Long-term debt...................................... 11,500,000 5,914,000
Deferred revenue.................................... 848,000 969,000
Other liabilities................................... 1,606,000 1,546,000
------------ -----------
13,954,000 8,429,000
------------ -----------
Mandatorily redeemable common stock................. 2,477,000 2,412,000
------------ -----------
Non-mandatorily redeemable common stock and other
shareholders' equity:
Common stock, no par value, 24,800,000 share
authorized, 9,375,000 and 8,576,000 shares issued
and outstanding at June 30, 2000 and December 31,
1999............................................. 40,041,000 39,424,000
Common stock warrants............................. 1,003,000 1,003,000
Accumulated other comprehensive loss.............. (710,000) (916,000)
Accumulated deficit............................... (15,741,000) (13,468,000)
------------ -----------
Total non-mandatorily redeemable common stock and
other shareholders' equity....................... 24,593,000 26,043,000
------------ -----------
$ 49,351,000 $44,047,000
============ ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
Item 1. Financial Statements (continued)
Synbiotics Corporation
Condensed Consolidated Statement of Cash Flows (unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------
2000 1999
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income................................ $ (2,208,000) $ 1,180,000
Adjustments to reconcile net (loss) income to net
cash (used for) provided by operating
activities:
Depreciation and amortization.................. 1,101,000 1,231,000
Early extinguishment of debt................... 937,000 (200,000)
Changes in assets and liabilities:
Account receivable........................... (740,000) (940,000)
Inventories.................................. (1,362,000) (441,000)
Deferred taxes............................... (22,000) 754,000
Other assets................................. 211,000 770,000
Accounts payable and accrued expenses........ 133,000 (246,000)
Income taxes payable......................... 186,000
Deferred revenue............................. (121,000) 1,332,000
Other liabilities............................ 61,000 59,000
------------- ------------
Net cash (used for) provided by operating
activities...................................... (2,010,000) 3,685,000
------------- ------------
Cash flows from investing activities:
Acquisition of property and equipment.......... (374,000) (432,000)
Proceeds from sale of securities available for
sale.......................................... 2,127,000 229,000
Acquisition of KPL poultry product line........ (3,554,000)
------------- ------------
Net cash used for investing activities........... (1,801,000) (203,000)
------------- ------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt....... 10,000,000
Payments of long-term debt..................... (7,450,000) (1,300,000)
Proceeds from issuance of common stock, net.... 136,000 325,000
------------- ------------
Net cash provided by (used for) financing
activities...................................... 2,686,000 (975,000)
------------- ------------
Net (decrease) increase in cash and equivalents.. (1,125,000) 2,507,000
Effect of exchange rates on cash................. 206,000 (1,254,000)
Cash and equivalents - beginning of period....... 2,260,000 4,357,000
------------- ------------
Cash and equivalents - end of period............. $ 1,341,000 $ 5,610,000
============= ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
Item 1. Financial Statements (continued)
SYNBIOTICS CORPORATION
Notes to Condensed Consolidated Financial Statements (unaudited)
-------------------------------------------------------------------------------
Note 1--Interim Financial Statements:
The accompanying condensed consolidated balance sheet as of June 30, 2000
and the condensed consolidated statements of operations and comprehensive
(loss) income and of cash flows for the three and six months ended June 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--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 shareholders of W3COMMERCE may receive up to an
additional 800,000 shares of the Company's common stock if certain per share
stock price targets for the Company's common stock are reached prior to
January 12, 2003.
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. 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.
The transaction was accounted for as a purchase. Goodwill arising from the
transaction totalled $4,288,000 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.
4
<PAGE>
Item 1. Financial Statements (continued)
SYNBIOTICS CORPORATION
Notes to Condensed Consolidated Financial Statements (unaudited)
--------------------------------------------------------------------------------
The Company's statement of operations includes the results of operations of
W3COMMERCE for the period January 1, 2000 to June 30, 2000 and the results of
operations of the KPL poultry product line for the period April 21, 2000 to
June 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 Six Months Ended
June 30, June 30,
----------------------- ------------------------
2000 1999 2000 1999
----------- ---------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues:
As reported............ $ 8,754,000 $8,404,000 $17,977,000 $17,857,000
=========== ========== =========== ===========
Pro forma.............. $ 8,885,000 $9,049,000 $18,702,000 $19,103,000
=========== ========== =========== ===========
(Loss) income before
extraordinary item:
As reported............ $ (791,000) $ 473,000 $(1,625,000) $ 1,064,000
=========== ========== =========== ===========
Pro forma.............. $ (745,000) $ 480,000 $(1,372,000) $ 1,121,000
=========== ========== =========== ===========
Net (loss) income:
As reported............ $(1,374,000) $ 473,000 $(2,208,000) $ 1,180,000
=========== ========== =========== ===========
Pro forma.............. $(1,328,000) $ 480,000 $(1,955,000) $ 1,237,000
=========== ========== =========== ===========
Basic net (loss) income
per share:
As reported............ $ (0.15) $ 0.05 $ (0.24) $ 0.12
=========== ========== =========== ===========
Pro forma.............. $ (0.14) $ 0.05 $ (0.21) $ 0.14
=========== ========== =========== ===========
Diluted net (loss) income
per share:
As reported............ $ (0.15) $ 0.05 $ (0.24) $ 0.12
=========== ========== =========== ===========
Pro forma.............. $ (0.14) $ 0.05 $ (0.21) $ 0.13
=========== ========== =========== ===========
</TABLE>
Note 3--Inventories:
Inventories consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- ------------
(unaudited) (audited)
<S> <C> <C>
Inventories:
Raw materials..................................... $2,958,000 $2,320,000
Work in process................................... 409,000 589,000
Finished goods.................................... 3,173,000 2,269,000
---------- ----------
$6,540,000 $5,178,000
========== ==========
</TABLE>
Note 4--Long-Term Debt:
In April 2000, the Company refinanced its outstanding Banque Paribas debt
with Imperial Bank ("Imperial"). The new Imperial debt agreement includes a
$6,000,000 term loan and a $4,000,000 revolving line of credit.
The term loan is due in April 2005, bears interest at the rate of prime plus
0.50%, is payable beginning in May 2000 in monthly installments of $100,000 of
principal plus accrued interest and is secured by substantially all our assets.
The line of credit, of which the Company had drawn the entire $4,000,000 as of
June 30, 2000,
5
<PAGE>
Item 1. Financial Statements (continued)
SYNBIOTICS CORPORATION
Notes to Condensed Consolidated Financial Statements (unaudited)
-------------------------------------------------------------------------------
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, the Company was not in compliance
with certain financial covenants, and has obtained a waiver from the bank. In
exchange for the waiver, the Company has: 1) paid the bank a waiver fee of
$35,000; 2) made a one time principal payment on its term loan of $500,000 and
3) increased the interest rate on both the term debt and the line of credit to
prime plus 2.00%.
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.
Note 5--(Loss) Income per Share:
The following is a reconciliation of net (loss) income and share amounts
used in the computations of (loss) income per share:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2000 1999 2000 1999
----------- ---------- ----------- ----------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Basic and diluted net (loss)
income used:
(Loss) income from
continuing operations..... $ (791,000) $ 473,000 $(1,625,000) $1,064,000
Less accretion of
mandatorily redeemable
common stock.............. (33,000) (31,000) (65,000) (62,000)
----------- --------- ----------- ----------
(Loss) income from
continuing operations used
in computing basic (loss)
income from continuing
operations per share...... (824,000) 442,000 (1,690,000) 1,002,000
Early extinguishment of
debt, net of tax.......... (583,000) (583,000) 116,000
----------- --------- ----------- ----------
Net (loss) income used in
computing basic and
diluted net (loss) income
per share................. $(1,407,000) $ 442,000 $(2,273,000) $1,118,000
=========== ========= =========== ==========
Shares used:
Weighted average common
shares outstanding used in
computing basic (loss)
income per share.......... 9,369,000 9,071,000 9,312,000 9,003,000
Weighted average options
and warrants to purchase
common stock as determined
by the treasury method.... 381,000 365,000
----------- --------- ----------- ----------
Shares used in computing
diluted (loss) income per
share..................... 9,369,000 9,452,000 9,312,000 9,368,000
=========== ========= =========== ==========
</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
1,245,000 and 1,291,000 shares have been excluded from the shares used in
computing diluted net (loss) income per share for the three and six months
ended June 30, 2000 as their effect is anti-dilutive. In addition, warrants to
purchase 265,000 and 284,000 shares of common stock at $4.54 per share have
been excluded from
6
<PAGE>
Item 1. Financial Statements (continued)
SYNBIOTICS CORPORATION
Notes to Condensed Consolidated Financial Statements (unaudited)
-------------------------------------------------------------------------------
the shares used in computing diluted net (loss) income per share for the three
and six months ended June 30, 2000 and 1999, respectively, 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 six months ended
June 30, 2000.
Note 6--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.
The following are revenues for the Company's diagnostic, vaccine and
instrument products:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ------------------------
2000 1999 2000 1999
----------- ----------- ----------- ------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Diagnostics............... $6,557,000 $6,748,000 $13,093,000 $14,138,000
Vaccines.................. 1,464,000 1,347,000 3,503,000 3,106,000
Instruments............... 625,000 241,000 1,204,000 482,000
Other revenues............ 108,000 68,000 177,000 131,000
---------- ---------- ----------- -----------
$8,754,000 $8,404,000 $17,977,000 $17,857,000
========== ========== =========== ===========
The following are revenues and long-lived assets information by geographic
area:
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ------------------------
2000 1999 2000 1999
----------- ----------- ----------- ------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues:
United States........... $6,469,000 $6,189,000 $12,967,000 $12,585,000
France.................. 854,000 814,000 2,146,000 2,202,000
Other foreign
countries.............. 1,431,000 1,401,000 2,864,000 3,070,000
---------- ---------- ----------- -----------
$8,754,000 $8,404,000 $17,977,000 $17,857,000
========== ========== =========== ===========
<CAPTION>
June 30, December 31,
2000 1999
----------- ------------
(unaudited) (audited)
<S> <C> <C> <C> <C>
Long-lived assets:
United States................................... $18,678,000 $12,079,000
France.......................................... 5,957,000 6,440,000
Other foreign countries......................... 19,000
----------- -----------
$24,654,000 $18,519,000
=========== ===========
</TABLE>
The Company had no significant customers during the three and six months
ended June 30, 2000. During the three months ended June 30, 1999, sales to one
customer totalled $1,690,000. The Company had sales to one customer totalling
$2,292,000 during the six months ended June 30, 1999.
7
<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 have put our primary business up for sale
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 the sale process
will, until a sale is completed, have the potential to 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), Abbot Laboratories 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 36% of our sales. In addition to
our historic competition with IDEXX Laboratories, the sales leader in this
product category, our sales were substantially affected in 1999 by a new
heartworm product from Heska Corporation. We have filed a lawsuit against
Heska, claiming that its heartworm product infringes our patent. Also, Abbott
Laboratories entered the canine heartworm diagnostic market in March 2000, and
our market share and average selling prices may decline, perhaps
significantly.
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 $15,741,000 at June 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 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
8
<PAGE>
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. 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 third party distributors for a substantial portion of our sales,
but we are experiencing difficulties with the distribution channel
Because we have historically depended upon distributors for such a large
portion of our sales (although we did not have any 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 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. Although we have rescinded this policy, and some of our former
distributors are again selling our products, we do not expect our sales to
distributors to reach their previous levels. 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.
9
<PAGE>
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.
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.
10
<PAGE>
We rely on new and recent products
In our animal health business we rely to a significant extent on new and
recently developed products, and expect that we will need to continue to
introduce new products to be successful in the future. There can be no
assurance that we will obtain and maintain market acceptance of our products.
There can be no assurance that future products will meet applicable regulatory
standards, be capable of being produced in commercial quantities at acceptable
cost or be successfully commercialized.
There can be no assurance that new products can be manufactured at a cost
or in quantities necessary to make them commercially viable. If we are unable
to produce internally, or to contract for, a sufficient supply of our new
products on acceptable terms, or if we should encounter delays or difficulties
in our relationships with manufacturers, the introduction of new products
would be delayed, which could have a material adverse effect on our business.
We may need additional capital in the future
We 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 put a 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. 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 research and development
programs. Any of these events would impair our competitive position and harm
our business.
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, we were not in compliance
with some of the financial covenants in our agreement with Imperial, and we
have obtained a waiver 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.
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. 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, our newly acquired
poultry diagnostic products and our Internet business will also reduce our
seasonality.
11
<PAGE>
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 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 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.
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
12
<PAGE>
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.
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 second quarter of 2000 increased by $310,000 or 4%
over the second quarter of 1999. The increase reflects an increase in our
vaccine product sales of $117,000 and an increase in our instrument product
sales of $384,000, offset by a decrease in our sales of diagnostic products of
$191,000. The decrease in our sales of diagnostic products is primarily due to
promotional programs in the United States during the first quarter of 2000 in
response to increased competition in the canine heartworm diagnostic market.
As a result, sales that would have been made in the second quarter of 2000
were made in the first quarter of 2000, at reduced average selling prices, as
our customers took advantage of our promotional program. Our U.S. heartworm
sales during the second quarter of 2000 decreased by 28% from the second
quarter of 1999. This decrease was partly offset by sales of the KPL poultry
diagnostic products which we acquired in April 2000. The weakening of the
French franc against the U.S. dollar also negatively impacted our diagnostic
sales in Europe. Our increased vaccine sales reflected an increase of 59% in
sales of bulk FeLV vaccine (related to the timing of shipments as requested by
our OEM customer), offset by a 62% decrease in sales of vaccines to private
label partners. Our instrument and reagent product sales increased due to
sales in Europe, as these instruments have obtained the European CE mark,
increased sales of reagents in the U.S. resulting from increased placements of
instruments, and to a full quarter's worth of sales of our SCA 2000(TM) blood
coagulation timing instrument, which we introduced during the second quarter
of 1999.
Our net sales for the six months ended June 30, 2000 were relatively flat
compared to the six months ended June 30, 1999, although our sales of
diagnostic products decreased $1,045,000, offset by an increase in our vaccine
product sales of $398,000 and an increase in our instrument product sales of
$725,000. The decrease in our sales of diagnostic products is primarily due to
promotional programs in the United States during the first
13
<PAGE>
quarter of 2000 in response 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 six months ended June 30, 2000 increased by 6% over the six months ended
June 30, 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 European diagnostic sales. Our increased vaccine
sales reflected an increase of 89% in sales of bulk FeLV vaccine (related to
the timing of shipments as requested by our OEM customer), offset by a 71%
decrease in sales of vaccines to private label partners. Our instrument
product sales increased due to sales in Europe, as these instruments have
obtained the European CE mark, increased sales of reagents in the U.S.
resulting from increased placements of instruments. and to a full six month's
worth of sales of our SCA 2000(TM) 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. Although
veterinary products manufacturers, including us, have traditionally relied on
distributors, we have been increasing our direct sales of products to
veterinarians via telesales and the Internet as part of a focused strategy. In
addition, we stopped selling to several distributors and to Vedco, Inc., a
distributor co-op, in the second quarter of 1999.
Our cost of sales as a percentage of our net sales was 42% during the
second quarter of 2000 compared to 41% during the second quarter of 1999
(i.e., our gross margin decreased to 58% from 59%). The lower gross margin is
a direct result of two factors: i) the increased sales of no margin bulk FeLV
vaccine to Merial, which are at cost, and ii) the fact that a significant
portion of our manufacturing costs are fixed costs. Our gross margin,
exclusive of the no margin bulk FeLV vaccine sales, would have been 65% and
62% for the second quarter of 2000 and 1999, respectively. 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 48% during the six months ended June 30, 2000 compared to
42% during the six months ended June 30, 1999 (i.e., our gross margin
decreased to 52% from 58%). The lower gross margins are a result of the two
factors mentioned above. Our gross margin, exclusive of the no margin bulk
FeLV vaccine sales, would have been 58% and 61% for the six months ended June
30, 2000 and 1999, respectively.
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.
In March 1999, we amended (effective July 1, 1998) our FeLV vaccine supply
agreement with Merial Limited ("Merial"). Since 1992, we have supplied FeLV
vaccine to Merial in the United States. This has included shipments to Merial
at our cost, while Merial has paid a royalty to us on their sales of Merial-
labeled FeLV vaccine. In exchange for $1,500,000 in cash ($1,453,000 of which
we are recognizing ratably over the remaining term of the supply agreement,
and the remainder 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
14
<PAGE>
FeLV vaccine to Merial at cost for the U.S. Sales of our own VacSyn FeLV
vaccine product, our sales to Merial S.A.S. in France, which are at a profit
rather than at cost, and the collaborative research relationship between
Merial Limited and us were not affected by this amendment.
Our research and development expenses decreased $38,000 or 7% during the
second quarter of 2000 as compared to the second quarter of 1999, and
decreased $51,000 or 4% during the six months ended June 30, 2000 as compared
to the six months ended June 30, 1999 Our research and development expenses as
a percentage of our net sales were 6% and 7% during the second quarter of 2000
and 1999, respectively, and were 6% during the six months ended June 30, 2000
and 1999. We expect our research and development expenses to increase during
the remainder of 2000 due to further development of our instrument product
line and our newly acquired poultry diagnostic product line.
Our selling and marketing expenses during the second quarter of 2000
increased by $990,000 or 56% over the second quarter of 1999, and increased
$1,513,000 or 40% during the six months ended June 30, 2000 as compared to the
six months ended June 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 32% and 21% during the second quarter of 2000
and 1999, respectively, and were 30% and 21% during the six months ended June
30, 2000 and 1999, respectively.
Our general and administrative expenses during the second quarter of 2000
increased by $565,000 or 40% over the second quarter of 1999, and increased
$876,000 or 31% during the six months ended June 30, 2000 as compared to the
six months ended June 30, 1999. The increases are due primarily to legal
expenses related to our patent litigation with Heska, increased goodwill
amortization related to our W3COMMERCE and KPL acquisitions, increased use tax
resulting from a state use tax audit, and foreign currency losses related to
our intercompany receivable from SBIO-E. Our general and administrative
expenses as a percentage of our net sales were 23% and 17% during the second
quarter of 2000 and 1999, respectively, and were 21% and 16% during the six
months ended June 30, 2000 and 1999, respectively.
Our combined effective tax rate was 0% during the six months ended June 30,
2000 as compared to 47% during the six months ended June 30, 1999. The
decrease in our effective rate is due primarily to the net operating loss for
the six months ended June 30, 2000, offset by a change in our deferred tax
assets and state income tax expense resulting from certain states' taxes being
calculated on our net worth rather than our net income.
Financial Condition
We believe that our present capital resources, which included working
capital of $8,428,000 at June 30, 2000, are sufficient to meet our current
working capital needs and service our debt. As of June 30, 2000, we had
outstanding principal balances on our Imperial Bank debt of $9,800,000, 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, we were not in compliance with certain financial
covenants in our loan agreement with Imperial Bank, and has obtained a waiver
from the bank. In exchange for the waiver, the Company has: 1) paid the bank a
waiver fee of $35,000; 2) made a one time principal payment on its term loan
of $500,000 and 3) increased the interest rate on both the term debt and the
line of credit to prime plus 2.00%.
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 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. 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. The
operations of SBIO-E have reduced our
15
<PAGE>
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 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 June 30, 2000 was
$1,316,000, 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 June 30, 2000 was $12,613,000, of
which $2,813,000 has a fixed interest rate of 6.21%, and the remaining
$9,800,000 has a variable interest rate based on the prime rate.
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 SBIO-E
as it transacts business in Euros, its local currency. However, this risk is
limited to our intercompany receivable from SBIO-E and the conversion of its
financial statements into the U.S. dollar for consolidation. There is no
foreign currency exchange rate risk related to SBIO-E'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 SBIO-
E's financial statements, including its intercompany payable, into the U.S.
dollar for consolidation.
16
<PAGE>
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
On March 10, 2000 we began a solicitation of written consent, of
shareholders of record on March 6, 2000, to approve an amendment of our
articles of incorporation to change our name. The solicitation was completed
on April 30, 2000, and 52.8% of the outstanding shares of our common stock on
March 6, 2000 were voted (by giving written consent) in favor approval of the
amendment, with the results indicated below:
For: 4,927,536 Against: 453,813 Abstain: 27,280
We have suspended the name change process pending the outcome of the
possible sale of the animal health business.
Our Annual Meeting of Shareholders was held on June 8, 2000. The only
matter submitted to a vote was the election of directors, with the results
indicated below:
<TABLE>
<CAPTION>
Nominee For Against Abstain Withheld Broker Non-votes
------- --------- ------- ------- -------- ----------------
<S> <C> <C> <C> <C> <C>
Patrick Owen Burns....... 7,573,872 N/A N/A 230,605 0
Kenneth M. Cohen......... 7,732,951 N/A N/A 71,526 0
Rigdon Currie............ 7,719,899 N/A N/A 84,578 0
James C. DeCesare........ 7,575,220 N/A N/A 229,257 0
Joseph Klein III......... 7,732,587 N/A N/A 71,890 0
Colin Lucas-Mudd......... 7,766,187 N/A N/A 38,290 0
Donald E. Phillips....... 7,731,894 N/A N/A 72,583 0
</TABLE>
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<C> <S>
4.4 Credit Agreement by and between the Registrant and Imperial Bank,
dated April 12, 2000.
4.4.1 First Amendment to Credit Agreement by and between the Registrant
and Imperial Bank, dated April 18, 2000.
</TABLE>
(b) Reports on Form 8-K
None.
17
<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: August 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)
18
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Exhibit
----------- -------
<C> <S>
4.4 Credit Agreement by and between the Registrant and Imperial
Bank, dated April 12, 2000.
4.4.1 First Amendment to Credit Agreement by and between the
Registrant and Imperial Bank, dated April 18, 2000.
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